A continuously pessimistic outlook for offices is starting to worry the $27 billion Spirit Super, which has an overweight position in the sector.
Since the start of the pandemic-induced era of remote working, valuations of office towers have been consistently questioned. Consulting firm McKinsey has forecast that as much as US$800 billion ($1.2 trillion) could be slashed from the value of offices in global hubs by 2030.
In the midst of this crunch, super funds including Australian Super, Australian Retirement Trust and Cbus were forced to write down some office assets by up to 15 per cent last year.
Speaking at the Investment Magazine Real Estate Forum this week, Spirit Super’s property portfolio manager Bianca Ray said the fund has been trying to cut office exposure as a part of a strategy pivot for the past two and half years.
However, she said recent market re-pricing has complicated the re-weighting.
“[Our fund] is not materially overweight against the benchmark but is certainly not near the target bottom that I would like it to be, and pivoting is very challenging,” she told the forum in Melbourne.
“What does really worry me is the lack of liquidity.
“At the back end of this decade, there will be a number of office funds with redemption windows, and I am concerned about who the buyers will be.
“Where is the demand going to come from?”
Meanwhile, UniSuper’s head of property Kent Robbins said the $124 billion fund has the opposite problem and is now very underweight in offices. He believed there’s another fall coming for office valuations and “the sooner it happens, the better”.
“Unless you’re close to a loan-to-value ratio, I think you just want it to happen,” he said.
“Then you can just move forward and raise equity.”
With renewal incentives considered, Robbins believed while the effective capitalisation rate in retail and logistics could be between 4.5 and 4.75 per cent, that number is around 3.5 per cent for offices.
“I can’t see more growth out of office than I can in retail or logistics,” he said.
Valuation tales
At the Investment Magazine Chair Forum last month, APRA deputy chair Margaret Cole highlighted unlisted assets valuation to be the top subject of supervision for the regulator this year.
She said large to mid-sized funds with “material unlisted asset exposures” should expect a cross-sectional review, while all RSEs’ self-governance practices will also be examined.
Real estate is an asset class at the epicentre of this conversation, but both Spirit Super and UniSuper agreed that the quarterly valuation frequency – which has been given as a minimum requirement – has been the sector standard for a long time.
Robbins said property shouldn’t have anything to worry about.
“One thing that frustrated me so far in the debate is that property has an incredible story to tell about the quality of our valuation industry and the process,” he said.
“I think we should be leading with how robust the unlisted property valuation process is because I would say it’s definitely better than PE (private equity), and I think it is in front of infra[structure] as well through transaction.
“I don’t think we have a lot to fear here other than the bloody work that’s involved in doing it [valuation] – it’s a strength of property.”
Georgia Warren-Myers, an associate professor at University of Melbourne and a practising valuer, added that more frequent valuation also adds a risk of complacency.
“We have a relatively illiquid market compared to other asset classes, so consequently, how much really changes in a three-month period?” she said.
“If someone thinks the market moved and then just go adjust everything by 25 basis points – that I think is potentially more concerning than actually having the valuations further apart, where at least they get properly analysed in context of what’s going on in the market.”
Tech potential
Warren-Myers said there is a potential for an automated valuation model (AVM) to fill the gaps between regular quarterly valuations by identifying or flagging any assets at risk.
New developments in machine learning also bring more possibilities. Last year, ASX-listed online property settlements company PEXA Group launched an AI valuation tool through its majority-owned subsidiary Value Australia, touting the ability to extract factors like proximity to school and hospitals, as well as environmental determinants like flood and fire risks.
“AVMs can be run on a monthly basis, on a biweekly basis or on a daily basis, if required,” Warren-Myers said.
“That can flag market movements, which could then generate indicators… when an independent valuation needs to be done for this out-of-cycle.”
As Spirit Super edges closer to its merger with CareSuper to form a $50 billion fund, Ray said the imminent increase in scale will allow her team to explore some technology risk-taking AVMs.
But for now, since Spirit is still a relatively small fund, she said the property industry needs to stand firm and manage regulators’ expectations.
“[More frequent reporting] is even step two; we’re still dealing with step one of what information do we have, what do we have to attain and then how we’re going to pass that on to the fund managers,” she said.
“I think what would also be useful is if the Australian Property Institute were able to communicate with APRA and [help it] understand that the market a bit better. I think they’ve got a real responsibility there to try and influence.”
