Super savers: Rising pool of capital bodes well for commercial property

The ever-growing pool of superannuation capital has the potential to translate into a rising source of demand for commercial real estate assets over the medium-to-long term, with profound implications for investment activity and asset performance. Sectors underpinned by structural tailwinds such as industrial and logistics, data centres, healthcare & life sciences, and multi-family residential/build-to-rent are set to especially benefit from rising investor demand.

Growing pool of capital

Australia has a large pool of superannuation savings, which totalled $3.54 trillion as at Q2 2023, equivalent to 140% of nominal GDP over the year to Q2 2023. According to the Thinking Ahead Institute’s 2023 Global Pension Assets Study, Australia had the fifth largest pool of retirement assets globally in 2022 among the 22 markets it tracks behind the US, Japan, Canada, and the UK – relatively large compared to the size of the Australian economy, which is the 13th largest in the world in nominal US dollar terms.     

The pool of superannuation savings will grow significantly over the next couple of decades, boosted by strong population growth and legislated increases to the Superannuation Guarantee rate. Total superannuation assets are expected to grow to between $9 trillion and $10.5 trillion by 2040 (around 185% of GDP), equivalent to 6%-7% average annual growth over that period. This growth in the pool of superannuation assets could translate into an additional $25bn-$30bn for investment in property per year (assuming the overall super fund allocation to property remains unchanged at Q2 2023 levels), equivalent to over 40% of average annual commercial property investment in Australia over the past decade. 

Rising allocations to property

The growth in superannuation assets will translate into more liquidity in capital markets across equities, bonds, and real assets. In addition, rising target allocations to property among institutional investments globally will further drive commercial property investment and enhance liquidity. 

According to the Hodes Weill & Associates and Cornell University 2022 Institutional Real Estate Allocations Monitor, average target allocations among 173 institutional investors in 34 countries have on average risen by around 200 basis points over the past decade to 10.8% of assets under management. These institutions expect to increase allocations to real estate by a further 30 basis points to 11.1% in 2023. In the Asia-Pacific region, institutional investors also plan to increase their allocation to property, with an average target of 9.1% in 2023 compared to 8.9% currently.  

Even a seemingly marginal increase in asset allocation translates into a potentially large increase in the dollar value of investment. For example, Hodes Weill & Associates estimate a 10-basis point increase in allocation to real estate assets globally could potentially translate into US$80 billion to US$120 billion of additional investment, equivalent to 7%-11% of annual average global commercial property investment volume over the past decade. 

Changing allocations within property 

In tandem with rising investment in real estate, investors are increasing shifting their allocations within the sector towards industrial and multi-family residential. 

• The share of industrial & logistics property by asset value in the MSCI Global Property Fund Index roughly doubled from 16% in Q1 2008 to 33% in Q1 2023, reflecting both the relatively strong capital value growth of industrial assets in many markets globally in recent years and investors increasing exposure to the sector. 
  
  
• Similarly, the residential sector’s share of total capital value has increased markedly over the same period, rising from 9% in Q1 2008 to 23% in Q1 2023 reflecting the rapid growth in the multi-family sector.
  

By contrast, office and retail assets have become less prominent in the index over the same period. Office sector capital value as a share of the total index declined from 36% in Q1 2008 to 26% in Q1 2023, while the retail sector’s share fell from 36% to 14% over the same period, reflecting a combination of declining capital values relative to pre-GFC (Q1 2008) levels as well as an overall shift away from both sectors. 

Implications for commercial property capital markets 

• Strong demand for commercial property assets as the interest rate outlook becomes clearer – the ever-increasing in pool of savings from pension funds in Australia and overseas combined with rising allocations to real estate will bolster demand for commercial property assets and provide an ongoing source of liquidity. Investors with little to no leverage such as pension funds are in a unique position to increase investment, being relatively unaffected by higher debt costs. Underscoring this potential, the world’s largest pension fund, Japan Government Pension Fund, has recently committed $500 million to Blackstone’s Real Estate X fund – this fund is c.$30.4 billion and 7% of the fund will be allocated to Australia (c.$2.1 billion).
  
  
• Industrial and alternative assets set to benefit the most – investors are likely to seek out assets that will benefit from structural tailwinds such as industrial & logistics and alternatives.
  
  
• Strong population growth in Australia and constrained housing supply are likely to support the development of the multi-family/BTR sector, while population growth, increasing e-commerce penetration, and a reassessment of supply chains (including the potential for on-shoring or near-shoring and a shift to just-in-case inventory management) will continue to underpin occupier demand in the industrial and logistics sector.
  
• These tailwinds are prompting some of Australia’s largest super funds such as AustralianSuper and Australian Retirement Trust to restructure their property portfolios to shift towards industrial & logistics and alternative assets. For example, AustralianSuper has invested $2.5 billion in Vantage Data Centres, a major developer of data centres in Europe and the United States.
  
• By contrast, structural headwinds for the office sector will weigh on relative demand for office assets, particularly for secondary and less well-located assets. However, high quality and well-located office assets with relatively low leasing risk will continue to have appeal for institutional investors looking to invest at scale.
  
  
• Investor demand to support asset performance – the rapid rise in interest rates and debt costs has led to higher yields and placed capital values under pressure. While the market has yet to fully adjust to the higher interest rate environment, stronger investor demand over the medium to long-term will support renewed yield compression and capital value growth, boosting investment returns over a longer-term horizon.