Gavin Brearley, Senior Portfolio Manager, Funds Management
Australians have a deep love affair with residential property, both as homeowners and investors. At QSuper we invest in a portfolio of real estate assets, made up of mainly commercial office space and retail shopping centres. If you are a QSuper member, it’s quite likely that you either work in or have shopped at an asset that the Fund has an ownership stake in. Historically these assets were primarily located in Australia but in recent years we’ve purchased assets in both the USA and in Europe.
QSuper has $4 billion invested in real estate assets globally which form part of each of our Lifetime and Ready Made multi-asset class investment options (Balanced, Aggressive, and Moderate). Our Balanced option, which is the default option for our Income account members, currently has an allocation of 8.7 per cent1 invested in real estate assets. We use the expertise of high quality external managers to invest in these real estate assets.
The charts below show what our real estate portfolio looks like in terms of investment type and geography.
So why do we invest in real estate? Firstly, we expect over time for these assets to deliver returns that exceed the return objectives of the QSuper investment options mentioned above after fees and taxes. The real estate assets are expected to:
Real estate assets are important given the low future return environment that we (and others) expect from most assets going forward. If you’re a regular follower of our blog, you’ll also know that we believe a well-diversified, multi-asset class portfolio is the key to delivering more stable longer term returns. The real estate asset class can help diversify a portfolio consisting of bonds and equities.
Investing in real estate can also provide both an income and capital return. Tenants of commercial office and retail shopping centres pay regular income for their leases. Over time we also expect a return on capital which has many drivers such as re-developments and other value-adding improvements to existing assets.
Over time we expect higher returns from real estate compared to equities and bonds. This in part reflects the higher risks associated with investing in real estate. This higher risk may surprise many readers whose only experience is with Australian residential property, where prices have risen over many years. Remember that higher returns are nearly always accompanied by higher risk and real estate, like equities and bonds, can suffer from periods of negative returns.
I will touch very briefly on two risks of investing in real estate. The first is liquidity risk. Unlike equities and bonds, real estate assets cannot be bought or sold quickly. We expect to earn an illiquidity premium or additional return for taking on this risk. We don’t want too much liquidity risk across the QSuper portfolio, so we regularly assess and test the overall liquidity of the portfolio.
The second risk is “idiosyncratic”, which in this context relates to risk specific to each individual real estate asset. For example, let’s say we invest $100 in the S&P/ASX 200 share price index3. We have exposure to a number of common factors affecting the returns of all companies in the index (economic growth, inflation etc.) but we have diversified the risk of investing in any one individual company (the idiosyncratic risk).
If we instead invested that $100 in real estate this would generally be in a single asset (or individual company in our equity example). There will be risks specific to the asset that must be considered and managed. For example, the asset might have a long term lease with a single tenant. What would happen to the value of the asset if that single tenant was in financial difficulty and unable to pay its lease? Before purchasing an asset we carefully assess the possible future returns under a range of worst case scenarios, both overall and specific to that asset. We expect to earn an additional return for taking on the idiosyncratic risk associated with each asset. We believe this idiosyncratic risk is acceptable because diversification is assessed at the total QSuper portfolio level, of which real estate is only one component.
1. As at 30 June 2016. Allocations for other investment options can be found on the QSuper website.
2. This refers to QSuper Lifetime and the Balanced, Moderate and Aggressive options.
3. The S&P/ASX 200 share price index is a market capitalisation weighted index of Australian stocks listed on the Australian Stock Exchange. It is recognised as the investable benchmark for the Australian equity market and is comprised of 200 of the largest Australian listed companies.
The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of the QSuper Board. We’ve put this information together as general information only and you should get professional advice before relying on this information.
Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.
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Senior Portfolio Manager, Funds Management
In his role as Senior Portfolio Manager with the Funds Management team Gavin’s primary responsibilities include implementing investment policy decisions, structuring potential investments and managing a portfolio of external investment managers.