With debt finance likely to remain constrained for the foreseeable future, Knight Frank’s latest report on global real estate investment released at its Global Capital Markets conference in Shanghai, is predicting that the larger equity players – notably sovereign wealth funds and pension funds, particularly Australian and Canadian pension funds – will dominate the property investment landscape for the next year or two.
In particular, the Australian superannuation funds are expected to substantially increase their investments in core European and North American property markets in the near future. Ageing populations are prompting pension funds generally to invest more in real estate because of the growing reliance on self-funding for retirement. In Australia’s case, this is also being driven by changes to legislation which will increase employees’ compulsory pension contributions over the next seven or eight years.
A number of Canadian pension funds have already built a strong international presence over the last decade and now have considerable experience in global property markets. This trend is expected to continue as the funds diversify away from their relatively small domestic market. Canadian pension funds’ allocations to property have grown steadily in recent years, rising from 5.2% of total assets in 2000 to 9.4% in 2011.
Peter MacColl, head of global capital markets at Knight Frank commented: “The investment market has structurally changed from a debt driven market to equity, demonstrated by the buoyant, and increasingly cross-border, investment activities of the Canadian and Australian funds and sovereign wealth. The fierce competition for trophy assets is driving these investors to now consider an increasingly diverse range of opportunities.”
Darren Yates, partner, research, Knight Frank commented: “Unlike the Canadian pension funds, the Australian superannuation funds have not really ventured much outside their domestic markets. This is now changing, in part driven by legislation which will increase compulsory contributions to pensions, thereby genereating huge sums of additional capital for these funds. It could be in the tens of billions, much of which will find its way in to international property in order to source enough stock.
“Property yields in most global markets continue to offer a significant premium over government bonds. In addition, property offers relative stability of income against the current backdrop of low interest rates and unpredictable inflation.”