Down Under, SWFs Compete for Hard Assets Amid Rising Prices

April 15, 2015 by Loch Adamson

SWFs Eye Big Deals in Australian Infrastructure and Real Estate
Australian Infrastructure Privatization Draws Sovereign Funds
  • Print
  • Please login
Across Australia, sovereign wealth funds are buying up real estate and infrastructure, hoping to profit from favorable long-term demographic trends. But as prices rise and competition heats up, is the window of opportunity closing?


On March 27, voters in New South Wales, Australia, returned right-wing Liberal politician Mike Baird to power as state premier at the head of a coalition government with the countryside-focused National Party. Baird’s watchword throughout a bruising election campaign was "poles and wires" — he pledged to privatize the state’s electricity grid to raise money for an ambitious spending program to improve roads, schools and hospitals. As the opposition Australian Labor Party was against privatization, the election was considered a referendum on the sell-off — and the voters answered with a resounding yes.

No sooner had Baird delivered his victory speech than big institutional investors moved in to bid for assets. According to reports in the local media, the Abu Dhabi Investment Authority (ADIA) with over $600 billion under management, and Wren House Infrastructure Management, a unit of the $548 billion Kuwait Investment Authority (KIA), have joined a consortium that has proposed a A$13 billion ($9.9 billion) offer for a 49 percent stake in the electricity distribution network, while the $653 billion China Investment Corp. (CIC) is apparently leading a rival investor group.

The strong interest from sovereign wealth funds in New South Wales’ energy grid comes as no surprise — when other regional governments implemented similar privatization programs in 2014, foreign state investors joined in the bidding. But it’s not just infrastructure that’s drawing interest. Australian real estate, too, is attracting huge sums of capital from foreign investors, with office buildings in the major cities of Sydney and Melbourne proving especially popular. 

"Baby Boom"

Cheap mortgages, a transparent regulatory environment and strong economic fundamentals — Australia’s population is growing fast, a rarity among developed nations — are among the factors encouraging long—term investment in hard assets, according to Andrew Ballantyne, director of research at investment services firm Jones Lang Lasalle in Sydney. "Australia is a very transparent market, there are no regulatory nasties in the system," he says. 

"Australia also has a very strong population growth rate, because the country is attractive to young, skilled migrants," Ballantyne says. "And we’re seeing a mini baby boom — that’s unique for a mature economy."

But the rush to buy real assets in Australia has inevitably pushed up prices, and Singapore’s GIC, whose market moves have proven timely in the past, has already begun to divest from Australian property. In November 2014 the Singaporean sovereign wealth fund sold an office tower at 175 Liverpool St. in central Sydney for A$390 million ($337.4 million), and reportedly wants to offload its A$900 million Australian industrial and logistics real estate portfolio, despite increasing its investments in the European and the U.S. logistics sectors in 2015.

Other state-owned funds remain bullish on Australia, though, especially in infrastructure sector. In February, the Korea Investment Corp. invested in an infrastructure fund managed by Brisbane, Australia—based QIC (a government-owned investment firm, formerly the Queensland Investment Corp.), while KIA is reportedly part of a consortium bidding A$5 billion for the Port of Melbourne, the country’s biggest container seaport, alongside two local firms: IFM Investors and Hastings Funds Management. 

Sydney Harbour Bridge

Recent interest in Australian infrastructure can partly be explained by major changes in the Australian population, which have made it necessary for the government to seek foreign capital for major projects. According to a research paper published last month by The Australia Institute, a Canberra-based public policy think tank, the country is experiencing a "golden age of migration," along with a domestic baby boom, that has made Australia one of the fastest-growing of the Organisation for Economic Co-operation and Development (OECD) countries, behind only Israel and Luxembourg. The population grows by 400,000 — the current size of the capital city — every year.

In an interview with Sovereign Wealth Center earlier this month, Dale MacMaster, CIO of the Alberta Investment Management Corp., which oversees C$72 billion ($58 billion) for the Canadian province, including the $15.5 billion Alberta Heritage Savings Trust Fund, said the Australian government’s willingness to invest in infrastructure to accommodate this growing population makes it an attractive investment destination — particularly given the seeming reluctance of the U.S. and many European countries to kickstart their own, much—needed infrastructure upgrades.

"Countries in general need to spend tens of billions on roads and bridges and basic infrastructure and its frustrating because we haven’t really seen [that spending], it’s been slow to emerge. Australia’s one exception, there’s going to be a lot of infrastructure there and that’s one area we’re looking at," says MacMaster. 

For the most part, however, the opportunities for foreign investors lie in mature assets, which state governments are selling off to raise capital for new construction projects. For example, New South Wales’ Baird plans to use the money raised by selling the electricity grid to build a highway in Sydney and a second rail link under Sydney Harbour Bridge.

Big Transactions

"Institutional investors and pension funds are focused on the Australian market because we have a large brownfield privatization program, which in turn is being used to fund a very large program of greenfield major projects," says Brendan Lyon, chief executive of Infrastructure Partnerships Australia, an industry body. "The scale of privatization and new projects is significant and of a global scale, meaning it’s a very good time for governments like New South Wales."

New South Wales is following the lead of other states such as Queensland, which were encouraged by the federal government to start auctioning infrastructure assets in early 2014. One of the biggest deals was completed in July last year, when ADIA teamed up with toll road operator Transurban Group and pension fund AustralianSuper to buy Queensland Motorways, which controls a 38.5 mile—long system of roads around Brisbane, from the state government for some A$7 billion ($6.6 billion).

Not all of the privatizations have gone smoothly. The high degree of political autonomy accorded to individual states in Australia means that policies relevant to infrastructure projects often change after regional elections. In November 2014, for instance, the state of Victoria elected a Labor administration that promptly scrapped a planned public-private partnership to build a new stretch of motorway in Melbourne. And Labor’s Annastacia Palaszczuk put a halt to any further privatizations in Queensland when she won state elections in January 2015, canceling a sell off of the state’s electricity grid.

As yet, however, no party has reneged on deals already agreed to with private investors — and Australia’s robust long-term economic fundamentals are overriding any fears about sudden shifts in the political climate. Australia was one of the few countries to raise interest rates between 2009 and 2013, as the economy performed much better than many developed nations. But now the Reserve Bank of Australia, the country’s central bank, has started to cut interest rates, which means it is cheaper to finance big transactions.

Cash Flow Growth

These factors are helping to drive a real estate boom, too. According to figures from Jones Lang Lasalle, commercial real estate investment in 2014 amounted to A$240 billion — a new record. Offshore investors accounted for 40 percent of that total. 

Ballantyne says that overseas institutions are being drawn by the cheap mortgages — and the promise of rising yields. In Australia, it is common for long—term leases on both office and logistics properties to have rate rises built in — an attractive prospect for sovereign wealth funds, with their decades-long investment horizons.

"In Australia, fixed increases are usually built into the lease, and logistics properties tend to be on ten—year leases," he says, with the raises implemented annually. "In the industrial sector you’d be looking at around 3 to 3.25 percent contractually built into the lease; on the office sector it’d be up to 4 percent. Inflation in Australia is running at 2.5 percent, so you’re getting real growth in your cash flow."

But with these strong yields being offered, competition for property is growing fierce and prices have hit new highs. ADIA, for example, is reportedly teaming up with LaSalle Investment Management to prepare a bid for Sydney-based Investa Property Group, a real estate business being sold by global financial services giant Morgan Stanley, which features several office buildings as part of its portfolio. But they are not alone: reports suggest that no fewer than 42 institutional investors have accessed the data room for the sale. Morgan Stanley’s rumored asking price is A$9 billion, a substantial increase on the A$6.6 billion it paid for the assets in 2007.

Long-Term Value

With valuations at such high levels, GIC’s eagerness to cash in on its prime Australian real estate portfolio is understandable. The Singaporean fund made a considerable profit on the Sydney office tower it sold for A$390 million in November — it bought the property for A$125 million in 1997. 

According to reports in the local media, GIC has also put the Sydney Westin Hotel on the market for A$400 million — more than double the A$160 million it paid for the building in 2002. It is also selling the Four Points by Sheraton in Perth, which it owns as part of its Pacifica Partners joint venture with U.S.—based hospitality group Host Hotels & Resorts, for more than $150 million — that price would represent a strong return on the $61 million the partners paid for the property in 2012.

GIC has been actively managing its Australian hotel portfolio for some time — the fund sold the Sydney Shangri—La for A$330 million in June 2012, for example — even if the rise in valuations appears to have encouraged it to sell more frequently over the past 12 months. Ballantyne thinks prices have further to rise, however. "We think there is scope for further capital value growth; when you look at high quality assets there’s still a positive spread there." 

The risks, he says, have less to do with the prospect of a sudden price correction than macroeconomic factors. "The big risk everyone looks at with Australia is what’s happening with China. The slowdown in the Chinese economy and lesser demand for commodities could have a big knock-on effect on Australia," says Ballantyne.

Australia is a big exporter of iron ore and coal to China — and demand is falling as China rebalances its economy away from big infrastructure projects toward more sustainable sources of growth, such as the consumer sector. The potential consequences for Australia were graphically illustrated on Monday, when unexpectedly weak economic data from China — imports fell by almost 13 percent year—on—year in March — prompted a plunge in the Australian dollar.

Nevertheless, the Australian economy is more than an open-pit mine: mineral extraction and related industries account for only 12 percent of the country’s output — and the central bank is hoping the fall in interest rates will stimulate investments into other parts of the economy. Meanwhile, the projected growth in the population is helping reassure state investors of the long-term value of assets like real estate and infrastructure. With cities growing and further infrastructure privatizations to come, we could be seeing plenty more deals Down Under.





Updated Fund Profiles

Our market-leading fund profile library provides unrivalled analysis of more than 90 government and sovereign funds.

Register to read fund profiles

Recent SWF Investments

Search the database of direct investments and mandates by fund, industry and target market to identify past deals that match your requirements. Access over $1 trillion worth of transactions dating back to the 1960s.

Register to explore our data

Latest SWF News

Sovereign Wealth Center makes staying abreast of the most recent government and sovereign fund events easy. Our team undertakes a thorough review of global news feeds every morning and distills salient points.

Register for the latest SWF news
Join the discussion:

To be able to print this content,
you must be a subscriber

For details on your subscription options,
please contact: