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.