Why super funds veer away from residential property

There is a role for superannuation funds to invest in so-called “build to rent” (BTR) residential property developments but the risk-adjusted returns would need to be sufficient to meet member best interests, according to the Association of Superannuation Funds of Australia (ASFA).

In a submission to the Victorian Government Build-to-Rent Industry Working Group, ASFA said there was scope for superannuation to participate in the BTR sector as a significant institutional investor of long-term, patient capital.

But ASFA then inserted the significant caveat that “superannuation funds must first determine that capital allocation to the sector is in the best interests of their members”.

In doing so, the submission pointed out that history does not paint BTR residential property as a natural investment destination for superannuation funds with ongoing income yields on residential property having been very low in Australia, notwithstanding strong capital growth.

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“…although capital growth has been strong over much of the last 20 years or so, it would be hard to assume that this sort of capital growth will continue going forward – that is, total returns currently in prospect would be unlikely to be very compelling for superannuation funds,” the submission said.

It said that superannuation fund investment in BTR residential property had the potential to provide high-quality, affordable rental market supply with greater certainty of tenure for renters because institutional investors could take a longer-term perspective than individual investors.

“Superannuation funds also could benefit via access to a diversified, visible and consistent long-term rental income stream,” the submission said. “However, institutional residential real estate hasn’t developed in Australia to any great extent due to a cultural and economic desire for individuals to own property (either to live in or as an investment) which creates sufficient retail demand to provide developers with a liquidity option that is probably easier than having to sell a package of properties to institutions.

“In general, prospective returns from a BTR model are not as attractive as those from a “Build to Sell” model. By way of example in the UK, Build to Sell typically delivers a development return of circa 17.5 per cent Internal Rate of Return, whereas BTR delivers approximately 7.5 per cent, well below the 10-12 per cent that institutions would require to justify the development risk.