Super funds running out of places to allocate members' money

Australia’s superannuation funds, investment managers, and custodians are growing increasingly concerned about finding a home for $3.4 trillion of members' money.

Speaking on an upcoming episode of Relative Return, the new podcast by Super Review sister brand Money Management, Mayflower Consulting chief executive Sarah Penn said capacity constraints had become a major issue for the super sector.

“Our super funds are now bigger than sovereign wealth funds in a lot of countries,” Penn said.

“AustralianSuper, for example, sources a lot of their investments offshore. But the area where it is even worse is ESG. The pressure on funds is incredible. There is also a lot of consumer pressure on funds to divest of assets that don’t meet ESG criteria.

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“The problem is, if they do that there is literally nowhere else to put the money.”

Penn, who works alongside super funds and fund managers as a consultant, said Australia lacked a sufficient volume of early-stage product development that retirement funds could invest in.

In addition, she said the local investment community is largely risk-averse and is unlikely to support new ventures such as building a solar farm.

“There is not enough actual activity happening and the activity that is happening doesn’t meet the structure that you need for a big super fund to be able to invest in you,” she said.

Penn’s comments come after the Labor government announced on 20 February that it intended to change the legislated objective of super. A consultation paper on the issue noted Australia’s super pool has grown from around $148 billion in 1992 to over $3.3 trillion.

“It now represents 139.6 per cent of gross domestic product (GDP) and is projected to grow to around 244 per cent of GDP by 30 June 2061. Australia’s pool of pension assets is now one of the largest in the world, and the fourth largest in the OECD,” the paper noted.

Labor was eager to funnel more of this money into so-called ‘nation building’ projects, a plan that had been met with criticism from those who argued that the government was raiding their retirement savings to do so.

“There is a significant opportunity for Australia to leverage greater superannuation investment in areas where there is alignment between the best financial interests of members and national economic priorities, particularly given the long-term investment horizon of superannuation funds,” the consultation paper stated. 

“For these broad benefits of superannuation to be maximised and for superannuation to best support higher living standards for Australians over time, it is critical for there to be a clear, shared understanding of the objective of superannuation.”

Investing in rental accommodation

One area where super funds were increasingly deploying capital was rental accommodation.

Build-to-rent (BTR) projects were far more common in the UK and US than in Australia, where 67 per cent of people owned a home. In the US, there were more than 20 million build-to-rent housing  units, representing 12 per cent of the country’s total housing stock. In the UK, the build-to-rent sector had grown from 47,000 units in 2016 to over 240,000 in 2022.

But with a growing housing crisis and affordability concerns, BTR is fast becoming a viable option that ticked economic and political boxes.

Aware Super recently announced a $900 million investment in London-based BTR operator Get Living, while HESTA has committed $240 million to develop 1,600 dwellings in Victoria.

A recent EY report estimated that the current size of the build-to-rent sector in Australia is $16.87 billion (just 0.2 per cent of the total value of the residential housing sector) with only 11 operating build-to-rent projects and another 72 projects in the pipeline.

The report suggested on conservative estimates, if the sector grew to just 3 per cent of Australia’s residential stock, it could be worth $290 billion.

Property Council of Australia chief executive, Mike Zorbas, called on the federal government to make major tax changes that would incentivise more BTR activity in Australia. 

“It’s critical that investments in build-to-rent housing need to be eligible for the 15 per cent withholding tax rate, and an incentivised tax rate of 10 per cent for investors that choose to incorporate the supply of affordable housing dwellings within their build-to-rent projects,” Zorbas said.

“To accomplish the ambitious goals established in the National Housing Accord, the government needs to level the build-to-rent investment playing field in the May 2023 budget.”