Australian real estate funds are increasingly shopping at that quintessentially American institution -- the mall. Indeed, of the top 12 buyers of retail properties in 2003, three were Australian -- Centro MCS 32, Galileo America Shopping Trust and Macquarie DDR Trust. They were the only foreign players in the group.
According to Real Property Analytics, a New Yorkbased property research firm, Australian funds acquired about $1.6 billion of U.S. retail properties last year, up from just $145 million in 2002.
The buying spree reflects a basic reality Down Under: The country’s $384 billion in superannuation funds -- government-mandated retirement pools managed by financial services companies -- invest about 6 percent of their assets in real estate, and there’s a limited amount of Australian property available to investors. The average annual inflow of $38 billion into the government investment funds means some $2.3 billion goes to real estate investment each year.
“There’s going to be an increasing source of capital from Australia,” says Mark Baillie, who moved from Sydney to Chicago to head up North American real estate for Macquarie Bank.
Last year Sydney-based Macquarie was the biggest Australian retail property buyer -- and the largest Australian capital raiser for U.S. property fund investment. Altogether, Macquarie ranked fifth, with about $730 million in purchases. The top four are U.S. real estate investment trusts: Inland Retail Real Estate Trust, Mills Corp., General Growth Properties and Pennsylvania Real Estate Investment Trust. The other Australian names, Centro and Galileo, rank at No. 10 and No. 12, respectively.
Macquarie is one of Australia’s biggest financial services firms, with total assets of $25 billion, and the country’s third-largest real estate fund manager, with $5.8 billion in its coffers. In October, Macquarie, in partnership with Developers Diversified Realty Corp., a Cleveland-based REIT, launched Macquarie DDR Trust. It’s a listed property trust, the Australian version of a U.S. REIT. In late November Macquarie DDR Trust paid about $730 million to acquire 11 U.S. shopping centers from Developers Diversified’s portfolio. A few days later it went public on the Australian Stock Exchange, having already raised $339 million from institutional investors during a prelisting phase.
“I think it’s always good to have foreign interest,” says John Bucksbaum, CEO of Chicago-based General Growth Properties, a shopping mall owner. “It’s a verification of the appeal of our real estate. More potential buyers can drive pricing to higher levels. That hurts if you’re looking to buy something. Of course, it also increases the value of our own portfolio.”
Australian investors looking for the stability and dependability of real estate holdings are drawn to overseas markets partly because much of Australia’s commercial real estate is already publicly owned -- Baillie estimates as much as 40 percent, as opposed to about 12 percent in the U.S. The rest is privately -- and closely -- held. And with scant prospects for new opportunities at home (the uninhabitable outback makes up much of the Australian land mass), Australian real estate investors must look offshore for future growth and diversification.
Now in their 12th year, Australia’s rapidly growing superannuation retirement funds give real estate investors the wherewithal to search farther afield. The government gradually raised the required contribution level that employers must make to the retirement funds from 3 or 4 percent of annual salary in 1992'93 to 9 percent in 2002. It’s expected to rise to 12 percent in the next few years. As a result, the $384 billion in superannuation funds is expected to jump to nearly $1 trillion over the next 15 years. The local property market can’t absorb all the available money.
“The volume of capital that has flowed into Australian pension funds has been escalating dramatically,” observes Steve Mallen, a partner and head of global research at London-based international real estate services firm Knight Frank.
“Many Australian institutions have more capital than they can viably invest in the country because the domestic market is too small,” he says. “I think we’ll see more Australian funds with international real estate in their portfolios.”
