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Property investing at Sunsuper

When it comes to property investing, we know the opportunities for long-term growth are strong, and that’s why we offer our members a range of pre-mixed diversified portfolios and single-sector portfolios to enable the construction of personalised and diversified multi-asset portfolios. 

How can members invest in property with Sunsuper?

Sunsuper’s major diversified options – the Balanced, Growth, Retirement, Conservative and Socially Conscious Balanced options – hold an allocation to Sunsuper’s unlisted property portfolio.

To complement our pre-mixed diversified portfolios, Sunsuper also offers members and their advisers a diverse range of single-sector portfolios to enable the construction of personalised diversified multi-asset portfolios, including two distinct property investment options. The Australian property–index option provides members with access to a low-cost, passively managed portfolio of Australian Real Estate Investment Trusts (A-REITs). The option seeks to closely match the performance of the S&P/ASX A-REIT Accumulation Index before investment tax and investment fees and costs.

For members wishing to access Sunsuper’s capabilities in unlisted property and for those advisers looking to construct diversified client portfolios with an exposure to unlisted property, the Sunsuper Property option holds a 75% allocation to our unlisted property portfolio with the remaining 25% allocated to a passive portfolio of global REITs.

What property assets do we invest in?

Sunsuper’s unlisted property portfolio includes a range of institutional-quality property assets, both within Australia and globally. These include office buildings, retail centres and industrial warehouses but also residential property, hotels, retirement villages, healthcare, education, leisure and self-storage facilities, data centres and land. In addition to investments in property – both directly and via institutional funds – we also invest in property-backed debt securities in the US, the UK and Europe.

The impact of COVID-19

The worst recession in living memory clearly impacted unlisted asset valuations. This was a recession by design not by accident: rather than occurring as a result of economic imbalances building up over time, this recession was deliberately engineered by governments across the world in a bid to contain a global pandemic. In any “normal” recession, consumers still shop, go to restaurants and bars and stay in hotels, for either business or pleasure and in many cases pay for those activities with the income they earn by working (often in close contact with their colleagues) in commercial properties. As we all know, this recession really was different!

Early in the COVID-19 crisis, Sunsuper adjusted the carrying value of our property and unlisted assets to reflect the likely impact of the crisis. Within the property portfolio, retail shopping centres, and travel and leisure-related assets suffered the largest drawdowns as widespread lockdowns and restrictions on travel were imposed. Traditional retail assets have struggled in the face of the long-term growth in online retailing: a trend that clearly accelerated under COVID-19 lockdown conditions. In the case of Sunsuper’s largest property exposure, the Discovery Parks network of holiday parks, business was already suffering from the impact of Australia’s severe bushfires in late 2019 and early 2020.

While the property portfolio was adversely impacted by the COVID-19 recession, the quality of the underlying assets and the diversification within our portfolio served members well. And while unlisted portfolios generally have lagged behind the very sharp recovery in share markets since March 2020, we have definitely seen the impacts of a post-COVID-19 recovery in the subsequent performance of our property portfolio.

The future of retail

While COVID-19 intensified pre-existing pressures on traditional retail, the fortunes of the sector will likely improve in the aftermath of the pandemic. Consumer spending, aided by ongoing fiscal and monetary policy support, is likely to grow strongly once vaccines are successfully rolled out.

Household saving rates and the build-up in bank deposits strongly suggest there is a good deal of pent-up demand that can be unleashed. However, the damage to traditional retail business is likely to be long lasting. Despite the best efforts of their owners, managers, bankers and governments, many retail businesses in the worst impacted economies will not survive. Some retail property assets will suffer permanent impairment. Furthermore, such drastic changes may result in a wholesale shift in the relationship between the landlord and retailer. Retailers are increasingly demanding landlords reduce fixed rents in exchange for rent based on revenue or profits, potentially leading to more volatile rental streams. Sunsuper’s property portfolio has been underexposed to retail relative to many of our peers and that remains the position. We do not expect a return to pre-COVID-19 valuation levels for the retail sector for some years to come.

 

Woman with baby on her laptop


Bright spots?

However, other assets experienced either very little adverse impact or, in some cases, became clear beneficiaries from the crisis. Sunsuper’s strategy of diversifying via investments in alternative property sectors certainly helped the portfolio weather the challenges that COVID-19 wrought on traditional property sectors such as retail and office. Data centre assets have benefitted greatly from what continues to be a massive surge in demand for data storage capacity and industrial warehouse assets have performed very well, due in no small part to the rise and rise of online shopping which has produced greater demand for warehouse space. US multifamily residential exposures - both debt and equity - continued to perform well, particularly given the apparent shortage of good quality residential rental properties across the US. The Discovery Parks network experienced a strong recovery when the initial lockdowns ended in Australia with holiday makers rushing to book domestic accommodation, particularly given the inaccessibility of overseas alternatives. As current lockdowns ease in NSW and Victoria, the Discovery Parks are well placed to benefit from a similar recovery in domestic holiday demand. And while there was some impact on office property valuations, the sector has fared considerably better than retail: leasing arrangements remained in place and office rent collection rates generally held up well, aided in no small part by government support measures and low interest rates encouraging investors to buy for the long term.

Persona Waterpark


The death of the office?

Despite the relatively impressive performance of commercial office space so far, the longer-term prospects for the sector remain highly uncertain, with competing dynamics at play. Work-from-home (WFH) during COVID-19 proved to be a great success even among those industries and businesses where WFH was previously viewed as unworkable or otherwise undesirable. On balance, it is safe to assume a reduction in longer-term office space demand because of WFH. However, the extent to which WFH arrangements become the new normal is far from certain and likely to vary greatly across industries, job roles and geographies.

Many back-office functions may be well suited to ongoing WFH while job roles requiring much greater collaboration and human contact are likely to default back to an office environment, with some WFH as either a regular or occasional option. Those geographies where the bulk of the workforce resides in suburban environments with larger living spaces are likely to see greater take-up of WFH than those where residential living is more space constrained (central Hong Kong and Tokyo are cases in point).

There is another dynamic at play: the need for greater space per employee in the office environment – a trend rather clumsily described as “de-densification”. As the kinds of activities taking place in office environments become increasingly collaborative and the awareness of the health benefits of more personal space (ongoing social distancing, if you will) is enhanced, greater space per employee is likely to be demanded. In short, the death of the office may have been grossly exaggerated!

The Foundry


What does Sunsuper’s property portfolio currently look like?

The table below shows the largest holdings in Sunsuper’s ~A$7 billion unlisted property portfolio as at 30 June 2021. The portfolio is well-diversified across sub-sectors of the asset class and includes a significant exposure to less traditional sectors such as US multifamily residential, aged care, data centres and holiday parks. We have long invested a substantial portion of the portfolio outside of Australia, particularly, but not exclusively, in North America. The number of individual property assets exceeds 100.

Asset % of Property Portfolio Sector Geography Description
Discovery Parks
12% Other Australia & NZ Holiday parks across Australia
Goodman Australia Industrial Partnership 7% Industrial Australia & NZ Fund invested in Australian industrial assets
Berkshire Bridge Loan II 6% Residential North America Debt fund relating to US residential properties
AMP Capital Shopping Centre Fund 5% Retail Australia & NZ Fund invested in Australian retail assets
Carnegie Catalyst Healthcare Real Estate Trust 4% Residential Australia & NZ Aged care assets across Australia
South Eveleigh, NSW 4% Office Australia & NZ Office buildings in NSW
GPT Wholesale Office Fund 4% Office Australia & NZ Fund invested in Australian office assets
QIC Property Fund 4% Retail Australia & NZ Fund invested in Australian office assets
Smart Markets Fund 3% Diversified North America Diversified property fund in the US
Arcadia Australian Wholesale Property Fund 3% Diversified Australia & NZ Fund invested in Australian office and retail assets
Other 48% Diversified Global