Total assets controlled by the Australian superannuation (pension) sector surpassed AUD 1.6 trillion for the first time in December 2014. To put the Australian pension system into context, Towers Watson reported that the Australian pension system has the fourth largest asset base in the world behind the US, UK and Japan. Superannuation funds have maintained a relatively consistent allocation to real estate of between 8% and 10%. The current allocation to real estate is 8%, implying that superannuation funds have a AUD 131 billion exposure to the real estate sector.

The recent acquisition of a 25% stake in the Ala Moana shopping mall in Honolulu for USD 1.1 billion by Australian Super captured media attention in Australia. However, the Australian superannuation sector has a domestic bias in its real estate portfolio. Real Capital Analytics reported that Australian investors have acquired only USD 9.09 billion worth of offshore assets over the three years to March 2015. This headline figure includes acquisitions made by listed Australian REITs and developers. Superannuation sector investment activity has been limited with the aforementioned Australian Super the most active, followed by QIC and Q Super.

The question is: when will the tipping point occur for the Australian superannuation sector moving into offshore real estate markets?

The superannuation sector is projected to increase over the next decade. The Superannuation Guarantee levy increased to 9.5% in July 2014. Based on current laws, the Superannuation Guarantee will remain at 9.5% for seven years, increasing to 10% from July 2021 and eventually to 12% from July 2025.

While the long-term projections for the size of the superannuation sector vary, we have assumed an increase of 7% per annum between 2014 and 2025. Based on this simplistic modelling the superannuation sector will increase to AUD 3.5 trillion by 2025. Assuming superannuation funds maintain an 8% allocation to real estate, the incremental demand for real estate between 2014 and 2025 will be AUD 144 billion.

Part of the incremental demand will be absorbed by the capital appreciation of existing real estate stock, but it implies there will be underlying demand of AUD 95 billion for real estate investment between 2014 and 2025.

The Australian superannuation sector is highly fragmented and a number of funds lack the scale or infrastructure to adequately assess offshore investment opportunities. Further consolidation is expected in the sector over the next two to three years with a number of large funds emerging. A shortage of real estate assets in Australia will see an increasing number of superannuation funds diversify their real estate portfolios by moving offshore. By 2020, the Australian superannuation sector could be one of the most active cross-border real estate investors.

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