Super dangers loom amid sharp property value fall

There has been a fundamental change in the value of office blocks because the working from home syndrome has lessened the need for office space in most enterprises. Picture: NCA NewsWire / Damian Shaw

The sharp fall in the value of office blocks and to a lesser extent major shopping centres is not a crisis for industry superannuation funds, but it will cause many of the funds to perform at a lower rate than members’ expect.

But some funds are now encountering a danger that has been apparent for many years but was swept under the carpet.

APRA needs to make sure that current property values are recognised as quickly as possible, and certainly by June 30.

Particular attention needs to be paid to separately traded property and infrastructure units in superannuation funds, where alert unitholders can switch out of any inflated value units with only a few days notice.

Eventually, any damage caused by such switching at inflated prices will have to be born by balanced fund members. In the past decade these assets have performed brilliantly and have provided a major boosts to industry funds and so long term industry fund members should not be concerned by any dip, but it does need to be recognised

The situation was highlighted when Hostplus announced that its real estate and infrastructure units in a few months would no longer be quoted separately.

Hostplus is an excellent, well-funded superannuation fund, but it allowed self-managed funds who were not members of the overall fund to invest in the infrastructure and property-based units.

The self-managed funds rushed in because such high quality property and infrastructure assets were not available elsewhere in the markets. But even the best assets have periods when short term values fall.

The property unit holders right to switch out with a few days notice was not appropriate for this sort of investment

There is no sign in the Hostplus property and infrastructure units prices that shows that their non-listed values have moved into line with the value of listed assets.

To understand the superannuation problem, one needs to go back into history.

In the 1980s, a whole series of unlisted property trusts emerged where unitholders could cash in their units at short notice.

This created a highly dangerous situation because while there was a boom, property was easily sold and money was flowing in.

In the late 1980s and early 1990s there was a sharp fall in commercial property values and the unlisted trusts unit values did not adjust quickly, so they received a rash of redemption requests which could not be met. The trusts were frozen and nasty losses followed.

Fast-forward to around 2010 and similar events took place. These days most trusts are listed, so there are no redemption issues and liquidity for investors is obtained via the share market. Today’s unlisted property trusts have learned from the past and unit holder redemption rights are long term, which ensures continuity of the funds.

While superannuation members can switch funds on short notice in most balanced funds, unlisted property units usually represent less than 10 per cent of the fund and so although a downturn in the value of these unlisted properties impacts performance there is not a liquidity issue.

The superannuation funds investments in listed property trusts have their values marked to market daily.

The valuation process in unlisted property and infrastructure securities is very different.

The assets are valued by professional valuers, who usually base their values on recent sales. In tough times, there is usually a period when property turnover falls to very low levels because the owners of commercial property are initially unwilling to sell at the lower values being indicated by the share market.

This time round values of most property and infrastructure assets have been impacted by higher interest rates but top tier assets that have inflation adjusted or regular worthwhile increases in income have not slumped.

But there has been a fundamental change in the value of office blocks because the working from home syndrome has lessened the need for office space in most enterprises.

Some shopping centres will perform in line with top tier infrastructure and property assets, but others will not.

Given these assets are being traded every day in superannuation funds, the trustees should have set up a valuation system that was linked to major moves in the equivalent listed securities as a back-up to values.

Hostplus’s removal of the ability to invest separately in infrastructure and property by mixing it with other categories will be unattractive to self-managed funds. Most will exit.

What’s important to the Hostplus long term members is that the exit price is at actual current values, not values based on historic prices.

It may be that all the Hostplus property investments are all in top tier non-office block assets and the adjustment requited to the current market is small, but all the facts need to be put on the table and so far that has not happened.