Grant Harrison, Head of Private Assets, Cbus Super

Real Asset Profile – Cbus Property

Cbus Property was established in 2006 with a specific brief to develop and manage real estate assets for what is now the $50-billion Cbus Super, the industry super fund for the construction and building sector.

Cbus Property has created a significant holding of prime office buildings, leased to blue-chip tenants. Along the way, it has created over 90,000 jobs for its sector.

While other institutional investors continue to compete fiercely for core assets, Cbus Super is sitting pretty, as its wholly-owned property arm has a pipeline of projects valued at around $5.5 billion.

Cbus’s commitment to the property sector has, so far, been richly rewarded with average annual returns of 16.15 per cent ( since inception in 2006 to June 30, 2018).

“When it comes to bringing large office assets onto our books, we don’t buy them, we create them,” says Grant Harrison, Head of Private Assets at Cbus Super.

When it comes to bringing large office assets onto our books, we don't buy them, we create them

“Cbus Property was designed to be a developer that could provide strong risk-adjusted returns to members through property development and could help support employment in the construction sector.”

Harrison says Cbus Property’s charter is first and foremost to provide risk-adjusted returns along with the secondary benefit of supporting our industry.

“Historically, Cbus Property has done two things,” he says. “It has developed premium CBD office buildings to hold as core assets and it has developed residential apartments to sell.”

Cbus Super is among the top 10 largest owners of real assets among Australian super funds. As of December 31, 2018, Cbus held 11.5 per cent of its assets in property, and 11.4 per cent in infrastructure.

“Cbus has been a long-term large investor in unlisted assets.” Harrison says. “We can have up to 11 per cent allocation to infrastructure and up to around 13 per cent to property.”

“There is a long-term view that that is an acceptable allocation.”

Harrison brought with him two decades of experience of investing for super funds when he joined Cbus Super in 2013.

“We are basically at allocation and, therefore, we don’t have a requirement to place a huge amount of capital into the market. We place capital in line with the growth of the fund.”

Harrison has oversight over a team of 10 investment professionals who cover real estate, infrastructure and private equity. His team is responsible for investing up to 25 per cent of all assets under management.

He started his career as a commercial property valuer in 1990 and then took a role with Funds SA, the South Australian public sector pension fund, where he oversaw property and private equity investment for 10 years.

He was managing director of a boutique private equity firm for seven years, then consulted with Commonwealth Superannuation Corporation from 2011 until 2013.

We are basically at allocation and, therefore, we don't have a requirement to place a huge amount of capital into the market. We place capital in line with the growth of the fund

He says Cbus Super sees the role of the property asset class very much as a core asset providing both defensive and growth characteristics.

It is defensive because it delivers stable, income generated from high quality core assets located in central business districts in capital cities. Growth comes from rent increases, which are, in turn, sustained by strong underlying demand for quality office accommodation.

Among office towers in Cbus’ $5-billion portfolio are 1, Bligh Street and 5 Martin Place in Sydney, and 171 Collins Street in Melbourne and 1 William Street in Brisbane.

But for Cbus, the icing on the cake is development profit that Cbus Property has been able to deliver year-after-year. This was especially true during the recent boom in the apartment market. The development company reported annual average return of 20.06 per cent in the five years to June 30, 2018.

Of the day-to-day operation of Cbus Property, Harrison says: “In terms of high-level strategy and capital allocation, there is a strong interaction and reliance between the two parties. In terms of underlying activities – on the individual asset level, Cbus Property has its own board, management and governance. It is left to execute its own strategy.”

Does property development expose the fund to development risk?

No, says Harrison, explaining that Cbus Property’s board has a strong focus on risk. Risk is managed in two ways: preleasing on commercial development and presale on residential development.

On the risk inherent in property, he says it is mitigated by owning core buildings, secured on long-term leases to tenants, such as government departments.

“Cbus owns eight office towers, which provides a solid base around the total returns generation,” So it has helped to de-risk the overall returns from Cbus Property. One individual development positive or negative is not going to blow up Cbus Property.”

In an increasing asset-scarce world, pension fund investors, especially those from offshore, are looking to new niche sectors in Australia, such as build-to-rent.

“We continually assess them and, if they stack up, yes, we will invest in them. To date, we have not invested in build-to-rent because it is an area where some issues, including legislative hurdles, still exist.”

“With build-to-rent you effectively have to run the accommodation. We are here to maximise returns for our members. [Besides] build-to-rent is not yet an institutional grade asset class,” Harrison says.

By comparison, build-to-sell is more straightforward. “These projects generate development profits. You can walk away once you have sold all apartments,” he says.

One of Cbus Property’s current projects is Collins Arch, a $1.25 billion mixed use project offering 200 luxury apartments, a five-star hotel and a prime office tower with some 49,000 square metres of space in Melbourne’s central business district.

He adds: “We do see an opportunity for Cbus Property to grow its role within the portfolio over the time.”

Cbus Property accounts for half the fund’s direct investment in property. The other 50 per cent is invested through pooled institutional property funds, managed by AMP Capital and ISPT, a real estate fund manager, owned by a group of industry super funds, including Cbus.

Cbus has an overseas exposure through the US fund manager Heitman. It also has a small allocation to global listed property securities managed by the Sydney-based Resolution Capital.

Harrison indicates that as the fund looks to increase its diversification, it could look to add more names to its current list of just a small handful of external managers.

Cbus Super has a strong home bias in its property investment, mainly because Cbus Property has such a ‘large appetite’. “It has enabled us to place a large amount of capital into the domestic market successfully,” says Harrison.

On the increasingly important issue of ESG (environment, social and governance), through Cbus Property, the fund now has one of the greenest property portfolios among institutional owners.

Cbus Property is targeting net zero carbon emissions from its entire property portfolio by 2030. It has a ‘green by design’ mandate that puts sustainability at the core of its design and development approach.

Reflecting on his tenure at Cbus, Harrison says: “At the end of the day, the biggest achievement (of my team) is continuing to generate sustainable and relatively stable returns for our members.

“The biggest challenge is continuing to evolve our strategy as market environment always constantly evolves.

“There is an old saying that money never sleeps. That is an incredibly generic statement but it gets me up in the morning and takes me to bed at night. It is as simple as that.”