Florence Chong speaks to CBus’ John Longo about opportunities in residential real estate and weighs equity versus debt in this sector
It should come as no surprise that Cbus Super recently came forward with a commitment to invest up to $500 million over five years to support construction of new social and affordable homes in Australia.
Cbus is, after all, the super fund for the construction and building sectors.
The investment will be made through the Housing Australia Future Fund (HAFF), being created under the Federal Government’s National Housing Accord announced in Australia’s October 2022 budget.
Although the nation’s largest super funds have all signed up to the Accord, which aims to deliver a million extra houses from 2024, none apart from Cbus Super has publicly committed in hard dollars and cents specifically to support the government initiative.
In December, Cbus laid out its commitment, with its CEO, Justin Arter, describing the fund as a pioneer in the financing of social and affordable housing.
Commitment to the National Housing Accord was an extension of the fund’s leadership in this sector, he said in December, when pledging support to the national housing goal.
Cbus has invested in social and affordable housing mainly through debt. To date, our investment totals about $120 million in debt. We think debt return is acceptable for the risk we are taking
John Longo, Cbus Super head of property, told [i3] Insights: “Cbus has invested in social and affordable housing mainly through debt. To date, our investment totals about $120 million in debt. We think debt return is acceptable for the risk we are taking.”
Cbus is a regular investor, along with other funds like HESTA, in housing bonds issued by the National Housing Finance and Investment Corporation (NHFIC), soon to be renamed Housing Australia as its role is expanded under the new government.
Cbus has worked with NHFIC since 2018 to help develop financing models that deliver returns for Cbus members along with affordable financing for Community Housing Providers (CHPs).
Says Longo: “We haven’t invested in equity in this sector to date because we think the returns are too low for the risk we are asked to take.”
The government is still working through its affordable housing policy, he says, and published a draft document in late 2022 to flesh out policy implementation.
“In general, we would look at investments we think offer an attractive risk return profile. We are very interested in affordable housing; we have spoken to many managers and seen many proposals.
“We are actively looking – and not just in the last 2 months. Cbus has reviewed opportunities for over 10 years, and since I joined the fund we have continued to assess opportunities in social and affordable housing.
“If we can come up with a model which has government support and the returns are attractive, in all likelihood we would do it.”
Current support arrangements include stamp duty and GST savings. Longo says that if an investor can work with CHPs, which specialise in providing social and affordable housing, and it is structured appropriately, it will improve the viability of the project, which is another option.
He says there are also some models that do not rely on government support which are being investigated
“At some point, we will find a way in which we can participate.”
That point has not yet been reached, according to Longo, even with the more commercial proposition of build-to-rent (BTR), which has attracted a growing list of institutional investors, including leading super funds.
In Longo’s view, there are still many impediments, even in Australia’s fast-growing BTR market.
We have a 10 per cent weighting of our property portfolio to residential, and our intention is to increase our exposure. We’re definitely talking to people
Cbus Super does, however, have exposure to the more established, deep and liquid US multifamily sector.
“We are invested through our manager, Resolution Capital, (based in Sydney) which has in its portfolio of global property securities a number of US multifamily REITs.”
Cbus is seeking to increase its offshore exposure, talking to a range of global managers – like Heitman, based in Chicago – to point the fund to investment opportunities.
“We have relationships with the likes of Brookfield and Blackstone, but we do not have property equity investments with them at this stage,” Longo says.
“On the whole, we have a 10 per cent weighting of our property portfolio to residential, and our intention is to increase our exposure. We’re definitely talking to people.”
While Cbus Super does not have direct holdings of residential rental assets, it has benefitted considerably in the built-to-sell residential projects undertaken by Cbus Property, its wholly-owned property development and investment arm.
Cbus Property is an active residential apartment developer with a current project pipeline of approximately $2.5 billion across Victoria, New South Wales and Queensland, including 17 Spring Street, Melbourne; 111 Castlereagh in Sydney CBD and Newmarket Randwick in Sydney’s eastern suburbs.
The portfolio has been resilient to the impacts of the pandemic. One example was the sale of two whole-floor apartments, including its exclusive Garden Residence, at 17 Spring Street, Melbourne, which in July 2021 sold off the plan in two weeks for a combined total of $25 million – at the height of the COVID pandemic in Australia.
Longo says higher interest rates have yet to impact Cbus Property’s activities.
“Interest rate hikes especially impact investors and first home buyers. When rates are high, these purchasers borrow less, affecting appetite and pricing. That said, I wouldn’t expect a large adjustment in demand for core, owner-occupier product, but there will be adjustments at the margin,” he tells [i3] Insights.
“But as long as people are not forced to sell, I don’t expect a big change in prices.”
We expect our offshore allocations to go from 20 - 30 per cent over five years, but we’re unlikely to have half of our assets overseas
Longo also points out that Cbus has exposure to residential through its investments in ASX-listed property groups which have residential development.
All things being equal – and everything depends on pricing – Longo says the fund’s preference is to invest in Australia, However, he expects exposure to increase to international assets over time, possibly in the 20 – 40 per cent range.
“We expect our offshore allocations to go from 20 – 30 per cent over five years, but we’re unlikely to have half of our assets overseas. This is because of our size – and we are not growing exponentially, and believe we can find attractive opportunities in Australia.
He adds: “If pricing adjusts in Australia and it is much cheaper than other regions, then we would stay in Australia.”
As Longo admits, the Cbus trump card is Cbus Property.
“Having Cbus Property gives us a competitive advantage in Australia,” he says. “We get exposure to high-quality residential, retail and office property. And Cbus Property has a good track record and costs are well managed.”
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.