Logistics is a natural companion to retail assets, and as one of the largest owners of prime shopping centres, it follows that UniSuper will become an impressive player in this sector.
Over the next eight to 10 years, the UniSuper portfolio of warehouses and distribution centres will grow in the billions as it builds out its landbanks in Sydney and Melbourne.
Every unit of population consumes products, so it needs direct services in retail and logistics – online warehouse distribution and brick-and-mortar stores, says Kent Robbins, Head of Property at UniSuper. He adds that not every unit of population needs office.
Over the past 18 months, UniSuper has stepped up its exposure to logistics through direct investments. Direct investments now represent 65 per cent of its $8.5 billion unlisted property portfolio.
In February, UniSuper paid $260 million for a prime warehouse, logistics and manufacturing greenfield development site in Deer Park, some 15 kilometres west of Melbourne’s CBD. GPT, its strategic partner, sourced the asset off-market. On completion, the complex will be worth an estimated $1 billion.
Barely a month later, another strategic partner, Richmond Bridge, brought UniSuper into a 50-50 joint venture with the Melbourne-based property asset manager, ISPT, to buy a 280-hectare greenfield logistics site adjacent to the entrance of the new Western Sydney International Airport. Known as Burra Park, the project, will be developed over the next seven years, with an expected value on completion of almost $4 billion.
“We are forecasting that it could take eight, or maybe 10 years of development,” says Robbins. “We will only develop these assets when they meet our members’ return requirements.”
He adds: “Today, we have zero vacancy. As the market continues to perform strongly, we will be developing. I imagine over the next 10 years we are probably going to get a down cycle, in which case we won’t be developing during those times.”
The advantage of a super fund is that we have a stable source of capital to deploy. And we can buy when everyone else is out of the market. We can be countercyclical investors
Robbins says the stabilised assets in the fund’s portfolio are generating income. This means it can afford to hold these long-term development sites. Developing its own property is an efficient strategy because the fund will not have to pay stamp duty on the future value of the asset.
One of UniSuper’s stabilised logistics assets is its investment in the $15.8 billion Goodman Australia Industrial Partnership (GAIP), which owns 111 properties and enjoys 95.8 per cent occupancy. The trust distributes 80-90 per cent of operating earnings and has consistently returned around 15 per cent annually over the years.
In July 2023, UniSuper bought 50 per cent of an industrial portfolio comprising 20 assets across Sydney and Melbourne in a deal worth $560 million. The stake, in what is known as the Australian Industrial Partnership (AIP), was previously owned by Korea’s National Pension Scheme. UniSuper’s co-investors in the $1.1-billion AIP are Blackstone and Dexus.
Looking back on the AIP deal, Robbins says he thought either Blackstone or Dexus might exercise their pre-emptive rights to the stake of the Korean investor. But as it turned out, neither was in a position to deploy money into AIP.
“The advantage of a super fund is that we have a stable source of capital to deploy. And we can buy when everyone else is out of the market. We can be countercyclical investors.”
The stabilised assets in AIP, including the Quarry Industrial Estate in Greystanes, Western Sydney, are fully leased. Robbins says the fund’s investment in the Quarry Industrial Estate delivered net operating income for the 2023-24 financial year up 9.5 per cent on the previous year.
Robbins’ main investment criteria is net operating return. “If you look at the (MSCI) benchmark index it says retail is down two per cent and industrial down five per cent. We are posting positive returns for both of those asset classes.
“Our entry point into big plays in the last 18 months was made on a cap rate at 5-5.5 per cent. When the cap rate went down to 3.75 per cent, we would not buy any assets at that level. The market argued that we bought at a discount, but we say we bought the assets where they should have been repriced to.
“We are reliant on NOI (net operating income). We just want to see the income growth. With a 5.5 per cent income yield and income growth of around 4 per cent, you get a strong return of 9 per cent.”
It takes a lot of discipline to sit out waiting for the right opportunities. We were not going to go ballistic at logistics until we could see evidence of repricing
So UniSuper waited for the frenzy that descended upon the logistics sector during and post-COVID – as investors rushed in to secure warehouses to meet the demand of online retailing – to cool. Says Robbins: “We would have liked to buy into industrial during that phase, but we weren’t seeing quality assets befitting our membership. And the pricing was wrong.”
It was worth the wait. UniSuper was able to land assets at prices that Robbins had doubted would be possible during the peak of the cycle.
He tells [i3] Insights: “It takes a lot of discipline to sit out waiting for the right opportunities. We were not going to go ballistic at logistics until we could see evidence of repricing. And even more important than pricing, we look for quality. You wouldn’t invest in some of assets we saw (during the boom).”
As Robbins will tell you, he is a patient investor, not someone who can be pressured to rush into buying unless each asset satisfies the three pillars to his investment approach. “Quality assets in quality structures with quality managers. If we don’t fulfill those three criteria, we don’t invest. It is not always easy to get all three in place, and that sort of makes investing frustrating, but you have got to be patient.”
UniSuper is not what he calls a “bucket-filler”, preferring to stay true to their reading of market trends. “If the conditions are not right you don’t have to spend the money. Supers are long-term investors; you develop the best quality assets you can when it is the right time.”
One example is the office sector. The market is starting to move, with transactions taking place at discounts of up to 25 per cent. Robbins, who admits that UniSuper is “massively” underweight office, says: “We are clearly looking, but we are not yet ready.”
And why would he want to buy office now when the vacancy rate in Melbourne is 15 per cent, probably closer to 20 per cent, and there is more supply coming onto the market? Or when (tenant) incentives are up to 50 per cent of rents in Melbourne and 30-35 per cent in Sydney?
“I am still posting negative returns out of office, and I am fully leased, and I have super prime Sydney locations with growth in net operating incomes,” says Robbins. UniSuper owns a quarter of the $2-billion Brookfield Place in Sydney CBD and 100 per cent of 7 Macquarie Place in Circular Quay.
“If someone says to me that the cap rate has moved out from 4 to 5 – 6.5 per cent my response is that you are still giving away a 50 per cent incentive – that gives me an effective yield of 3.25 per cent,” he says. The problem is oversupply. And incentives are a real distortion in the office market.
Robbins offers the example of Brookfield Place. “The cap rate has moved out 0.75 – 1 per cent. If your discount rate moves out by 75 basis points you will have to have 15 per cent rent growth to keep whole – and that just hasn’t happened – yet.
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[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.