How conservative are AustralianSuper’s Unlisted Property Valuations?

Summary: When you actually check the accounts, relative to their own valuation ranges, it would appear that AustralianSuper carries the value of their unlisted property investments conservatively. It would seem that the values AustralianSuper use are much closer to the Low end of the valuation range provided by the fund.

I think one Chief Investment Officer put it best when he said to the AFR “The tired old myth that industry fund outperformance somehow relies on loose valuations isn’t borne out by reality, and this has been proven decade after decade”.

I genuinely agree with him 100%, although, without being rude, the fund that CIO works for is not my favourite.

I also think most people who parrot the same rubbish about all industry funds (it’s always “all”) generally have a huge financial incentive to perpetuate a line which I’ve never seen any decent data to support.

I.e. the same people claiming this are line simply slagging a competitor who prevents them from charging you fees. It’s kind of like the owner of the local Blockbuster store telling you in 2012 that Netflix is never going to work and is a rubbish way to watch movies.

However, it doesn’t mean that there’s not some merit to checking for oneself. Unlisted assets are tricky. By the way, there are other funds that love unlisted property.

I would point out that you’ve more than one regulator, independent valuations, reasonably clear guidelines, a seriously hostile political establishment, and an entire industry constantly checking for cracks to appear and hoping for mistakes.

So the question is, how reliable are AustralianSuper’s valuations? Are they accurate? or are they dreamin….

Well, I thought a good place to start would be the biggest guy in the room, AustralianSuper, and unlike most, I bothered to check the relevant statements / disclosures.

Despite what some would have you believe, super funds are not magical black boxes with no transparency. Rather, now more than ever, they actually disclose a lot.

Namely via their Portfolio Holdings Disclosures, which for the AustralianSuper Balanced option you can find here or in a more aesthetic and interactive form here, for the record and it’s back from 2019, but you can check AustralianSuper’s Investment Valuation Standard here.

Unlisted Assets

The story goes, assets like a major office block, or massive industrial estate, aren’t traded on the stock exchange, thus, if left to their own devices, super funds will value these assets on their books for much more than they are actually worth (e.g. what people would pay).

‘Unlisted Property’ includes things like office blocks (of all qualities in all different corners of the globe), industrial estates, medical centres, pubs, shopping centres (big, small and in between), residential, build-to-rent, trailer parks, aged care, hotels, you name it, if it’s got four walls and a roof and isn’t an airport, it’s probably in there somewhere.

Again, despite what you hear, super funds disclose these assets, Aussie Super are pretty damn good, again, there’s a list of the entire 161 investments here. The website has a Google Maps feature, showing the where and what of each asset.

Here’s the top five:

Source: AustralianSuper

Now, we can (and should) argue about what moron decided to name no 3 Canada Water when it’s located in London, UK. But for the sake of time we’ll stick to debating the valuations.

Valuations

Valuing a big property is not a perfect science. Even if the big property (or properties) are listed. If an asset is listed e.g. trades on the stock exchange, it just means that’s what the market is valuing a single share at i.e. a really small part. It’s definitely good, but it’s still not perfect.

If you had to sell the whole thing, the story might be different - maybe more, maybe less. This is shown in real life by discounts for ‘block trads’ and take over premiums.

Secondly, if you’ve got a long-term view and heaps of cashflow (e.g. a super fund), property is actually extremely well suited to being unlisted, my understanding is that superfunds tend to avoid loading them up with debt, which is a good thing in these instances (happy to be proven wrong).

For its 161 unlisted property investments, AustralianSuper provides a “Value Range” (Column V) for all investments, with a low and high end. Again, these vary in their ranges and differences.

Here’s an example:

Lets confirm, each asset has a range, as shown below for World Square in Sydney.

Now Aussie are kind enough to tell us the low and the high ends, so we can’t say for certain where they’re settled on for example, the above, which is just AustralianSuper Balanced Fund’s share of World Square Shopping Centre, not the whole thing.

However, AustralianSuper, do tell us the total unlisted property values for the Balanced Option (and other options) and that’s not a range, they provide a value.

Ergo, primary school mathematics can tell us, if we add them all up, what are Aussie thinking? Are they valuing the total properties at the high end or the low end?

And, it would appear, as at 31 December 2022, they are much closer to low than high, which would imply (assuming the ranges are fair) that AustralianSuper are being conservative, responsible and astute investors.

No Towelie, and neither does AustralianSuper it would seem.

The numbers

Ok let’s assume someone went through and compiled all 161 assets and then compare the totals for the low estimate and the totals for the high estimate relative to the total for unlisted property.

Assume no longer, because I did:

As shown above, AustralianSuper’s Balanced Option per 31 December 2022 Portfolio Holding Disclosures valued their total Unlisted Property investments at $9,984,140,340.

This compares to my estimates of $5,586,000,000 on the low end and $20,414,000,000 on the high end.

Here’s how that looks relatively:

What that tells us, is that on AustralianSuper’s numbers, they’re valuing the portfolio conservatively, towards the lower end, pending the following assumptions:

• Assumes all properties are valued the same, e.g. not some at highs and some at lows.

• Assumes for the value range of <$2M a ‘low’ of $500,000.

• Current as of 31 December 2022.

This is a good thing, because it means AustralianSuper investors theoretically less likely to be told they’re dreamin.

Ranges, Bands, Variances, Guides…

Now, lets us rightfully point out, some ranges are bigger than others, for example, above you will notice they range as follows;

• < $2m

• $10m to $50m

• $50m to $100m

• $300m to $1.5Bn

Fundamentally everything discussed in this article is worth no more than the valuation ‘bands’ by AustralianSuper.

It’s entirely possible the Highs are ridiculous and the lows are realistic, however, I’m in no position to assess this, I’m not a property valuation expert, I don’t have a team that can provide critiques on the discount rates used, I don’t know what comparable transactions of similar assets in recent time frames have occurred.

However, I really like that AustralianSuper provide ranges for their assets, ranges are good. This is the key with an unlisted asset, it’s impossible to say with resolute conviction what the precise value is. The price is what someone will pay right now for the asset, 9 figure price tag property holdings don’t sell like bananas from the supermarket or shares of CBA on the ASX.

A simple analogy would be selling a residential house, you’ve got an idea and inking what it’s worth, and you can consider both recent sales and similar properties, but until the actual cash lands in your bank account, all you can rely on is a guide.

My research shows that AustralianSuper are conservative within their own ranges. I can’t critique the guide, I’ve not seen anyone else and would love to hear someone who can, I’d just prefer they do so from an educated, independent and objective viewpoint, and not someone who is a retail super fund lackey or a suburban financial adviser who doesn't know shit from clay, or anyone else with an overwhelmingly poor intellect and even higher conflict of interest.

Now, my understanding is that each value band, e.g. “$10m - $50m” represents just the Balanced fund’s ownership, not the entire value of the actual property. This is shown when you compare the same properties to the High Growth options which as a whole has much lower FUM, you see properties on much lower ‘bands'.

As confirmed below, the actual properties are weighted to not just the fund but the actual investment’s (e.g. Balanced vs High Growth) ownership stake.

Internal vs External

By the way, Aussie also discloses the internally managed properties versus those external. By this I mean, there’s a chunk of money that is managed by global property experts, you can see those below.

Source: Australian Super 2022 Report.

(Fortunately the page cut off the very first external manager, which was AMP, how fitting...)

About 49% of the properties however are managed internally, by AustralianSuper themselves, i.e. at the top. Note they’re still valued by independent experts, however, they’re managed internally.

Managing assets internally is a really good thing, they can often do the same job if not better, at a much lower cost to members, it’s one of the ways AustralianSuper provide such low fees.

This is $4.894 billion of the balanced option or approximately 49% of the total property holding.

Further, they identify which assets are managed internally, which gives us an intriguing opportunity to see how the internal and externals stack up relative to their respective highs and lows, again, they’re both valued and assessed by independent, third-party experts.

And verdict? Well, the internal portfolio is more conservatively valued than the external portfolio relative to its range.

Again, more conservative than the external portfolios relative to their ranges.

Now, there’s a small amount of guesswork to figure out what is internal. Aussie discloses 28 separate properties as being so, you can then pick these out of the list, and add them up.

I suspect, if there is an inaccuracy in my assumptions, it would be that I’ve underestimated the number of properties in the internal camp, which, would make it even more conservative again, but, I’ve been quite thorough so I think it’s reasonable, subject to all the other assumptions.

Again, this isn’t conclusive, but it does in my opinion lend evidence that AustralianSuper has their feet on the ground relative to their property investments and valuations.

We should all remember that some (not all) of the same property managers that manage money for AustralianSuper externally do the same for financial planning clients. I note that AustralianSuper’s investments are likely much better than those in financial planners’ portfolios despite having the same ‘brand’, however, the point is to remember that the same people chanting that their valuations are askew might find that their own clients are in far worse investments.

Show me the incentive and I’ll show you the outcome

My personal favourite line in finance rings true with almost every part of the industry, the line is “Show me the incentive and I’ll show you the outcome” Charlie Munger, who is Warren Buffett’s 99-year-old right-hand man.

Industry fund analysts and CIOs are not paid enormous bonuses like their wealthy cousins in retail and bank funds. Their remuneration is not directly tied to performance to such a degree that you would be wary of irresponsible, risk-taking behaviour.

Examples of such behaviour include the GFC as well as the problems excruciatingly illustrated from the Royal Commission. Incentives can be a powerful driver of poor behaviour and in this instance, there are not extraordinary multi-million dollar succulent carrots for the managers of these funds.

They are paid bonuses, which is good as it incentivises them to perform for their members, but again, not to a degree that their could be influenced to undertake excessive and outrageous risk taking behaviour.

per this interesting article in the AFR “In AustralianSuper’s case, executives are paid bonuses based on the performance of the overall blended balanced fund option, not the underlying singular returns of any asset class.”

The absence of crazy incentive plans doesn’t make AustralianSuper or its members immune from stupid decisions and doesn’t guarantee property prices, but, it does help me have confidence in their decision-making and the motivations behind them.

Office Armageddon

It’s pretty clear there’s some pain coming for office blocks in the next 6 - 12 months. For funds like AustralianSuper, this isn’t the end of the world, they have multidecade investment horizons and have no shortage of incoming cash, this makes unlisted property a really good fit - in appropriate amounts - which in the AustralianSuper Balanced account is 5.49% of the total.

Within Office blocks as well, I would expect there will be a significant divergence between CBD A-Grade Premium Stock versus B-Grade and C-Grade city fringe stock.

Subject to my assumptions, my calcs tell me that 1.9% of the Balanced option or $3,534,113,750 is invested in Unlisted Office. I don’t think that’s problematic. I think that would be one of the lower of all MySuper options.

Whilst Aussie has a reasonable amount in Unlisted Property as a whole, it’s made up of different investments, offices, medical centres, to pubs to shopping centres, education, industrial, commercial, etc. Pubs might have inflation-linked leases, industrial might just zig when office zags, and the portfolio is diverse, which protects member capital.

Plenty of sceptics

You’ve got to remember that by and large the financial services industry despises industry funds, this is due to the simple fact that they make charging ongoing adviser fees redundant. Industry funds are also not especially liked by certain members of government.

Industry funds have grown stronger and stronger for decades, they scored near-perfect marks in the royal commission, every single year they are dragged before hostile senate estimates and time after time after time they have come up with a clean bill of health. There are exceptions, some industry funds are better than others, but as a cohort, excluding EISS, they’ve been remarkedly immune from scandal and as such their clients have fared significantly better than those in advised products or bank-affiliated retail funds.

Industry funds employ Big 4 Firm Auditors, high-priced and respected valuation experts, it’s definitely not infallible, but it’s definitely not a finger in the wind business.

Further, let’s remember, these funds have entire political parties and an enormous financial services industry actively rooting for their demise, I haven’t seen a piece of evidence it’s coming any time soon - quite the contrary. Certain funds got caught out in differing degrees in the GFC, like virtually every financial product, but any missteps don’t even pale in comparison to that of the retail or advice sector.

Summary

So is it possible for AustralianSuper to inflate their returns by overvaluing unlisted Property? Yes, It’s possible, I don’t see it, but it’s certainly possible. They’d have to convince a lot of different auditors and experts and there are a lot of people who would have an interest in proving it which they never have, but it’s possible. It’s certainly not unbelievable to get a friendly actuary and a strongarm valuation. Are they incentivised to? Not to my understanding the staff aren’t, nowhere near to an extent that would give me pause.

Is it possible the people who have been repeating the same line that industry funds use imaginary valuations are either lying, stupid or both? Yes, in fact, I’d say it’s probable.

I’d argue the people with those opinions have a vested interest in telling you that. It’s also very likely that the lender of such opinions has precisely zero idea what they are talking about and hasn’t checked nor produced any evidence to substantiate their claims.

One final confirmation is that these problems really take effect when you sell assets, which, is unlikely to occur anytime soon for a major industry fund, given they have the unbelievably powerful tool of reliable cashflows and long-term investment horizons. The other key impact would be a major event, ala COVID, ala GFC. Both of these scenarios would also affect listed property investments, which are massive as well by the way and found in all super funds and virtually all investments.

Whilst I personally think there’s pain coming for office investments and property as a whole with interest rates where they are, I can’t see AustralianSuper being caught swimming naked if the tide went out.

I’m getting bored of writing about unlisted property, so I’ll be returning to blogging about what I consider to be the most important element for Australians, which is fees, very soon.

Then I’ll be back to writing what I think is most important, fees.

Thanks,

Andy

Some important disclaimers: This blog and its posts are written to educate Australians on their financials, anything in this post is solely general information and commentary. All of the information referenced and provided has been sourced from publicly available information and all attempts have been made to ensure everything is accurate. All information is current as of the publishing date of 20th of April 2023, and may change in the future, it is important readers conduct their own research and ensure that any figures below remain current at the time they read. There is every chance the fees displayed and discussed may change in the future.