Put simply, RG97 is the fees and cost disclosure regime for superannuation and managed investment products.
The problem for real estate is that stamp duty must be disclosed to fund members as a fee rather than a tax. Instead of treating stamp duty as a standard project cost and calculating returns on the full cost base, RG97 pulls it out and labels it a fee.
That makes life difficult for major super funds, which must tightly manage their fee budgets, and the result is that many of their real estate allocations are pushed offshore.
Be that as it may, super funds haven’t been avoiding alternative living sectors completely with Australian Super and Hesta each taking a 40 per cent stake in affordable housing developer Assemble.
Chief executive officer of Mirvac, Campbell Hanan has been quite vocal about RG97 and has approached ASIC on numerous occasions to ask how an infrastructure fund buying a piece of real estate and paying stamp duty is considered a cost, but a real estate company buying the same thing is a fee.
The good news he said is the government and ASIC are now reviewing the regime.
Hanan also pointed out that local super funds also expected higher returns than the alternative living asset sector offers as they consistently want around 12 per cent annually whereas the sector often comes in at around 9 per cent.
“It’s all about ensuring their members get a fair and reasonable return and while the funds have a social conscience (around alternatives such as build-to-rent (BTR) or social and affordable housing), they serve their members, they’re not benevolent,” Hanan said.
For former NSW planning minister and group executive of housing at Anglicare, Rob Stokes, this is a particular concern in the social and affordable sector where the returns are never going to be as high.
Former NSW planning minister and group executive of housing at Anglicare, Rob Stokes.
“Social without subsidy just cannot work,” he said.
Stokes said governments are pushing to make social and affordable housing more attractive to investors and one way of doing that is making more people aware that community housing providers in the social housing space are not-for-profits.
“They pay no tax and often own the land as well so there’s no need to develop a large margin but as we’ve seen in childcare which is heavily subsidised, it needs to be heavily regulated.
“It needs to be considered as more like investing in bonds,” Stokes said.
Without local super funds investing heavily at present overseas pension and sovereign wealth funds are stepping into the void.
Gaitanos said The Living Company has very little locally denominated capital in their business.
“Everything else from BTR to retirement living and purpose-built student accommodation (PBSA) is offshore,” Gaitanos said.
Co-founder of The Living Company Stephen Gaitanos.
“It’s extraordinary, we have capital partnerships with the National Pension Service (NPS) of Korea and other Korean pension funds, and off the back of those we decided to open an office in Seoul alongside our Singapore and Hong Kong offices,” Gaitanos said.
“We also have the Dutch pension fund APG as an investor as well so I think the foreign capital is here to stay despite everything our governments do to push them away in terms of foreign investor surcharges and land tax, which has to stop.”
Gaitanos said foreign capital is drawn to Australia because any global pension fund looking for exposure to Asia, which he says is almost all of them, inevitably lands on Japan and Australia. Both countries are viewed as politically stable with low regulatory risk.
What’s more Gaitanos said The Living Company now have scale as a key selling and can say to investors they’re number one or two in any market they play whether that be PBSA, BTR or retirement living.
From a local banking perspective in debt markets, Westpac institutional bank’s managing director of real estate Chris Cahill said the alternative living sector is now the bank’s largest pipeline in commercial real estate.
“It’s a strategic priority for the broader bank, but an important part of our real estate portfolio,” Cahill said, ” and you can see the competition coming into the market from domestic and offshore banks and private credit is really active in the market as well.
“And that competition’s not going to abate.”