Future funding housing

From the Age this morning.

The Future Fund has gone into partnership with a land developer to buy and develop greenfield sites on the outskirts of the major cities.

West Australian-based property developer Peet Limited yesterday announced a partnership to buy land in areas of projected population growth and develop master-planned communities.

The arrangement is expected to be worth more than $300 million over 10 years.

The Future Fund was ..

… established by the Future Fund Act 2006. The object of the fund is to strengthen the Australian Government’s long term financial position by making provision for unfunded Commonwealth superannuation liabilities. These liabilities will become payable at a time when an ageing population is likely to place significant pressure on the Australian Government’s finances. The Future Fund has received contributions from a combination of budget surpluses, proceeds from the sale of the government’s holding of Telstra and the transfer of remaining Telstra shares. The Future Fund Board of Guardians is responsible for deciding how to invest the assets of the Fund.

So basically this is a superannuation fund run by the government for itself to fund its own superannuation liabilities. The fund’s mandate sets some fairly tough targets.

The Future Fund Investment Mandate sets a target return of between 4.5% and 5.5% above the Consumer Price Index (CPI) measure of inflation over the long term. The Board has interpreted this as an objective to provide a return of at least 5% above CPI over rolling 10 year periods. The mandate also requires the Board to take an acceptable, but not excessive, level of risk.

$300 million over 10 years certainly isn’t a large investment, but for some reason I find myself feeling conflicted about this particular article.

On the positive side  I am happy that the government has had the foresight to realise its superannuation liability and to create a facility to deal with that issue. However on the negative side I feel that more direct intervention into the Australian housing market by the government (or pseudo-government body) is unwarranted.

This also creates an interesting chain of government financial dependency on itself. The Future fund which is setup to manage a financial liability of the government is investing in housing, which it is implicitly supported by that same government via bank funding guarantees. No matter how remote you consider a housing crash to be,  that double-dipping on risk is certainly an issue. It isn’t as if the taxpayer isn’t already on the hook for enough government initiated housing risk via those particular guarantees and AOFM operations ( past and future ).

Obviously the other question is whether it is an investment that is able to return 5% above CPI over the next 10 years given the continuation of falling housing market

House prices continued their downward slide in May losing more value in the first five months of this year than they did in similar period during the 2008 global financial crisis.

National city home values fell 0.3 per cent over the month, seasonally adjusted, but posted a decline of 2.7 per cent over the year from January, the latest figures from RP Data-Rismark show.

By comparison, in the five months up to July 2008 during the peak of the GFC, house values dropped 2.4 per cent, RP Data researcher Tim Lawless said.

Obviously this is a long term investment, but the trend in credit issuance for housing certainly looks to be baked in and you only need 1 or 2 years of losses to make it very hard to catch up.

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Comments

  1. According to this

    http://www.futurefund.gov.au/__data/assets/pdf_file/0015/4362/Portfolio_update_310311_A173416_.pdf

    The Future Fund’s return for the quarter ending 31 March 2011 (excluding the Fund’s Telstra holding) was 3.9%, giving a return for the first nine months of the financial year of 11.7%. Since the first contribution to the Future Fund on 5 May 2006, the return stands at 5.3% per annum.

    That is a pretty good year !! However 5.3% p.a is below their mandate. Feel free to do some more digging as they have 22% equity 19% debt securities according to that file.

    I assume that a fair percentage of that $14.2Billion in debt securities is OZ banks, and probably the same of equities?

    So maybe it is a triple decker risk sandwich.

    • That’s a ridiculous mandate – it stands alongside similar stupid 8% targets that the majority of US pension funds are REQUIRED to achieve to match their long term unfunded liabilities.

      Maybe the FF should have invested in the US property fund recently highlighted by UE……

      The Military Super fund (which also has a huge unfunded liability) is similarly poorly performing.

      The average super fund has returned 3.2% a year for the last 10 years, before CPI.

      Unless they have Marc Faber or another Market Wizard at the helm, good luck with improving on that.

    • ASX 200 started the financial year at 4300. End of March it was 4838, an increase of 12.5%. So that would’ve helped.

      Of course, ASX 200 is now down almost 6% from that end of March level, so the next quarter’s returns might not look so flash.

      Triple decker risk sandwich is about right. Today, diversification is difficult, everything is correlated to liquidity.

  2. In Sept 10 I saw a story in the Australian about the Future Fund investing in Lord Rothchilds Investment Bank, and at the time many SME’s that I knew of were having difficulty getting bank loans so I emailed the Future Fund as to what the investment profile was, give the SME situation.

    Here is the response
    ==============================

    Dear Adrian

    Thank you for your email and interest in the Future Fund.

    Under its mandate the Board is required to target a return of at least CPI +4.5% per annum with acceptable but not excessive risk.

    Accordingly the Board has developed and is implementing an investment strategy that invests across a diversity of countries, asset classes and sectors. Investment in overseas markets is extremely important to achieving the Fund’s objective, but the program also includes the investment of significant capital in Australia – our last annual report indicated that around 44% of the Future Fund (excluding the Telstra holding and cash holdings) was invested in Australia .

    Thank you again for your interest.

    Kind regards

  3. on the eve of the retirement of a very large demographic, they decide to put the majority of their eggs in one basket. So our Governments only investment strategies are real estate and china.

    I know lets charge the people more taxes!

  4. On a pedantic note, this is not so much an investment in housing as in the supply of land to meet future residential housing demand.

    Peet and Co have a long track record in this. The model they use is very conservative: no debt involved, long-term, multi-stage subdivisions, aimed at entry-level buyers…..so aimed at the part of the market where new households will be forming in the future.

    I would have thought this is not a bad place for Super cash to be directed. The income and capital will be returned over a long time horizon from the supply of socially-useful goods.

    At the same time, $300 million is not a lot of money, either for the Future fund or for this kind of project.

  5. Sandgroper Sceptic

    $300m out of $74.6bn (as at end of March 2011) = 0.4% of fund balance.

    I agree it is a worrying investment due to risk and the poor expected returns for property over the next decade(s) but it is less than 1%.

    The holding in Aussie bank debt is much more of an issue.

  6. I did say those exact words in the post.

    “$300 million over 10 years certainly isn’t a large investment,”

    It was more of a comment on the further support of the politico-housing complex. Obviously it may end up being a great investment and in that case I will have worried for nowt.

    • Sandgroper Sceptic

      Not a criticism! I agree with your sentiments…just adding in some extra detail.

    • The investment is not in Peet stock, but in land. The project belongs to the equity investors and Peet will manage the development. The shares look abysmal (I don’t own any) – like most in this sector at the moment.

      This is really a bet on the longer run demand for residential land in Perth….not likely to be a losing bet, as long as the asset is funded with cash and not debt.

    • From the article

      “One of its former subdivisions, Cranbourne’s Brookland Greens estate, is subject to continuing legal action after hundreds of residents were forced to evacuate in 2008 because of dangerously high levels of methane, which had leached from a nearby land-fill site.

      Residents won a landmark $23.5 million settlement. But the estate’s manager, Peet & Co Casey, was recently named among nine other third parties in a legal action by Casey Council to recoup costs.”

      That explains the share price. Nice bailout! Wonder which politician has stocks?

  7. Having recently visited some of Melbourne’s new suburbs recently in the outer outer outer East (and West), I can’t say I’m impressed with the quality of the lifestyles being created in these kind of places. The more expensive estates are quite nice but the cheaper ones are really Dickensian slums in the making. One estate I saw recently in Deer Park had houses that nearly touched each other with a postage stamp sized backyard (so what’s the point of living in the outer suburbs if you can’t at least have that?). So pay a bargin price of $300,000 and you’ll be cheek by jowl with your neighbours with a stiff mortgage to boot. Great.

    I guess if you are used to living in the outer rings of Saturn then its not an issue. Its very reassuring to know that our pollies giant protected super fund is helping to make more urban sprawl miles from any public transport or services…

    • Yep, there are kilmometers of that sort of estate ringing the outer boundries of the Melbourne Metro area (often we are talking 40-50kms out).

      It is rather odd to be driving though empty rural paddocks and over the rise you will find several housing estates exactly like you describe. Huge houses crammed onto tiny blocks with perhaps a metre or so betweem them each. Hardly any yard to speak of and trees are far and few between. Edge of the Estate is paddocks again. Really odd to see.

      Public transport? Nope. Shops? Nope, Schools or childcare? Nope (Sure they are often ‘proposed’, usually in the empty paddock next door and maybe years away.

      Where is the upside for these folks?. Sure the house maybe a bit cheaper, but you need to run at least two cars and gobs of fuel each week to live crammed in like sardines.

      I also note these big boxy houses soak up plenty of sunshine and needs some fairly grunty air con units to keep the temp steady. Seems madness to me, but hey…

      • Darklydrawl, there are also lots of social and economic problems that get hidden in those places too. My experience is there are lots of problems with drink driving (no public transport), pokies (I’m so bored, let’s go to the local mini-Vegas) and obesity (nowhere is within walking/riding distance so let’s drive everywhere). Depending on the area there can be problems with pollution, dust or heat (lack of trees), traffic crammed onto inadequate roads etc and as you also pointed out – none of these box type big houses have eaves or much shelter so they are really expensive to heat or cool.

        Obviously not all of those estates are like that but I’d hate to be living on a fringe estate when petrol hits $2 or $3 a litre… at the moment I believe peak oil isn’t factoring on anyone’s radar at all in this equation.

      • You can thank Australia’s land-use regulations (restrictive zoning and urban growth boundaries) for these kinds of estates – i.e. big houses crammed onto tiny blocks and each other, with minimal open space. That’s what happens when you force up the price of serviced fringe land from 20% of the total cost to 50% plus as well as designate minimum density ratios – it causes developers to cram lots of homes into smaller spaces. This is bad for everyone concerned.

        It’s crazy that Melbourne’s middle suburbs (e.g. Ferntree Gully, Ringwood, etc) have nice traditional suburban homes on good size blocks whereas further out, blocks and open space shrink significantly.

        • Yes Leith, it is almost like a picture tells a thousand words. It certainly supports your argument in a visual way.

          My parents still live in a small (by today’s standards) 3 bedroom house on a genuine 1/4 acre block. I grew up there and our back and front yards was our world when we were kids. Endless entertainment for many years.

          I feel sorry for any children in these McMansions. Full of TV’s but not much dirt and trees to play with.

          oh well, maybe I am just getting old…

          • Yes Leith and Darklydrawl, its all very odd that nobody seems to mind living in these places, they very sort of estate the Future Fund are aiming to finance. Another factor I forgot to mention is access to jobs… if you don’t work locally you are faced with huge commutes to the inner city for work. I used to work with lots of people who reside around the Mernda/South Morang area and worked in the city. None of them seemed to really mind the hour plus commutes (longer on the bus/train) because they felt the trade off for a cheaper/larger house was worth it.

            Melbourne is already well over 100kms from one end to the other … if we keep expanding like this then we should at least look at a system of dedicated cross-city express trains to compliment our moribund freeways and tollways (they have cross-city trains in Paris and it works really well).

  8. They could have deliberatly picked suburbs with expansion plans based on mining like Karratha, WA.

    From a risk point of view, that would be one step closer to “maximising returns”.

  9. DE,

    Firstly, I am a big fan of the site and certainly subscribe to the housing over valued story.

    However, it would be incorrect to think that the FF’s recent deal represents quasi gov support of the housing market.

    I have some dealings with the FF from time to time, so I know a bit about how they operate. They are quite an independent entity with an independent board. They regularly make politically incorrect investments or investments that are not in line with what the federal government would want.

    I suspect this JV investment is just part of their ‘opportunistic real estate’ allocation and it would have been assessed on its merits.

    Secondly, its a land subdivision and new communities play, so it will be increasing the supply of land rather than restricting it.

    I cannot vouch for the quality of the investment or otherwise (I personally have my doubts) just that it should not be considered as politically motivated support for the ‘politico-housing complex’.

  10. Does it really matter if the FF can’t make it’s targets? Presumably they will fund any shortfall by selling government controlled assets to make up the difference. ie NBN, Public utilities, land.
    After all we are talking about protecting the future pensions of our illustrious leadership.