AustralianSuper Pty, the country’s largest pension fund, is facing further losses on US property assets as a lender prepares to take back a vacant Washington, DC office tower it owns with Brookfield Corp.
(Bloomberg) — AustralianSuper Pty, the country’s largest pension fund, is facing further losses on US property assets as a lender prepares to take back a vacant Washington, DC office tower it owns with Brookfield Corp.
The 12-story building in the US capital is now controlled by Starwood Property Trust Inc., which provided a $120 million loan to the property, said two people familiar with the matter. Starwood has been in talks to either find a new tenant for the early 1990s-built tower, which has been unoccupied for some time, or convert it into apartments, the people said.
The building at 1200 K Street is part of a package of eight Washington, DC offices 49%-owned by AustralianSuper, snapped up in a showpiece deal with Brookfield eight years ago as pension funds piled into private markets. But as borrowing costs soared and hybrid work made offices harder to fill, Brookfield and other landlords have this year defaulted on some office mortgages as property values fell.
It’s the latest setback for AustralianSuper’s US property investments, which also include the world’s largest open-air shopping mall in Honolulu, half-owned by Brookfield. Broker estimates suggest the Washington offices have suffered heavy valuation losses, while Brookfield reports show the mall’s value has fallen by about $800 million in the past two years.
A spokesman for AustralianSuper declined to comment on specific properties, while spokespeople for Brookfield and Starwood declined to comment. The pending foreclosure of 1200 K Street was previously reported by the Washington Business Journal.
“Property is a tale of two halves. There’s always something that is not doing well, and we have some legacy assets that fall into that bucket and are working to respond to these challenges,” AustralianSuper Head of Mid Risk Portfolios Jason Peasley said in an emailed response to questions. “In the US office sector in particular, we are holding assets at far less than what we bought them for several years earlier.”
While the properties are a sliver of the fund’s A$300 billion ($193 billion) of assets, they show the increasing pitfalls for pension funds in unlisted markets. The country’s A$3.5 trillion industry has plowed into overseas private assets as surging inflows force funds to invest beyond their own backyard. But regulators globally are becoming increasingly wary of the risks posed by the often opaque holdings, where valuations can be less frequent and rarely made public.
In 2015, real estate was a relatively safe bet. AustralianSuper bought into the Brookfield office portfolio that year, in a deal that valued the Washington buildings at $1.3 billion. But values in the downtown DC area have now tumbled by between 25% and 60% from their peak, according to real estate broker Cushman & Wakefield Plc, which thinks that market is still to hit a bottom.
“It looks like we’re approaching it, but most people don’t think we’re quite there yet,” Nathan Edwards, senior director in the firm’s Washington, DC metro research team, said in an interview.
AustralianSuper also paid $1.1 billion for 25% of the Ala Moana Center in Honolulu in 2015. Three years later, Brookfield gained control of the mall when it took over General Growth Properties. By then, retail property was already suffering from the shift to online shopping, but the pandemic accelerated that trend and also crippled tourism that the mall heavily relied on.
Brookfield valuations show that Ala Moana’s value dropped to $4.9 billion in June this year from $5.7 billion at the end of 2021. The mall also borrowed $2.4 billion in April 2022, mainly to refinance existing debt, according to loan data compiled by Bloomberg. Monthly interest payments have more than tripled to $16.4 million on the loan, though there is currently an interest-rate cap facility in place, the data show.
While Ala Moana is still classed as a prime shopping center that’s home to many luxury brands, it faced an additional Covid fallout of declining tourism to Hawaii, which has also recently been hit by catastrophic fires on the island of Maui.
“The population in Hawaii cannot sustain Ala Moana,” Rick Latella, New York-based Retail Practice Group Leader for Cushman & Wakefield’s Valuation & Advisory group, said in an interview. “This mall benefits exclusively from the amount of tourism. So if that wanes in particular years, they’re going to suffer.”
Latella said he thought the outlook for well-managed malls like Ala Moana with good tenants was still positive.
AustralianSuper’s Peasley said the pension fund was having a far more “positive experience” with its key UK real estate assets, which include massive London investments in the redevelopment of the King’s Cross and Canada Water districts. Unlisted property assets made up about 8% of its main default option for members as at mid-year.
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