The impact of office valuations on Australian real estate property trust (AREIT) prices has been extensively covered, but little media attention has been given to the risk for superannuants of carrying office property in super funds at unattainable valuations.

For AREITs, implied valuations are down by a third since December 2021. Dexus, Mirvac and GPT currently trade at discounts of 30% to 40% of their net asset value, as The AFR noted last month.

Citing increasing supply, lower occupancy and rising vacancy rates in the office sector, AFR noted that credit ratings, gearing thresholds and refinancing could all become issues for AREITs as office valuations fall.

While these are real and tangible issues, they are all priced into the market price of an AREIT on the ASX.

If a superannuant buys a parcel of AREIT units at today’s market price, they accept that the market price reflects the market’s view of the outlook for the AREIT’s asset values.

Commonly, that means that the discount between net asset backing and unit price is, in their view, sufficient to cover the likely falls in the value of the AREIT’s office properties going forward.

Superannuants buying AREIT units are not paying for unattainable valuations. Chances are that they may end up ahead if office values don’t fall as much as the market suggests. Conversely, the market may have under-estimated and they may suffer a loss.

So, when superannuants consciously choose to buy a parcel of AREIT units at market price, they go a long way towards absolving all those parties of responsibility in the event they make a loss on their investment due to a fall in valuations.

Checking out

The key issue, however, is that the share market’s view of future office valuations is built into the market price paid by the superannuant for the parcel of AREIT units, and they make a conscious choice to invest.

Effectively, the share market is saying to directors, management, risk committees, valuation committees, auditors and valuers for the AREIT that it will value the office portfolio for them and reflect its opinion in the AREIT’s market price.

So, when superannuants consciously choose to buy a parcel of AREIT units at market price, they go a long way towards absolving all those parties of responsibility in the event they make a loss on their investment due to a fall in valuations.

However, for the directors, management, risk committees, valuation committees, auditors and valuers of superannuation funds, things are potentially very different. Super funds usually hold property either directly or as units in wholesale unlisted funds.

The value attributed to these property holdings affects the unit price of the superannuation fund’s investment options that include these property holdings.

In whose best interests?

So herein lies the issue.

If the directors, management, risk committees, valuation committees, auditors and valuers of superannuation funds and wholesale unlisted funds choose not to reduce the value of direct office property holdings, then the unit price of those superannuation fund investment options holding such office property will be artificially high.

This benefits superannuants who choose to withdraw or switch out of their units in investment options holding office property, as they get more than the underlying market value.

That’s great for the superannuant exiting, but not so great for all those remaining, who have effectively just paid a premium to the exiting superannuant.

While it may be argued that those superannuants putting new money into investment options holding office property are making a conscious choice, this is less clear for the millions of wage earners contributing their superannuation guarantee payments every payday to default investment options.

Chances are that their superannuation guarantee payments go automatically into the investment options selected – with many balanced and growth investment options including office property.

Therefore, every payday, part of their superannuation contribution finds its way into units holding property that are priced artificially high because the underlying assets haven’t been revalued.

It is true that each individual superannuant may only suffer a small paper loss when valuations are eventually reviewed downward.

It is also true that, over the long term, they will probably recover any losses as valuations increase. It is also true that they could have made a conscious choice and changed their investment options, but they are trusting all those involved in running the fund to look after their interests.

The downside for the directors, management, risk committees, valuation committees, auditors and valuers of superannuation funds is that they are all insured, making them attractive targets for angry members.

From small losses…

While individual losses may be small, across all the superannuants in a large fund, many small losses sum to a large loss, which then sums to very large losses across a number of large funds. It is then only a small step for the payday investors to claim that they were effectively sold units that the superannuation fund knew had a lower value than price.

The downside for the directors, management, risk committees, valuation committees, auditors and valuers of superannuation funds is that they are all insured, making them attractive targets for angry members.

As the AFR pointed out, while major office holding AREITs currently trade at discounts of 30% to 40% to their net asset value, they potentially face limited risk from disgruntled unitholders who made conscious decisions to invest at a unit price reflecting the market’s view of the value of the office holdings.

Meanwhile, the situation facing directors, management, risk committees, valuation committees, auditors and valuers of superannuation funds is potentially quite different from that of their AREIT peers, but it is also potentially fixable.

Dr David Parker is a property expert, mediator, consultant and adviser and may be found at www.davidparker.com.au This article was originally published in the AFR.

Parker’s new book, Introduction to Property Valuation in Australia, is available at www.routledge.com/9781032503165 with a 20% discount for API members entering the code EFL04 at checkout.