Land titles prove hot property for financial institutions
Head of Global Infrastructure Coverage identifies new infrastructure theme
The growing trend for Australian authorities to lease state-owned land registries is emerging as an interesting new infrastructure asset class which provides an innovative way of achieving reliable, long-term investment for financial institutions like pension funds.
Like HM Land Registry in the UK, each state in Australia holds a central register of all its land. These form an official record of the landowners and include other information like details of mortgages or covenants.
Although there is no underlying asset, land titles are financed like any other infrastructure asset and like all ‘infra’ investments, are long-term by nature; this is one of the main attractions for pension funds which require long-term investment horizons. Contracts are also essential to ensure there is a reasonable amount of guaranteed income. In other words, you can’t invest in something that you think will be phased out in a few years’ time - you need longevity.
The ‘resilience’ of land titles as an investment further increases their appeal to pension funds, which crave long-term visibility. Land titles are largely immune to market fluctuations. As long as there are marriages, divorces, deaths, or simply families with changing requirements, houses will be bought and sold. And each time this happens, a new land title is logged with the registry. This will continue even if there is a major recession, which is almost certain at some point during the next 35 or 40 years.
Pension funds require income in order to service their members’ provision of benefits; here too land registries deliver. As well as providing a reliable source of income through the continual sale and purchase of houses and land, the prices are quite stable: the fee to register has to be fairly set. In the case of New South Wales, where the land registry was leased for AUS$2.6bn in 2017, the registration fee is contracted with prices linked to the Consumer Price Index. Payments collected by toll roads – another key infrastructure asset - are similarly index-linked. In this way, the price is nicely protected.
High barriers to entry further ensure investors can rely on the market being stable. The market is monopolistic because there is only one agency in a given state that can actually register houses. This means there will be no rivals popping up to challenge, as there can be in other markets.
While the dependability of the market is reassuring, there is room for growth too. Compared with the UK, the Australian land titles market is relatively immature. In the UK, there are increasingly sophisticated portals, such as Zoopla and Mouseprice which use data from HM Land Registry. These have found ways of commoditising the data. They can predict the value of your house, for instance, ‘front-end’ the data and sell it on to other agencies. The market in Australia is yet to develop in this way so, in that respect, there is real potential for growth.
When a plan to privatise the UK’s HM Land Registry was mooted in 2014 and 2016, it was scuppered by concern about a lack of potential growth. Privatisation, however, is a subject which divides opinion and perhaps more importantly, the proposal had touched a political raw nerve. The action was seen as the sale of a self-financing government business, which could potentially fall into private hands with the risk of removing transparency to the general public.
In New South Wales, public perception is very different from that in the UK. AUS$1bn of the land titles sale proceeds will be invested into updating sports stadiums. A further AUS$1.6bn will go to the funding other infrastructure projects, such as public transport, roads, schools and hospitals.
The money flowing back into the public sector surely provides a useful counter-argument to the voices of dissent. The question remains as to whether this type of deal could be replicated in other key infrastructure markets globally. In Australia at least, with Victoria’s already-announced land registry auction and a potential future process for Western Australia, all the signs are that land registries have been embraced as a valuable new infrastructure asset.
Andrew Landon Green is Head of Global Infrastructure Coverage at Societe Generale.