Australia’s superannuation industry has targeted water as an important new investment class, but to date the opportunities have been bigger overseas than locally.
The IFM Investors umbrella group, which invests for a number of industry funds, has about $3.1 billion in water provision and infrastructure.
Infrastructure investment specialist with IFM, Josh Crane, said Australian water assets account for only about $100 million of those assets, with offshore investments mainly in Europe accounting for around $3 billion, he said.
In rural northern Victoria near Swan Hill, industry fund VicSuper has about $200 million invested in its Farming Landscapes Trust, which is returning 9000 hectares of degraded farm land back to high level productivity.
The fund also holds significant investments in irrigation water rights that are managed as a separate asset to the farms.
Land and water
VicSuper CEO Michael Dundon told investors in its Kilter fund, which owns the land and water, that the original attraction was the land itself, and that in turn sparked an understanding of the value of irrigation water rights alongside the land.
“For many investors, water remains an anomaly: an easy investment that’s difficult to understand,” Mr Dundon said.
“Its attraction is that values are expected to increase, even in good rainfall years. Estimates by economics consultancy Aither project a 10 per cent per annum increase in water prices in low rainfall years, and at least a 7 per cent rise in higher rainfall years.”
The below chart from water market group Waterfind shows returns for temporary water rights which can be sold off by farmers in years they don’t want to use the water themselves.
It demonstrates that returns to investors fluctuate with the seasons but have grown significantly in recent years.
Waterfind CEO Tom Rooney told The New Daily that for permanent water (where farmers sell their entitlements permanently) returns have been positive over the long term.
“Our research over 35 years shows a 9.6 per cent annual capital gain with returns strong in the last five years particularly,” Mr Rooney said.
Possibilities in urban water
Urban water infrastructure, such as what IFM is invested in, is very well suited to super funds.
“It requires long term, patient capital and it allows groups like IFM to deploy capital over time. There is a growing population, ageing infrastructure and governments are fiscally constrained,” Mr Crane said.
IFM said the group would invest more in local water provision if Australian governments saw a necessity for bringing outside capital into the sector and create the correct framework for this to happen.
However, stakeholders would need to be comfortable with the changes for that to happen.
Currently rural water attracts outside investors, partly because farmers find it hard to borrow against their water rights.
“Back in 2004 [in water reform legislation] the government did a half-arsed job separating water and land. As a result water rights aren’t bankable,” Mr Rooney said.
Neither fish nor fowl
Because farmers can’t easily borrow against them, “The only way they can get money from them is to sell them,” Mr Rooney said.
Water rights need to recognised as a genuine, definable asset for farmers to more easily borrow against them, he said.
Federal Labor has put water firmly on the agenda with the party saying it would end a ban on governments buying back more water rights to deliver extra environmental flows.
“By removing the cap we are making clear that if we end up having to provide more water for the rivers then this will not be a barrier to doing this,” Labor spokesman Tony Burke said.
That move would potentially make irrigation water more scarce and push up water prices.
The New Daily is owned by Industry Super Holdings