Listed property trusts have been amongst the better performers on the ASX in recent years. With distributions included, the sector has returned 12.9% this calendar year. Over the 3 years to the end of October, the sector has averaged a return of 16.07% per annum. Although there is no franking, distributions from property trusts often include a tax-deferred component, making them partially or wholly tax-free.
An alternative to a listed property trust is an unlisted trust. Typically, these pay higher yields than listed trusts, are either single asset or own a less diversified mix of property assets and are smaller in size. The trade off, of course, is that there is no liquidity, so investors typically agree a timeframe for the fund with the aim of selling the assets and winding up the fund around this time to provide an exit path.
There are several property managers who develop unlisted property funds, including Charter Hall, Centuria and Cromwell. One of the latest unlisted funds is the Centuria 203 Pacific Highway Fund, which opens today for public subscription.
Centuria 203 Pacific Highway Fund
The Fund is a single asset, fixed term fund which will acquire a 50% long term leasehold interest in the property known as 203 Pacific Highway, St Leonards. The other 50% will be purchased by a related party, the ASX listed Centuria Metropolitan REIT (ASX: CMA).
The property is a modern 11 story commercial office building located in the heart of the St Leonards, directly adjacent to the St Leonards train station. St Leonards is 5km north of the Sydney CBD.
[1]Built in 2000, the property has a net lettable area of 11,196 sqm of office space, 542 sqm of retail space on the ground floor, and 150 car spaces. It is fully let, with 3 tenants of the office space – ASX listed Cardino and Primary Health Care, and Verizon.
Key property metrics include a WALE (Weighted Average Lease Expiry) of 5.0 years, occupancy 100%; fixed rental reviews of between 3.75% and 5.0% pa; and an average office rent of $479 per sqm.
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[3]Fund Metrics
The Fund is paying $43.03 million for its 50% leasehold interest (expires in 2088), which puts the property on an initial yield of 8.12% (as a function of the net property income). This will be financed by the issue of units to investors ($30 million) and borrowings of $17.2 million. This gives it an initial loan to value (LVR) ratio or gearing ratio of 39.6%.
The other circa $4 million includes stamp duty of $2.3 million, issue costs and an establishment fee of $0.86 million to the Manager, Centuria Property Funds. This means that the initial net tangible asset value (NTA) per unit is $0.90.
For unitholders, Centuria forecasts the following distributions:
[4]Investment Rational and Exit Plan
In addition to the strong forecast yields from rental income underpinned by a WALE of 5.0 years and high quality tenants, the Manager sees considerable potential upside for St Leonards. Residential conversions are forecast to reduce competing office supply, while the Sydney Metro Infrastructure Project is likely to select St Leonards as station.
[5]Australia’s largest public infrastructure project, the first stage (the Northwest rail Link in green) is due to open in 2019. A City and Southwest rail link (in blue) will include a second harbor crossing and improve St Leonard’s connectivity with the Sydney CBD. It is planned for completion in 2024.
The Manager also says that the property’s acquisition metrics compare favourably to recent sales in the area, and while yields have tightened in St Leonards, the spread relative to Sydney CBD and North Sydney prime grade office remains attractive. It quotes research from Jones Lang Salle that says that in Q215, the spread between St Leonards and Sydney CBD prime grade office property was 2.0% compared to a long term average of 1.75%, while to North Sydney, it was 1.25% or 0.35% higher than the long term average of 0.90%.
The Fund has an initial term of 5 years. Investors can vote to extend this by a further two years, but after 7 years, it can only be extended by a unanimous resolution of all investors. Accordingly, the Manager will be looking to market the building around the time of the initial expiry date, in the expectation that a building and area re-rating (from residential conversions/transport upgrades/spread compression/tenant quality and WALE etc) will have led to an increase in the property’s value.
The Manager is incentivised to maximise returns for unitholders, by potentially earning a performance fee of 20% of any excess return over an internal rate of return of 10% to unitholders (in cash). The Manager is also entitled to a base management fee of 0.80% pa of the gross asset value.
Our View
Centuria has a strong record in developing, managing and winding-up (i.e., creating a successful liquidity event for) single property unlisted funds. Although there has already been material compression in property yields (and hence a re-rating of commercial property), the investment case for this Fund is pretty attractive. While the property itself cannot be converted into residential apartments, if surrounding office buildings continue to be converted and the Sydney Metro goes ahead as planned, then a re-rating of this building and the St Leonards precinct is more than plausible.
Like all unlisted trusts, it is an illiquid investment. There is no liquidity. The minimum investment is $50,000 – and as there is no cooling off period, potential investors should read and consider the Product Disclosure Statement very carefully. This can be obtained here [6] or call 02 8923 8923.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.