Despite some predictions that the commercial property market was facing leaner times, with shopping centre property trusts potentially to be impacted by the arrival of Amazon and higher bond yields forcing up capitalisation rates, the listed property trust put in a pretty strong performance in calendar 2017. For the year, the sector returned 5.72% (distributions plus capital growth). This took the three-year return to an average of 11.0% pa, and the five-year return to an average of 13.23% pa.
In 2018, the sector has cheapened a little as bond yields have risen. This has led to forecast distribution yield for the major listed property trusts such as GPT, Dexus or Scentre moving back into the “big figure 5” category, with range typically now 5.0% to 5.5% pa.
An alternate to investing in listed property trusts is through 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 to 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, Cromwell and Folkstone. One of the latest unlisted funds is the Centuria Geelong Office Fund.
Centuria Geelong Office Fund
The Centuria Geelong Office Fund is acquiring a 100% interest in 60 Brougham Street, Geelong. This is a modern A-grade office building located in the Geelong CBD, with a long-term government lease and minimal capital expenditure requirements.
Completed in 2009, the building has 16,098 sqm of net lettable area over eight floors, and sits on a large island site of 5,475 sqm with sweeping bay views. It has a 5.5 star NABERS energy rating and 339 car spaces.
The property is 100% occupied with a long-term Weighted Average Lease Expiry (WALE) of 10.3 years as at 1 April 2018. 94% of the of the property’s gross income is underpinned by a lease to the Transport Accident Commission, a AAA-rated Victorian Government-owned entity.
The purchase price for the building of $115.2m represents an implied capitalisation rate of 6.83%.
Fund metrics
With stamp duty and other costs, the total transaction cost is just over $126m. The Fund will borrow approximately $52m (fixed for three years), with unitholders to contribute the balance of $74.3m through the issue of 74.3m $1.00 units. Based on an independent valuation of the property of $116m, the Fund will have an initial loan to valuation ratio (LVR) of 44.7% and an initial net tangible asset value (NTA) per unit of $0.89.
For unitholders, Centuria forecasts the following distributions:
* Annualised, for the period 1 April 18 to 30 June 18.
Distributions will be paid monthly to unitholders. They are also expected to be tax advantaged to the extent that they will be 100% tax deferred in FY18 and 100% tax deferred in FY19. (Tax deferred income is not assessable for income tax, but does reduce the cost base for CGT purposes).
Investment rationale and exit plan
In addition to the attractive forecast distribution yield, a long-term lease to a government owned corporation with annual rent increase of 3.5% and modern A-grade office building with minimal capital expenditure required, Centuria says that this is an opportunity to invest in a thriving regional centre close to Melbourne, where Federal and State Government decentralisation policies are supporting Geelong’s continued development.
In June 2017, the House of Representatives established a Select Committee on Regional Development and Decentralisation. A key focus of the inquiry is the potential decentralisation of non-policy related public sector jobs to regional areas, with the Select Committee’s final report due in May 2018.
The Victorian Government’s contribution to regional development is through a $500m Regional Jobs and Infrastructure Fund. In November 2017, the Government announced an agreement with US-based software company LiveTiles to establish their Asia Pacific headquarters and Global Innovation Centre in Geelong during 2018.
Geelong is also being positioned as a government social insurance hub and centre of excellence. In addition to Transport Accident Commission (TAC), WorkSafe Victoria, the National Disability & Insurance Agency and the Department of Human Services will have substantial operations based in Geelong. The City of Greater Geelong has also been lobbying for Comcare (the statutory authority that administers the Commonwealth’s workers compensation scheme) to relocate 650 Comcare employees from Canberra to Geelong.
Infrastructure spending is also expected to be a boost for Geelong, with the Surf Coast Rail and West Gate Tunnel projects. The latter is expected to cut travel times between Geelong and Melbourne by around 20 minutes.
Notwithstanding the very long lease to TAC (which expires in 2029), the Manager says that the building is ideally suited to Government tenants with its large floor plates and energy efficient rating (5.5 stars – one of only 13 buildings in Victoria).
The Fund has an initial term of five years. Investors can vote to extend this by a further two years, but after seven years, it can only be extended by a unanimous resolution of all investors.
The Manager (Centuria Property Funds Ltd) 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 9% to unitholders (in cash). The Manager is also entitled to a base management fee of 0.80% pa of the gross asset value and a disposal fee of 1.0% of the sale price.
Our view
The forecast distributions are attractive, and with TAC on a lease that runs until 2029, effectively “locked in” for the term of the Fund. The exit strategy for the Fund depends on the Geelong office market holding up over the next five to seven years and capitalisation rates not increasing materially, and/or TAC indicating that it will renew its lease.
Regarding the latter, given that TAC was involved in the design of the building, the large floorplate, the costs of fit-out and potential staff relocation, and the Government’s policy to support decentralisation, there is a high probability that renewal will occur.
The initial LVR of 44.7% is lower than some recent unlisted funds. While the debt facility is fixed for three years (meaning that there is virtually no interest rate risk for the first three years but rollover and interest rate risk for potentially years four and five), the interest cover ratio of 4.15 times presently sits comfortably above the facility’s covenant of 2.0 times.
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 will be available from Centuria shortly at www.centuria.com.au The offer is scheduled to open on 5 February, operate on a ‘first come, first served basis’ and will close when fully subscribed.
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.
