Road test – Centuria’s 8 Central Avenue fund

Co-founder of the Switzer Report
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In the search for yield, unlisted property funds are high on the radar for many SMSFs. These funds typically have the following features:

  • exposure to a single commercial office building;
  • forecast high, tax advantaged income yield;
  • geared to around 45%;
  • a defined exit strategy;
  • management fees that include an upfront payment for arranging the property acquisition and a performance fee payable when the building is sold; and
  • minimum investment sizes of at least $50,000.

The latest offering is from Centuria for ‘8 Central Avenue’, which is forecasting a distribution yield of 8.7% per annum growing to 9.10% per annum in year two.

8 Central Avenue, Australian Technology Park

The Centuria 8 Central Avenue Fund is acquiring a 50% interest in 8 Central Avenue for $99.6 million. The seller, a joint venture between Seven West/Kerry Stokes and other partners, is keeping the remaining 50%.

8 Central Avenue offers ‘A Grade’ office accommodation in a multi-purpose building in the Australian Technology Park (ATP) in Redfern, Sydney. ATP is located 2.5km south of the Sydney GPO, within 400m of both Redfern Station and the University of Sydney. Set on 14 hectares of land, it was originally established by the NSW Government to foster innovation and offer office space to small and large occupiers in the IT, new technologies and bio-medical industries. Today, it is a developing office campus, with approx 30% of the office space being occupied by State and Federal Government tenants.

As a precinct, the average office rent in Australian Technology Park is $385 per square metre net. According to Jones Lang LaSalle research, cited by the manager, this is approximately 30% lower than the average in the Sydney CBD. Given the age and quality of the buildings, abundance of parking and transport options, and proximity to the CBD, the manager says that the Park provides excellent value, compared to other major office markets.

The property 8 Central Avenue was completed in 2010 and contains 36,500 square metres of leasable space (including four high definition television studios), plus 341 car spaces. The lease income is split the following way – 44% is secured to Seven West Media entities (Seven Network and Pacific Magazines), 15% to Global Television and 32% to the NSW State Government. It boasts:

  • a long WALE (weighted average lease expiry) of 12.67 years;
  • 56% of gross income secured to 2029 and beyond;
  • large, efficient floor plates of approximately 3,000 square metres;
  • modern building with modern services, and 4.5 star NABERS environmental rating; and
  • minimal capital expenditure expected.

The fund

The fund is paying $99.6 million to acquire a 50% interest in the property. Stamp duty, acquisition fees, trust working capital and other acquisition costs bring the total cost to $108.8 million. This is funded by cash from investors of $66.4 million, and borrowings (which are at fixed rate) of $44.8 million.

While the gearing ratio at 45% is towards the high side for these types of funds, the interest cover ratio of 3.76 (net property income to interest expense) in FY 2014/15 looks reasonably comfortable.

For investors, The Fund is forecasting the following returns:

Year to 30 June 2014 – 8.70% pa, 100% tax deferred
Year to 30 June 2015 – 9.10% pa, 54% tax deferred

Exit strategy

The fund has an initial term of five years, which can be extended with the approval of unitholders. The manager believes that around five years time will be an optimal time to sell the building, in order to maximise the return to investors, based on further maturation of the Park, renewal of some lease expiries in 2017/18 and a forecast of improved market conditions. In the period leading up to the exit, the property is anticipated to offer minimal leasing and capital expenditure risk.

The manager

Centuria Property Funds will manage the fund. It has circa $1.1 billion of funds under management in 28 unlisted property funds (such as 8 Central Avenue). Centuria is a wholly owned subsidiary of the ASX listed Centuria Capital Limited (ASX Code CNI).

Centuria will earn a management fee of 0.80% pa for managing the fund, and 20% of the outperformance of the fund over a hurdle IRR (Internal Rate of Return) of 10%. This is calculated by looking at the returns to unitholders over the life of the fund, including any final return of capital upon the wind up of the fund. For example, if the IRR of the fund is 13%, Centuria would earn a fee equivalent to 20% of the outperformance of 3%. (ie 0.60%).

In addition to these fees, Centuria also receives an upfront acquisition/placement fee of $1.99 million.

Our view

The fund offers a high, pretty secure tax-advantaged income stream. With a long WALE of 12.7 years, more than 50% leased out to 2029 or beyond and the very large floor plates, it is going to pay a pretty tidy income stream for many years to come. Although the manager’s forecast of improved market conditions in five years’ time might prove to be optimistic, and unitholders may elect to not wind up the fund at this time (because the building can’t be readily sold), the contractual rental arrangements with quality tenants means that it should still be able to pay a reasonable income return.

One key risk is interest rates. While the interest rate on the monies the fund borrows will be fixed for the first five years, this will need to be rolled over if the fund continues past the exit date. The other key risk is the Australian Technology Park – and how it develops and matures as an office precinct. Personally, I was impressed when I made a visit – and with the “gentrification” of parts of the Redfern area that are occurring, my sense is that I would rather be a tenant in the ATP in close proximity to the CBD and with ample parking and public transport options, than at Parramatta or other outer suburban area in Sydney/Melbourne/Brisbane.

The minimum investment is $50,000 and given asset class/diversification principles, this means that only SMSFs above $1 million should realistically be considering this opportunity. As always, read the PDS carefully and if in any doubt, seek appropriate professional advice. The offer is expected to open next week (see www.centuria.com.au).

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.

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