The listed property trust sector was among the better performing sectors on the ASX last year, with distributions included, returning 14.32%. Over the last 3 years, the sector has averaged a total return of 15.87% pa. And in 2016, despite the overall market’s fall of 7.17%, the sector has only lost 0.81%.

With interest rates likely to stay low and vacancy rates largely stable, the outlook for the commercial property market remains reasonably robust; more so in the stronger east coast markets of Sydney and Melbourne. An alternative to accessing this market through a listed property trust 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 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 Stockland. One of the latest unlisted funds is the Centuria Australian Technology Park Fund, which is due to open for subscriptions in February.

Centuria Australian Technology Park Fund

Late last year, a consortium led by Mirvac acquired Sydney’s Australian Technology Park (ATP) from UrbanGrowth NSW for $263 million. The consortium intends to transform ATP into a “world- class business park with substantial retail and community amenities”.

Mirvac has secured a 15-year lease from the Commonwealth Bank to occupy a new 93,000 square metre: A grade office development. Expected to comprise two new buildings and house 10,000 bank employees, construction on the buildings is due to complete by mid-2020.

Located 2.5 kilometres south of the Sydney CBD and adjacent to Redfern station, the CBA development will kick start the repositioning of the Australian Technology Park as the pre-eminent office precinct within the Sydney CBD fringe. The new CBA buildings will complement the 8 Central Avenue building (currently owned by other Centuria funds), the locomotive workshop (used as a convention centre and technology office space) and the National Innovation Centre. Mirvac will also be spending $25 million on public domain and streetscape work.

As a member of the consortium, Centuria has been given the right to purchase 3 existing buildings in the Park and is using these to form the Centuria Australian Technology Park Fund. These are the NICTA Building, a modern, high quality office building of 11,194 square metres which is currently leased to government tenants; the Biomedical Building – a special use office building of 7,767 square metres of which Sydney University research laboratories occupy 90%; and the International Business Centre, a building of private office suites of 952 square metres currently leased to 15 tenants.

Key property metrics include a WALE (Weighted Average Lease Expiry) of 2.1 years, occupancy 100%; and an initial purchase yield of 7.57%.

Fund Metrics

The Fund is paying $104.0 million for the properties (there are also upfront costs of circa $10 million that includes stamp duty and an acquisition fee). This will be financed by the issue of 62 million $1.0 units to investors and borrowings of $52 million. Based on an independent valuation of $108.8 million, this gives an initial loan to value (LVR) ratio or gearing ratio of 47.8%.

The initial net tangible asset value (NTA) per unit is $0.94.

For unitholders, Centuria forecasts the following distributions:

The reason for the variability in forecast return for FY 17 is that the lease of the largest tenant in the NICTA building (about 50% by area by NICTA) is due to expire in June 2016 and Centuria is not yet able to confirm that the lease has been renewed. Further, the lease of the special purpose Biomed building by Sydney University (about 90% by area) expires in June 2019. If Sydney University does not exercise its option to renew the lease by June 2018, Centuria plans a complete refurbishment of the building to reposition it as high quality office space.

Investment Rational and Exit Plan

In addition to the strong forecast yields from rental income underpinned by high quality tenants, the Manager sees considerable upside for the precinct and as a result, a re-rating of the buildings. According to Centuria, the new CBA buildings are forecast to have an end value of approximately $1.0 billion, reflecting a capitalisation rate of only 5.75%. While not directly comparable, the NICTA building which was constructed in 2008 has been purchased by the Fund on a capitalisation rate of 7.00%

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. With the CBA buildings due to complete in 2020, the Manager expects to market the buildings around the time of the initial expiry date or shortly thereafter in the expectation that the precinct re-rating (and improved building metrics in terms of WALE and rental income) will have led to an increase in the value of the properties.

The Manager is incentivised to maximise returns for unit holders, by potentially earning a performance fee of 20% of any excess return over an internal rate of return of 10% to unit holders (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

Investing in this Fund ultimately comes down to whether the investment by CBA, Mirvac and others, including the NSW Government, will be successful in transforming the Australian Technology Park and make it a thriving office and technology park in Australia’s growth city. While Centuria is a very capable manager and the fund metrics are attractive, investment in this fund is largely a play on the precinct.

Like all unlisted trusts, it is an illiquid investment. There is no liquidity. The minimum investment is expected to be $50,000 – and as there is no cooling off period, potential investors should read and consider the Product Disclosure Statement very carefully, which should be available from Centuria in February. You can register an interest to receive this here.

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.