Very few of us have access to the millions of dollars needed to directly acquire commercial property. So as private investors, we usually approach this by investing indirectly through a managed fund where the monies of the many are pooled.
The two most common structures are listed property trusts (also called A-REITs or Australian Real Estate Investment Trusts) and unlisted property funds. Listed property trusts are typically multi-asset, more diversified, can be multi-sector (e.g. office or retail or industrial), larger and relatively liquid. The liquidity comes from being listed on the ASX with a diversified investor base.
Record low interest rates have fuelled the demand for A-REITS, resulting in the sector recording a return of 23.9% for the eight months to the end of August. This has also resulted in A-REIT yields compressing to 3.5% to 5.5% pa.
Unlisted property funds tend to be single asset, smaller and close-ended. They usually have a fixed term of between 5 and 7 years, after which the Manager tries to sell the asset and wind-up the fund. They are illiquid during the term. Investors are compensated in part for the lack of liquidity and concentrated exposure through the payment of higher distributions (5% – 7% p.a.).
A third option is an open-ended unlisted fund that invests in multiple properties/funds and provides a limited liquidity facility. The Centuria Diversified Property Fund is an example of this type. Here is our Product Road Test.
Centuria Diversified Property Fund
The Centuria Diversified Property Fund (Fund) aims to provide investors with tax effective monthly income and the potential for long term capital growth by investing in a diversified portfolio of property assets located within Australia.
Established in 2016, this open-ended unlisted property fund has grown to around $120m in size and has recently acquired two direct property assets.
The Fund pays a monthly distribution, based on the current distribution rate of 7.6c per unit (annualised). This puts the Fund on a yield of approximately 5.25% p.a.
The Fund also provides investors with a limited monthly liquidity facility.
Investment portfolio
The Fund has a target portfolio allocation of 80% direct property, 15% A-REITs and 5% cash. The latter (cash and listed property securities) are to assist with liquidity and returns.
Within direct property, the aim is to invest across a range of properties providing diversification by property, sector, geographic location and tenancy mix. 50% of the Fund is invested directly in two properties, and 27% indirectly through 11 Centuria managed unlisted property funds (see table below).
The largest investment of $35m is 10 Moore Street Canberra, a 6-level office building located in Canberra’s Civic precinct. Built in 1985 and re-furbished in 2019, the building is 100% occupied and has a WALE of 4.18 years.
10 Moore Street, Canberra ACT
The Fund has also recently acquired for $19.7m an A-grade commercial building within Brisbane’s Technology Park Northshore precinct at Hamilton (381 Macarthur Avenue). This precinct is located 6km from the Brisbane CBD and is 5km to Brisbane Airport. 381 Macarthur Street is 100% occupied and has a WALE of 4.88 years.
381 Macarthur Avenue, Hamilton QLD
Overall, the portfolio has the following characteristics (as at 30 June 2019):
- 15 property assets
- 138 tenants, weighted towards Government and ASX listed corporations
- Weighted occupancy of 99.77%
- WALE of 5.43 years
- Gearing of 34.01%
- Weighted capitalisation rate of 6.64%
- Portfolio gearing of 34.01%.
Returns
Centuria doesn’t forecast returns. Historically, the Fund has delivered an income return of 5.91% p.a. since inception and 5.15% p.a. for the 12 months to 30 June 2019. This has been further enhanced by a tax-deferred element. For FY20, the distribution rate has been increased to an annualised 7.6c per unit which if maintained, would translate into an income return of 5.25% p.a.
In capital terms, the unit price is currently $1.43 compared to its initial price of $1 in June 2016, representing capital growth of approximately 12.68% p.a. (to 30/6/19).
The manager and fees
Centuria Property Funds Limited (the Manager) is a 100% owned subsidiary of ASX-listed Centuria Capital Group (CNI), a specialist investment manager with $6.2 billion of assets under management across two ASX-listed REITs, 14 closed-end funds, two investment bonds products and this open-ended fund. Centuria was formed in 1998 with a specific focus on the purchase of high quality, growth oriented commercial property investments. Centuria has proved to be extremely adept at buying and managing commercial properties, and has initiated and wound-up 42 funds consisting of $1.9 billion of assets.
For this Fund, Centuria charges a management fee of 0.80% p.a., plus expense recoveries of an estimated 0.35% p.a., taking the total management expense ratio to 1.15% p.a. This is calculated on the Fund’s gross assets.
When the Fund invests in a property fund managed by Centuria that is already charging management fees, the Manager won’t double dip. The fee charged will be deducted from the management fee payable by this Fund.
Centuria is also entitled to a performance fee of 20% of the outperformance above a benchmark reflecting the Fund’s intended portfolio composition.
There are also fees payable where Centuria finds a property that the Fund purchases (2% establishment fee) and a sale fee of 1% where the Fund sells a property.
Liquidity
A relatively unique feature of the Fund is that it offers investors the opportunity to withdraw part or all of their investment monthly. This is largely satisfied from the Fund’s cash holding or realisation of its A-REIT investments, and is a limited facility.
Each month, Centuria advises on its website the amount available for withdrawal. This is expected to be at least 0.5% of the Fund’s net assets (in August, it was $8.6m). Applications received by the due date are processed, and are accepted or scaled back according to demand.
Our view
This Fund offers investors easy access to a diversified portfolio of commercial properties. The underlying properties are 99% occupied, have a weighted WALE in excess of 5 years, and strong tenants. Distributions are paid monthly, and for the last 12 months yielded 5.15%.
The monthly liquidity facility, while it can’t be relied upon and is ultimately at the discretion of the Manager, goes some way to address one of the downsides of investing in unlisted property. It should assist investors in normal market conditions.
A big positive is Centuria’s terrific track record in identifying for investment and then managing commercial properties. Downsides are the management fees, and that the Fund’s urban office exposure is primarily to metropolitan and regional markets, rather than CBD Sydney or CBD Melbourne.
The minimum investment is $10, 000. For more information, visit https://centuria.com.au/cdpf and download a copy of the Product Disclosure Statement.
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 regard to your circumstances.
