Very few of us have the tens of 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 (eg. office or retail or industrial), larger and relatively liquid. The liquidity comes from being listed on the ASX with a diversified investor mix. This carries its own price, resulting in lower distribution yields (4.5% – 6.0% pa).

Unlisted property funds tend to be single asset, smaller and close-ended. They often 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 (5.5% – 8.0% pa).

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, which is managed by Centuria Property Funds Limited (Centuria) is a recent example – here is our Product Road Test.

Centuria Diversified Property Fund

The Centuria Diversified Property Fund aims to provide investors with tax effective monthly income and the potential for capital growth by investing in a diversified portfolio of commercial, industrial and retail direct property.

Distributions are paid monthly, and the fund provides a limited monthly liquidity facility.

Investment portfolio

The fund invests across a range of properties providing diversification by property, sector, geographic location and tenancy mix. Currently it invests in a number of Centuria’s unlisted property schemes which invest in direct property, however, as the fund grows, it will expand to invest in direct property.. To assist with liquidity, the fund will also hold cash and listed property securities. The fund has a target portfolio allocation of 80% direct property/unlisted property trusts, 15% A-REITs and 5% Cash.

Direct properties or the properties through which the underlying Centuria unlisted property trusts invest will typically have the following characteristics:

• An asset with a long WALE (weighted average lease expiry);
• Financed by gearing at around 40% to 45% of the asset value;
• Commercial or industrial property preferred; and
• Secured by tenants, which have strong lease covenants, e.g. government agencies .

The target gearing level for the fund is 25% to 50%. This is measured on a “look through” basis, so that investments in funds that are already geared won’t be further geared.

The fund is ‘open-ended’ meaning that it grows in size as new investors purchase units. At 31 March, the fund had a carrying value of $31m. While it plans to acquire direct property assets as it grows, the initial monies have been invested in a portfolio of unlisted property funds.

Just on 90% of the fund is currently invested in 11 Centuria managed property funds, giving it exposure to 13 properties. A further 7.0% is held in cash and 5.6% is invested in the Vanguard Australian Property Securities Index fund. The current gearing (on a look through basis) is 38%.

The two largest investments are the Geelong Office fund (TAC Building at 60 Brougham Street Geelong) and the Havelock House fund (29 Havelock Street West Perth). The chart below shows the spread of investments.

The properties are 99% occupied, with government owned entities being responsible for more than 50% of the rental income. The WALE is 7.85 years. 

The manager and fees

Centuria has $3.4 billion of funds under management across two ASX-listed REITs, 16 closed-end funds and this one open-end 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 37 funds consisting of $1.6 billion of assets.

Centuria is a 100% owned subsidiary of the ASX-listed Centuria Capital Group (CNI).

For this fund, Centuria will charge a management fee of 0.80% pa, plus expense recoveries of an estimated 0.35% pa, taking the total management expense ratio to 1.15% pa. 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 tightly limited.

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 March, it was $1.3 million or approx. 3% of net assets). 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 long WALEs and very strong tenants. Distributions are paid monthly, and for the last 12 months yielded 6.3%.

The monthly liquidity facility, while it is ultimately at the discretion of the manager, goes some way in addressing 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 that the management fees are a little on the high side, 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, 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.