Finding value is a waiting game
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Competition from banks in a rising interest rates environment is a key concern for most fund managers, and the property space is no exception.
The Reserve Bank of Australia’s successive cash rate rises have resulted in term deposits yielding higher returns than in recent years, which has narrowed the gap between investment funds and these accounts.
In some cases, this has led investors to second guess whether to put their money in a fund or direct it to the traditionally more conservative bank options.
But property funds still hold a broad appeal, as they provide a wide variety of ways for investors to reap returns.
For fund managers, the increased cost of debt has led to a slowdown in acquisitions over the past 12 months, as buyers and sellers are in a stalemate over the perceived value of assets.
Higher interest rates generally have a negative impact on a property’s value, due to the need to factor in more debt into a transaction, but sellers are still coming to terms with this.
APIL director Nick Hughes spoke to Business News about this phenomenon.
“We are in a period where the mismatch between buyers and sellers is quite high, and there’s a lot of variability in the market and that’s creating some challenges,” he said.
“Jumping into transactions now is probably not something we are going to do or [have] done over the last six months.”
Perth-based APIL, which manages about $750 million on behalf of high-net-worth investors, is taking the approach of many funds and playing a waiting game.
“We are always looking at new opportunities and our investors have money that they would like to invest, but we’re more than happy to sit for 12 months and do nothing if that’s what’s best for everyone’s money,” Mr Hughes said.
“Our number one mantra is to protect investors’ capital, and sometimes the best thing you can do is nothing, that’s been the approach recently.”
Mr Hughes said there would soon come a time when the market would turn, at which point it would be at the bottom of the cycle.
“That can be the best time to buy, if you’re a cyclical investor,” he said.
APIL recently pulled out of a deal to buy Midland Centrepoint during the due diligence phase, deciding the purchase would not be in the best interest of investors.
Mr Hughes said the fund made a similar decision not to go ahead with another deal shortly after its decision on Midland.
“We just want to make the best decisions that we can at all times, and we hope we’ve done that,” he said.
Most of APIL’s funds are in the retail sector but Mr Hughes said the group was looking at opportunities to acquire industrial assets.
Adding value
Most Western Australian property funds have a philosophy of adding value to property through developing sites, deploying the capital of investors to do so.
Locus Development Group, which is largely synonymous with delivering residential projects, has structured its business in this way.
Shortly after the company launched in 2017, it bought a Victoria Park block for $5 million, sourcing a portion of the funds for the purchase from a pool of investors.
Locus developed 10 townhouses on the Leonard Street property, with the project having an estimated end value of about $8.5 million.
The company chipped in 40 per cent of its own money for the project, with the rest sourced from investors.
Several years on, Locus is working on four development projects and has five assets, including the recently acquired Woodvale Boulevard Shopping Centre.
The company entered a 50-50 joint venture with Security Capital Australia to buy the Woodvale centre for $36.5 million in September.
The acquisition resulted in Locus’ assets under management growing to about $214 million, adding to properties in Riverton, Cottesloe, Osborne Park and Fremantle.
Locus Development Group director and co-founder Cameron Alder told Business News the company’s investor base had evolved over time.
“We started off with close family and friends supporting us, now that’s broadened quite rapidly,” he said.
“[Now] we’ve got support from local accounting firms and financial planners and others that are seeing a much more conservative property group going out there and diversifying into unlisted property [assets].”
Mr Alder said Locus’ funds contained higher-risk products such as townhouse developments to lower-risk gentrification of shopping centres or industrial properties.
And risk, as Burtonwood Investment Partners managing director Chris Weaver pointed out, should not be viewed in a negative light.
“Risk is not a dirty word, it’s a gauge of the return you’d expect from any given investment,” he said.
Burtonwood was spun out of Perth’s Warrington Capital Partners, which Mr Weaver founded in 2008.
In 2020, Warrington was rebranded to Blackoak Capital as Mr Weaver and his business partner, David Zimmerman, pursued separate business interests.
Mr Weaver explained that Burtonwood was established as a fund to meet the needs of WA investors wanting to sink their money into east coast property.
He said the business model departed from that of Warrington, which involved a WA-based team, whereas Burtonwood had people on the ground in Perth and Sydney.
“One of the challenges of being a Perth property syndicator is we are the most isolated city in Australia [so] it was a lot of swimming against the tide,” he said.
“We were severely disadvantaged to the local opportunities on the east coast.
“I had a community and a network that enabled me to find opportunities and secure investors’ capital on the west coast [so] I started again in 2020, overcoming the disadvantage of having to go over east.”
While most of its assets are on the east coast, more than 75 per cent of Burtonwood’s capital comes from WA.
“We work with privates, family offices, charitable groups, foundations [and] small investors,” Mr Weaver said.
“We’re more interested in east coast markets because there’s bigger depth.”
In WA, Burtonwood’s main asset is in Anketell, where it entered a joint venture with Saracen Properties to acquire a 7.57-hectare parcel of land for $8 million in 2021.
The Thomas Road asset, purchased with a structure plan and approved subdivision in place, will be developed into a commercial and residential project across 46 lots.
Asset classes
Realside, which has $820 million funds under management, largely focuses on the office sector.
At a time when the asset class was falling out of favour with industry, Realside entered a joint venture with Lendlease to buy a 33 per cent stake in 108 St Georges Terrace late last year.
The 51-level tower was acquired at well below its replacement cost and at least $10 million less than Brookfield’s asking price.
Realside described the $340 million purchase as a way to take advantage of “short-term market mispricing” and to capitalise on the strong market outlook for Perth’s CBD market.
The property fund’s founding director, Mark Vonic, told Business News the acquisition reflected Realside’s long-term approach to building its portfolio.
“We are not constantly buying; we wait for assets to make sense,” he said.
“Before we bought 108, we didn’t buy any office assets for two years.”
Mr Vonic said the group’s focus in recent years had been on its industrial development platform Realside Ovest.
“We focused on building the industrial development business,” he said.
“We spent 80 per cent of our efforts making sure we had enough land.”
Mr Vonic said 108 St Georges Terrace, which was originally developed by Alan Bond in the 1980s, was seen as a way to add value to investors.
Vendors Brookfield spent more than $100 million upgrading the tower ahead of its sale but there was a lot of work to be done on the leasing side.
At the time of purchase, the building’s occupancy was about 90 per cent and its weighted average lease expiry was approximately three years.
“Most of our investors are looking for total returns, so they are not necessarily focused on cash returns,” Mr Vonic said.
“We don’t tend to buy properties that have a long lease, because people can pay a premium for those.”
Mr Vonic said rather than buying “set and forget” assets, Realside would buy a property that needed fixing in some way.
“We’d rather buy the asset, fix the problem, bring a tenant in and then create that value,” he said.
“That’s the way we think, and that’s probably different to most other fund managers, [in that] they’re looking to raise capital, because their investor base wants a security of income.
“We’ve identified a different type of investor, who says ‘I want you to create value for me, I don’t really need you to give me passive income, because I can go and get that in some other asset class or some other investment’.”
Rather than retirees, Realside’s investors are high-net-worth individuals wanting to deploy their wealth.
Two thirds of Realside’s assets under management are in the office sector, while the other third is in industrial property.
Mr Vonic said the fund would likely shift its focus from office to industrial in the near term, as well as look to branch out to retail investments.
Office assets have been considered the least attractive commercial property class by some fund managers in recent years, as the impact of COVID continues to affect working patterns.
Westbridge Funds Management chair Damian Collins said his business made the call to move away from the office sector seven years ago.
“We will come back into that space [but] assets now are trading below replacement,” he said.
“I still think that office is not dead but it has got some pain to go through.
“We will come back into the market when the time is right.”
Westbridge, which handles about $900 million assets under management, largely draws from WA high-net worth clients.
Mr Collins, however, has observed more capital flowing from the eastern states as the business grew.
“We have really targeted the WA market but we have picked up investors who have put in $3 million, $5 million, $10 million from over east,” he said.
“It’s surprising to me how many are from the east coast because we’ve never really marketed there, and we’ve got no business development function over there.”
Currently, about 10 per cent of Westbridge’s capital comes from eastern states investors and a large proportion is directed to industrial assets, with a portion of residential development.
Balcatta-based Jarra Property has been in the property funds sphere since 2019, when it bought four development assets in childcare and one service station development project.
The company has grown to have 15 projects in development and two completed assets, with about $80 million funds under management.
Jarra Property commercial director Mike Cameron said his, and his business partners’, approach was to acquire and develop properties.
“We were conscious that the near-zero interest rate environment had a limited lifespan, so our strategy was to develop and sell assets,” he said.
“The focus of our business has been on asset sales rather than building an income-generating asset portfolio.”
Mr Cameron said he had seen a growing volume of overseas capital flow into Jarra’s books, which are largely made up of WA-sourced capital, as investors saw Australia as a safe place to invest.
For Peet, one of the state’s largest land developers and property syndicators, the company’s investor base has become more sophisticated over the years.
“[We have] seen the profile of its funds business change in recent years, with an increased amount of investment funds being sourced from institutional and wholesale partners,” Peet managing director Brendan Gore said.
Investment mandate
For North Beach-based Centaur Property Funds Management, providing debt funding to residential property developments in the form of first mortgages has paid off.
The fund has recently returned its billionth dollar to investors and seen close to 200 loans through.
Centaur managing partner Mark Darling said for him, the approach was simple.
“Stick within your mandate, which is first mortgage debt investments, stick within your target investment strategy, which is within the residential commercial sectors, and that changes depending on what we’re seeing in the marketplace,” he said.
Centaur’s capital is sourced from a mixture of industry superannuation funds and family offices.