Time on the side of property funds

LONGEVITY appears to be a key ingredient when it comes to funds management in the property sector, with a list of Perth-based players showing an average leadership stint of almost 14 years.

Such durability at the helm should not be surprising when the names in those positions include Lester Group executive chairman Dick Lester, Satterley Property Group chief executive Nigel Satterley and APIL Group managing director Peter Hughes.

Between them they have nearly a century running their businesses, with funds management being a key element for most from the start.

But the current executive leadership belies the fact that many Perth-based funds managers often have a non-executive chair or key director whose background in property and associated funds management goes even deeper.

An obvious example is Peet chairman Tony Lennon, who has led the board since 1985.

Others include: Westbridge Funds management director John Mair, who started real estate agency Mair & Co in 1966 and, in 2015, merged it with Momentum Wealth, co-founded in 2006 by Damian Collins (see feature page 36); LWP Group founder Danny Murphy, who started the business in 2000; and Property Bank Australia chair Sandy MacKellar, who founded his business 30 years ago.

Another example is Quadrant Investments director Alex Gregg, who represents 50 per cent shareholder Richard Noble & Company alongside managing director Phil Fogliani. Mr Gregg has run a fourth-generation real estate group for 26 years.

Taking such people into account almost doubles the average duration of the key players to an astounding 21 years, and that is assuming there is only one of them.

In some businesses there are multiple experienced hands at board level and increasingly among the second generation of leadership.

Then again, perhaps it is not that surprising.

Reputation

Western Australia-based property funds management expects most investors to invest at scale.

Outside of Peet, a very early player in property syndication by some margin, it is hard to find a fund manager that is interested in retail clients.

 In the main, the sector is focused on sophisticated or wholesale investors and family offices.

Minimum investments are rarely below $100,000 and, in some cases, limited to $1 million.

While a handful of boutique WA players in the equities fund management sector expect the same starting investment from their customers, the deal-making sides of their business models are vastly different, especially now.

If the acquisition of undeveloped tracts of land or major built-form assets was expensive at the turn of the century, it has become even more so today.

You must be big to play the game, and regularly raising tens of millions of dollars from thousands of investors is simply not feasible.

And, in the competitive world of getting real estate deals right at every stage, there is a high level of faith put in managers by investors who expect those managing their money to have lived through the cycles as many times as possible.

In this scenario, more than a few grey hairs helps immensely.

It would be fair to say that there do not appear to be too many whiz-kids on the list of WA-based property fund managers.

Even the most recently formed businesses are run by people with at least a decade in key leadership roles.

In many cases they are competing with second-generation family businesses, where the founder remains firmly entrenched at the head of the board, if not doing the day to day.

Lester Group executive director Russell Lester is one of three brothers in management positions at the major local fund manager.

Started as a family business in 1995, it opened to syndicated investors in 2010 and has about $260 million in non-family money under management.

Mr Lester said management benefited greatly from the experience of his father, Dick Lester, a joint founder of Growth Equities Mutual, the forerunner of Australia’s listed property sector, which had $800 million in funds under management when it was sold in 1994.

“He is in the office all the time,” Russell Lester told Business News.

“He is stepping back. He is 83, so he has earned the right to do that.

“He is great to have around and great to bounce ideas off. “We are incredibly lucky we have this patriarch with that reputation, and that reputation has rubbed off on us.”

And such branding, if it could be called that, is clearly important when it comes to differentiating one business from another.

The nuances in the sector are often hard to discern and go well beyond the type of target investors and the specific areas of focus.

Lester Group, for example, puts an indicative end date on its syndicates, while others buy and hold.

Outlook

In terms of the current investment environment, Mr Lester offered sentiments that reflected the thoughts of many others in the market.

For instance, he said the heat in the market for industrial land had led the firm to move away from its typical stance of seeking well-tenanted and well-developed assets, with perhaps a quirk that allowed value to be added.

“In this market those properties are extremely expensive, so we are looking at developing [assets] ourselves,” Mr Lester said, noting the industrial vacancy rate at 0.2 per cent.

“What better time to look for a tenant in a new industrial development.”

Peet managing director Brendan Gore echoes the sentiment that the market is heated, although the land business is different and requires even more patience.

Having just acquired the remainder of the massive Flagstone project in Queensland from its investment partner, Peet has plenty of product for the future and does not feel pushed to enter deals.

“We don’t have to do much at all for three to four years,” Mr Gore told Business News.

 “We have not bought land on market for close to two or three years, probably two years.

“It means, in hindsight, we did not buy at the top of the cycle.

“We have the capability and patience to look at the next one to two years when vendors’ expectations become more realistic.”

But Mr Gore said that, even with land values likely to fall, it had become harder to develop land, a fact that played into the hands of bigger players such as Peet.

However, the same pricing and regulatory factors are also changing the funds management side of the business as retail customers become harder and more expensive to service.

“It takes a long time to put a [retail] syndicate together,” Mr Gore said.

“In our space you need to move quickly to lock down an asset.

“Wholesale is much quicker.”

Peet’s active investor base, who pay as little as $5,000 to enter a syndicate, has dwindled to 3,000 active investors, compared to 6,000 at its peak.

Alignment

Another concept echoed by every fund manager that spoke to Business News was the alignment with investors.

To varying degrees, they all put some of their own company or private funds into each syndicate. “Trust is driven by performance and alignment,” Mr Gore said.

“Look at Tony [Lennon]; he has 20 per cent of Peet and, like all of us, he invests in the syndicates.

“He has skin in the game.”

Also in the land sector, and the state’s second biggest property fund manager in terms of the value of assets under management, Satterley Property Group chief executive Nigel Satterley is also keen on alignment.

Mr Satterley, who has run the business since 1980 and been syndicating for most of that period, initially in apartments and then land from 1992, said all investors came into each syndicate at the same price and knew who else was investing.

He said the syndication model for land developers grew strongly after the financial services sector changed and local land financiers disappeared, an example being Town & Country Building Society’s acquisition by ANZ in the early 1990s.

Mr Satterley, whose investor base of largely family offices from Perth, Melbourne and Asia sits at around 150, is one who believes there has been a shift in the homebuyer market he serves since COVID.

Before the pandemic, he said, 30 per cent of new dwellings were duplex or high rise, but that had dropped to 20 per cent, with house and land packages gaining favour because lockdowns had changed many buyers’ thinking.

“We have 10 per cent more market share since COVID,” Mr Satterley said.

COVID

The pandemic’s impact on the sector was a consistent theme, although considerably varied, in conversations with Business News for this article.

APIL acquisitions manager Nic Hughes shares management duties with other family members at the major West Perth property syndicator where his 67-year-old father, Peter Hughes, remains firmly at the steering wheel and in the office almost full time.

APIL is more inclined to hold its acquisitions longer term.

It still owns its biggest investment done to date, the Floreat Forum shopping centre purchased in 2009, on the basis that there is a considerable cost in both the purchase and sale of an asset.

“If Floreat Forum was on the market tomorrow, we would look at it as an acquisition, so why sell it?” Nic Hughes said.

COVID has affected the business, slowing its ability to get deal flow.

An example was the APIL Essential Retail Income Fund, which the group had planned to have closed to new investment at $100 million by June 30 this year.

However, with $37 million invested, APIL has pushed out the fund’s closing.

It expects to have settled on a new acquisition, Clontarf Bayside Plaza in Queensland, by August, showing progress towards the new deadline.

“Given COVID and challenges we have faced over the past few years, we decided to stretch it out for a year,” Nic Hughes said.

“We felt getting $100 million was more important than closing it on June 30.”

Realside’s Perth-based principal Mark Vonic is another whose business has been significantly impacted by the pandemic, notably curtailing travel plans such that he has remained more focused on WA than intended.

The ex-Primewest executive started his property syndication business in 2017 but then joined forces with Sydney-based Alex Hone, whose background brought in private debt and structured equity.

More recently, Realside has expanded into the industrial property sector though a joint venture with the Drago family’s Hero Properties called Realside Ovest, led by Julie Drago.

In terms of the property side of the business, Mr Vonic said while the capital was mainly weighted from the east coast, more than half the portfolio was in WA.

“There is nuance in the map,” he said. “I could not travel for two years because of COVID.

“It would have probably evolved one third Perth and two thirds east coast.

“We escalated the business in Perth because of COVID.

“You take opportunities where you find them.”

Strategic moves

One of the biggest changes in the sector last year was the $600 million takeover of $5 billion fund manager Primewest by national group Centuria Capital, taking management out of WA.

It is worth noting that the calculation around longevity in the funds management business did not include Primewest’s founding group of Jim Litis, David Schwartz or John Bond.

Most of the market wonders how long they will be tied to Centuria. Interestingly, the trio still has direct ties into the sector via LWP in which they control a quarter of the shares.

At LWP, which has such a small investor base of around 30 that it is much less of a fund manager in the traditional sense, Mr Murphy will become non-executive chair at the end of the year, leaving the day-to-day management fully to managing director Brendan Acott, who came into the role in 2019 when LWP merged with PRM Property Group.

Steve Robertson, who founded PRM in 1998, is another long-term player who remains involved with LWP.

The other big change during calendar 2021 was the decision by Ascot Capital to sell almost 85 per cent of its holdings in the space of a month, reducing its assets under management from about $2.5 billion to about $300 million late last year.

Another powerful grouping, founders David van der Walt and Greg King and a later partner Peter Agostino, have not exited Ascot but are thought to be biding their time to re-enter the market after acting on advice to package up their assets for a premium in the heated environment.

At the more boutique end of the market, the 2020 spilt between Warrington Property partners resulted in two players.

Warrington was renamed Blackoak Capital, which continued with the asset base under David Zimmerman’s management and has about $185 million under management.

Warrington founder, Perth-based Chris Weaver, established Burtonwood Investment Partners with Sydney-based Christian McKelvey, to create a national property investment platform.

Its initial focus has been NSW with 14 per cent of its asset base in WA.

Mr Weaver said being on gardening leave for the first six months of 2020 as the pandemic hit had given him the breathing space to work out the model that would best suit.

He believes establishing a national business with its major office in Sydney and a presence in WA had given the business momentum during COVID.

It has raised $95 million and is managing an asset base with an end value of $345 million.

“None of our competition could go east, but we had a team here and we were not in lockdown,” Mr Weaver said.

“In two years since inception for us to build a business to that level is a point of difference.”