Centuria Capital John McBain joins Switzer TV to discuss the impact of rising bond yields

12 January 2017

Publication: Switzer Daily
Sydney, 12 January 2016

Centuria Capital John McBain joins Switzer TV to discuss the impact of rising bond yieldsCenturia Capital Group is renaming the 360 Capital Office Fund, following its acquisition of the 360 Capital fund which it is continuing to manage in line with existing strategy.

John McBain
What’s the outlook for commercial property this year, and what is the impact of rising bond yields? CEO of Centuria Capital John McBain joins Switzer TV
(broadcast on Wednesday 11 January, 2017).

Transcript

Paul Rickard: Welcome back to Switzer on Sky News Money. While there is ongoing commentary on the media on the state of the residential property market, particularly with fears of an oversupply of newer apartments in Sydney, Melbourne and Brisbane – the commercial property market barely rates a mention. Arguably this market is just as important. So what’s the outlook for commercial property in 2017? Are rising bond yields a bare flag for commercial property? And for investors, has the great run in real estate investment trusts come to an end? To discuss these issues, I’m joined with John McBain, the CEO of listed property funds manager of Centuria Capital. John, welcome to the program.

John McBain: Thank you for having me.

Paul Rickard: Let’s start with the outlook for commercial property, it had a pretty good year last year. It was particularly evident in the performance of the listed and unlisted retail investment trusts. How are we shaping up in 2017?

John McBain: I think we’re shaping up to having another record year. I was just reading something before coming on air, last year we had 27 billion commercial property sales around Australia. Almost 40 per cent of them went offshore. There is a huge demand for yield from offshore – driving prices upwards; yields down, unfortunately, and I just can’t see any of that changing in particular because there is a backdrop of a lack of quality stock.

Paul Rickard: You say you’re not worried of the impact of rising bond yields in the US giving investors a little uncertainty, maybe getting a bit more cautious about their appetite for commercial property.

John McBain: Yes, look we’re not immune to bond yields changing but ah I don’t think we’ve seen enough of a trend to be concerned. I think one swallow doesn’t make a summer. I noticed a couple of banks took the opportunity to erase rates on some of their mortgages. I didn’t see the same thing passed onto the savers and it’s their business. When we look at the vast bulk of people interested in investing in us, their alternatives are quite simple and straightforward. You know I’m getting 2.5 or 3 per cent if I’m lucky in the bank and if I can get a quality property investment like a two hundred million dollar Sydney office block yielding 7 or 8 per cent, the difference is stark.

Paul Rickard: So banks haven’t tightened their finances, is it any more difficult for you to potentially look at properties to get finance?

John McBain: Oh I think the banks have, I think gearing is lower, much lower than pre-GFC. We certainly as an organisation; gearing as a board decision now and we’ve tend to find that out – unlisted trusts are geared generally around that 40 per cent of evaluation level and our listed trusts are lower than that and in some cases, much lower.

Paul Rickard: So I want to come to a particular advantage and disadvantage of listed trust versus unlisted trust because you’ve been very strong in the unlisted trust market and now getting increasingly strong with the listed trust. But just one more question about the market because it’s not a homogeneous market so you know different states, CBD versus suburban versus non-prime. Any sort of views about Sydney/Melbourne, or Sydney versus the other states? Are we still seeing the demand being concentrated in a couple of the cities and the market in Perth and Brisbane under some pressure?

John McBain: Yes, for unlisted trusts, we’re very pro-NSW and Victoria at the moment because we see the opportunity there. NSW, in particular, there is so much infrastructure being constructed at the moment. We believe there is good opportunity for new areas, growing areas.

Paul Rickard: I was staggered to hear how much space is being taken out by the development of the tram going through Sydney. You know, how much property, 10 buildings, 11 buildings they’re knocking down!

John McBain: Well, it wasn’t so long ago that we were being told that the construction of Barangaroo was going to destroy the leasing market.

Paul Rickard: And that’s all been done and dusted and leased as far as I’m concerned.

John McBain: And there was never really a ripple. Our view was that it wouldn’t occur and we put our money where our mouth…actually we’ve put quite a few, two or three large buildings in the Sydney CBD. And our investors have done extremely well about that decision.

Paul Rickard: And what about Melbourne? Did you have the same thoughts about Melbourne?

John McBain: We like Melbourne. Melbourne is a more difficult market to enter. They’ve got a very, very strong legacy on investor based down there of wealthy families and they’re pretty hard to compete against.

Paul Rickard: Okay, let’s go on because Centuria as I said is now becoming increasingly strong in the listed property trusts. But for the investors: what’s the advantages and disadvantages of a listed property trust versus an unlisted trust?

John McBain: Yes, as you say, our heritage is is under the unlisted trusts. We run at the moment about one and a quarter, $1.3 billion of trusts and that varies from time to time when we buy and sell properties. They tend to be one-off opportunities where people select an asset and so on, I’d like to be on that asset, I’m not interested in it being listed, I want the outcome of my investment to be solely linked to the property.

Paul Rickard: So that’s generally single asset?

John McBain: Generally, although this year, we are launching a diversified product which will have more than one asset, that’ll be quite a good product actually. That would be more open-ended, but generally the single assets tend to have a fixed life. So I think that’s been very good, we have a very strong investor based, they generally get subscribed extremely strongly. But we really increasingly became involved in listed property trusts because we think it’s a product that complements the unlisted and gives our investors a range of products. Now those trusts, we have an industrial trust, it’s just about $900 million dollars in it and two office trusts, they total about $600 million. Those trusts give investors opportunity to be able to trade the units and with two plus free settlements, which you can’t do on the unlisted.

Paul Rickard: So you got the credited unlisted trust, effectively no liquidity until the unit holders agree to liquidate it then unlisted trust and that obviously is the key difference. You’ve mentioned you’ve got some new listed trusts, this has come because Centuria Capital, which is your ASX listed property management group has just completed the acquisition for the 360 Capital Group. Can you tell me what the rationale for that acquisition was

John McBain: So we only bought the majority of the property platform of 360 Capital. And we’re very pleased. That transaction occurred this week actually. It took a fair bit of 2016 to put together and that increased our property funds from 1.4 billion to about 2.8 billion. And then you add on the unlisted trusts, and we’ve also got that very mature investment bond – tax-effective investment bond – business. So our group, all up ,now has about $3.6 billion assets under management. So at a group level, we’ve really increased our market capitalisation markedly from somewhere around $80 million to probably just over $230 million.

Paul Rickard: And the rationale as a manager is largely about scale as a manager and being able to employ, use the same resources across multiple properties and some of the skills and technology to develop your own platform.

John McBain: Absolutely. I felt like when we completed that acquisition, it was a 20-year overnight success. We only had to employ three or four more people and we almost doubled the scale of our property funds management platform. We went up 63 per cent in total funds under management and tripled the market capitilisation. In a market where it is very difficult to buy assets, it was a good transaction for us.

Paul Rickard: I appreciate you’re a listed company and of course the disclosure rules apply but is there anything else that you can share just in terms of what we can expect in 2017?

John McBain: I think for the group, first of all, our group, we’ve got three excellent people running the divisions in the group: Nick Collishaw runs all of the listed platforms through his fund managers. He is a very experienced fund manager. And I think you can expect us to expand those listed bits. Jason Huljich, who has been on your program and has spoken about the unlisted trusts, we are still finding good unlisted opportunities. We found one in Canberra the other day and looks like it’s going to be massively over subscribed. And that’s a return of around 7 per cent, that delta between term deposit rates and the rates that we can produce on a high quality investment with low gearing is still there and thinks it’s going to be with us for a while. And we are going to work hard on our investment bond business. They are my three picks.

Paul Rickard: Maybe that’s a story for another day. John McBain – the CEO of Centuria Capital. Thanks for joining us on Switzer.

John McBain: Thanks Paul.

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