New Funds and Upcoming Opportunities Update – Michael Blake

1 July 2016

The second quarter economic news was dominated by volatile share markets and falling interest rates. It was reported that blue chip shares as represented by ASX 100 had risen less than 1% over the past 10 years. The Reserve Bank also lowered Australian interest rates further with the official cash rate now 1.75%. More recently, we have seen big swings in global equity markets as a result of Britain voting to leave the European Union.

Whilst talking with investors, financial planners and research analysts about the unpredictable nature of these asset classes it reminds us of why we have direct property as a substantial part of our investment portfolios. Diversification by asset class delivers real benefits in lowering the volatility of an overall portfolio. Whilst investors have been investing more and more in direct property for the higher level of tax effective income, we are starting to see strong signs that conditions are moving in favour of landlords in the stronger performing economies of NSW and Victoria. Increasing tenant demand and falling supply in some regions are driving fundamental property measures such as falling vacancy rates, decreasing incentives and high rents per square metre. All of this is forecast to flow through to real property growth over the next five years.

In Sydney, the central business district rental market is now very tight and landlords are in a very strong position when negotiating new tenant leases. We are seeing this flow through to suburban markets such as the North Shore markets of North Sydney, St Leonards and Chatswood. Parramatta and the inner west are also performing well.

On the 30th of May Centuria opened the Centuria Zenith fund to applications. The fund is acquiring The Zenith towers in Chatswood for $278 million. The fund is jointly buying the property with Blackrock. This is a rare opportunity for retail investors to invest alongside one of the world’s largest fund managers in a high quality “A grade” asset. As per the PDS, this fund will provide investors with a healthy 7.6% starting income which is almost 6% above the current cash rate. In addition, Centuria has identified a number of factors that will drive its valuation over the 5 to 7 year term of the investment. These include;

  • Splitting the title to create two separate assets of smaller value to widen to pool of potential buyers on exit.
  • Vacancy rates across Sydney’s Northshore fell significantly over the 12 months to December 2015. Chatswood recorded the biggest drop in vacancy from 10.5% to 6.8% according to the latest numbers from the Property Council of Australia.
  • The withdrawal of stock from the Northshore market for residential conversions and the metro line demolitions will see vacancy rates fall further.
  • Centuria’s leasing team has plans in place to lease up the 5% vacancy in the property and renew the upcoming leases in a market that has forecast rising rents.
  • Centuria is planning to upgrade the attractiveness of the property with budget capital expenditure of over $27 million that should flow through to the property valuation and its appeal to new and existing tenants.
  • The North West metro line construction has commenced and once complete in 2019 will see Chatswood at its epi-centre. Travel times to and from the city are set to halve with making Chatswood a more desirable work location.

Within the PDS is a Market Research Report from respected research group BIS Shrapnel who have provided an outlook for the Sydney metro market. This makes for essential reading for anyone who has invested in or is considering investing in Commercial property is Australia. The outlook is very positive and well researched pointing to a lack of supply and increasing demand substantially driving up rents and valuations for commercial property in this sector.

The Zenith property is an ideal investment for a value-add manager such as Centuria and is strategically located to benefit from a strong NSW economy. With such a high quality investment, applications are filling fast. If you would like to reserve your investment contact the Centuria investment services team on 02 8923 8923.

 

Other articles appearing in this quarter’s newsletter

Centuria Metropolitan REIT Update – Nick Collishaw

Portfolio Update – Victor Georos

Market Update – Hadyn Stephens

Staff Snapshot