21 May 2020

Quality tenants are paramount in market uncertainty

by Jason Huljich, Joint CEO of Centuria Capital Limited

One of the most attractive aspects of commercial real estate assets is their ability to generate consistent returns from rental income, which can make real estate focused investment vehicles very appealing to individual and institutional investors. In uncertain times, the threat to an asset’s ability to generate rental income is paramount to investor concerns, which is why quality tenants are the hidden, but most valued assets in any portfolio.

This is true for both listed and unlisted property funds.

Businesses whose operations are resilient against unforeseen external market conditions – be they from economic anomalies, natural disasters, or pandemics – are the most valued. These are companies whose goods and services are in constant demand, such as grocery suppliers, government agencies and medical practices.

The principle is simple.

The stronger a business, the less likely it will induce rental arrears. Therefore, the more likely a fund will continue to receive its ‘rentals’ and meet investor return expectations. Equally, stronger businesses are generally growing and, therefore, provide an opportunity to increase space and improve rental rates.

Targeting quality tenants has always been at the forefront of Centuria’s growth strategy.

Seventy-five per cent of the tenants in the Centuria Office REIT (COF) are government departments, multinational corporations and listed entities. Its largest tenant is the Commonwealth Government and second largest is the WA Government.

For the Centuria Industrial REIT (CIP), more than 30% of tenants provide ‘staple’ services and products. Among these tenants are Arnott’s and Woolworths. Additionally, 54% of the fund’s income comes from manufacturing, packaging and the distribution of consumer perishables with tenants including Visy, which provides packing for goods bought online.

Across our healthcare property portfolio, two-thirds of occupiers are either ASX-listed, national entities, private equity-backed or government-owned. This includes listed healthcare operator, Healius, global operator Sonic Healthcare, and the well-established Mater Hospitals & Health Services.

To attract these high quality, resilient commercial tenants, Centuria gradually changed its asset quality mandate with a focus on higher grade assets in periphery zones close to central business operations.

For offices, this meant a change from smaller suburban assets averaging 5,000 sqm with values of c.$25m, to large city fringe assets averaging 15,000 sqm with values of more than $100m.

In the industrial sector, Centuria has targeted tenants that are fulfilling ‘last mile’ requirements, that is, in-fill areas that support supply chains between the massive warehouses in outer ring locations to shop floors or homes in cities and towns. Over 90% of CIP’s portfolio consists of properties located in metropolitan locations to support this thematic.

However, it’s not enough to secure a quality tenant. It’s imperative to help them add value to their businesses.

In effect, this means growing with a tenant by meeting their operational needs – whether this is adding a complementary use-class, expanding a facility, or pre-empting their needs.

An example is our Townsville Distribution Centre, which is part of the CIP portfolio. Operations in North Queensland were stifled when natural disasters, such as cyclones, struck. Centuria worked with Woolworths to double the size of the distribution centre. Not only is its dry-store area significantly larger, but several cold storage facilities were added to ensure perishables could last long periods, which is essential when road access is cut off and new supplies cannot be brought into the region.  The result is an improved, resilient supply chain for Woolworths and a longer, extended 12-year lease for the fund.

In summary, the value of quality tenants and the strength of good tenant relations is at the core of a professional property fund manager’s strategies.