Centuria Diversified Property Fund meets income and liquidity needs
While the residential property market may be in the doldrums, the commercial property sector is continuing to perform well, providing an attractive option for investors seeking property exposure. But the residential property downturn has focused attention on the need for diversification to cope with changing market conditions.
The Centuria Diversified Property Fund (CDPF) offers property diversification through its investments in unlisted property schemes and A-REITs. Its target investment profile is 80% direct property (it is currently invested in 12 Centuria unlisted property funds, comprising 14 property assets), 15% A-REITs and 5% cash. This profile provides investors with a diversified offering of property returns and a limited monthly liquidity facility.
Diversification is important as not all assets in an asset class move in the same direction. For example, listed property fell in 2018 but unlisted property rose. The open-ended CDPF not only offers diversification through unlisted and listed property funds – but also through the geographical diversification of its unlisted funds’ underlying assets. Working together, the diversification qualities of the CDPF aims to provide stable returns with greater liquidity compared with pure direct investments.
The CDPF aims to provide investors with tax-effective monthly income along with the potential for long-term capital growth. This is where the mix of property, A-REIT and cash assets offered by the CDPF is important to understand. Because of its higher liquidity target of 20% compared with similar funds in the sector, the performance of the CDPF is more likely to be affected by any volatility in the sharemarket.
For example, because they are listed on the Australian Securities Exchange, the unit prices of liquid A-REITs will be affected by market volatility – either positively or negatively. In the CDPF’s case, its A-REIT investment includes the Vanguard Australian Property Securities Index Fund, which recently experienced some short-term volatility, and this was reflected in the fund’s unit price.
However, the diversification offered through the CDPF’s direct property asset investments was able to offset the effects of the recent market fluctuations. Investors in the fund receive monthly distributions – as opposed to the quarterly or semi-annual distributions of many other fund managers.
The diversification benefits of the CDPF can be seen in the following graph, which compares the performance over calendar 2018 of the fund against the S&P/ASX 300 A-REIT, S&P/ASX 300, and AusBond Index.
The CDPF performed well over the December 2018 quarter, returning 3.98%, outperforming fund benchmark by 0.5%.
How to identify quality diversified assets
Diversified funds can benefit an investment portfolio by helping to maximise risk-adjusted total returns. They may also provide reliable income returns, particularly when interest rates are low. The key question for investors is how best to evaluate the different options.
There are several factors to consider when assessing which diversified fund to invest in:
- How reliable are the earnings and how likely are they to remain stable over time? Fund managers that actively manage a portfolio of quality properties are historically more likely to provide investors with a stable income from returns than those that make a substantial percentage of their profits from development.
- Look at the portfolio’s weighted average lease expiry (WALE): A long WALE is a general indication that income is locked in. CDPF’s WALE is 7.5 years1.
- Conservative capital management is key to keeping risk under control. In particular, conservative debt levels mean interest rate coverage is likely to be better and the distributions should be relatively steadier than a similar fund with higher gearing.
- Is the distribution payout ratio sustainable? It’s important for funds to keep some cash on hand to maintain assets and to pay unexpected expenses.
- What has the manager experience been like through a number of property cycles? A clearly defined and communicated strategy is important.
- Your own risk appetite. As with all investments, there are risks involved with investing and we recommend that you review the relevant disclosure documents and seek professional advice before making any investment decision.
When choosing a diversified fund to invest in, how the fund is managed is an important consideration. Centuria believes an active management approach is a key driver of success, particularly the ability to understand what tenants want and how to provide it.
The CDPF’s performance has been positively affected by the management of one of its major property investments, via the Centuria Zenith Fund: an investment in two high-quality towers known as “The Zenith” in Sydney’s Chatswood. The Zenith is a major contributor to the performance of the CDPF and was instrumental in the recent increase in the unit price of the fund from $1.36 to $1.39 per unit during the December 2018 quarter.
One of the major contributors to this increase was the improvement in the valuation of The Zenith property. An independent valuation of the property showed a $55.0 million increase in the property’s value since 30 June 2018. This valuation increase was a direct result of Centuria’s quality asset management, improvement in occupancy and Centuria’s strategies to drive rents.
Centuria prides itself on its active management approach, which has resulted in an ability to attract and retain good tenants. This active management includes making improvements to communal areas such as foyers and end-of-trip facilities. This in turn increases the value in the underlying property funds.
Over its 20-year history, Centuria Property Funds has completed 402 unlisted property funds. As at the end of 2018, the Centuria Capital Group had $5.6 billion1 of assets under management. The current climate for property highlights the importance of funds that offer true diversification. Its diversified mandate sees CDPF continuing to seek opportunities to further diversify its investments with the objective of providing capital growth.
1 As at 31 December 2018
2 All available funds have been returned to investors. As at 31 January 2019
Centuria Property Funds Limited (ABN 11 086 553 639, AFSL 231149) and Centuria Property Funds No. 2 Limited (ABN 38 133 363 185, AFSL 340304) (collectively ‘Centuria Property Funds’), wholly owned subsidiaries of the Centuria Capital Group, are Responsible Entity/Trustee of Centuria’s listed and unlisted property funds.
Centuria Property Funds Limited (ACN 086 553 639, AFSL 231149) (‘CPFL’) is Responsible Entity for the Centuria Diversified Property Fund (ARSN 611 510 699) (‘CDPF’). Please note that the information contained herein is of a general nature only. It has not been prepared taking into account your particular investment objectives, financial situation and needs. You should assess whether any advice is appropriate to your individual investment objectives, financial situation and needs before making any investment decision. You should also consider seeking the assistance of a professional investment adviser. In particular, before making a decision to invest, you should obtain a Product Disclosure Statement (PDS) and read it in conjunction with the Continuous Disclosure. These are made available from Centuria’s website (centuria.com.au/cdpf).
Past performance is not a reliable indicator of future performance.