Experience, access and diversification – how Centuria is doing property differently
The Centuria Diversified Property Fund does things a little differently than most. Find out how this is benefitting investors.
This article was published by Livewire Markets on 16 May 2023.
There is no denying Australians’ love affair with property. We froth over bricks and mortar, and property investing could very well pass for the national pastime.
But, like most markets, the property market is becoming increasingly sophisticated and segmented. It takes considerable research, relationship building, and expertise to navigate it effectively.
Where should I buy? What should I buy? What price should I pay?
These are just some of the questions property investors ask themselves and whilst plenty is written about the property market, these answers are very rarely clear.
Take commercial property. Many people would have heard that it’s a potentially attractive part of the market to get into, but few would have any idea about how to gain access to it effectively or perhaps even the various property types within the segment – this author included.
Enter the Centuria Diversified Property Fund. Through the assets it purchases, the opportunities it has access to, and the expertise that it has built up, the fund provides access to a portfolio of high-quality, unlisted commercial property.
But as we will find out in this wire the fund does much more than simply buy property. Centuria is all about adding value both for tenants, and investors alike.
I recently sat down with fund manager Doug Hoskins who is responsible for the performance and management of several of Centuria’s unlisted property funds to discuss how he and his team add value, how he is seeing the property market right now, and the opportunities he is pursuing.
The benefits of commercial property
As mentioned above, property investing has become increasingly sophisticated over the years and there are often more benefits to be considered than the pure return on the investment.
With specific regard to commercial real estate – that is, properties that are used for business purposes rather than as a living space – Hoskins points out that commercial real estate “has performed particularly well historically with relatively low volatility and competitive risk-adjusted returns”.
The Centuria Diversified Property Fund has recorded a 10.7% p.a. total return since inception until the end of April 2023, with the three-year return at 6.0% p.a., which takes into consideration some of the volatility we’ve seen over the last 12 to 18 months”, notes Hoskins.
Of course, we can’t forget about the diversification benefits that property provides in general, and that the Centuria Diversified Property Fund provides specifically. As Hoskins points out, “You can have property investments in different states and you can have property investments in different asset classes”.
How do you do it?
To steal a line from John West, it’s the properties that Centuria rejects that makes it among the best for providing such robust returns.
“We look for assets with high creditworthy tenants on long-term leases”, says Hoskins.
“This way, regardless of what’s happening in the volatility of the market, the fund is able to deliver very consistent income returns”.
Whilst that is the general formula for consideration of new assets, Hoskins also keeps a keen eye on portfolio balance. Just like an equities portfolio, he doesn’t want too much concentration in geography, or asset type, and there are portfolio optimisation strategies that help with this.
“When we look at geography, you’re never going to get a perfect balance between states. You’re going to buy an asset and something’s going to slightly skew at some stage or asset classes”.
The thing I look at is the current portfolio makeup. Where are we sitting from a sector perspective across office, industrial, social infrastructure or any other sectors? Where are we sitting geographically?
“I look at those two factors and that starts steering me towards where I need to be. Do I need more industrial? Where am I concentrated the most?”
Aside from location, Hoskins also looks at the weighted average lease expiry (WALE) of the fund, which is an indication of how long the income streams, derived from the leases are for the property.
“When I’m looking at a new asset, am I looking for something with a longer WALE to bolster the fund’s WALE, or I’m looking for something for a shorter WALE that we could reposition or lease more effectively”, says Hoskins.
All told, Hoskins and his team are looking at geography, asset class, tenants and lease length.
“What I’m trying to do is build a portfolio that generically has a good diversification over multiple investment criteria”.
Uncovering the gems
Whilst Hoskins has a rigorous selection process and the properties the fund purchases are in the tens of millions of dollars, there are still plenty of opportunities worth pursuing. And, rather than being limited in number, they are limited in terms of visibility.
Truth be told, this is one of the reasons why you would invest in such a fund. It’s the visibility and access that relationship building affords Centuria.
Hoskins acknowledges this saying, “One of the things that Centuria has, which is a key advantage, is our in-house transactions team”.
“We’ve got a very strong transactions team. Those guys are very focused on getting good exposure to the market.
I’d say the majority of the acquisitions that we make are off market and that’s simply a reflection of the strong relationships we have both with tenants, vendors, and sales agents”.
What does all of this access provide? Well, undoubtedly it provides the opportunity for diversification that is key to the fund makeup and performance. You can’t have diversification without access.
An example of this is in the industrial space where Hoskins notes that properties have seen extremely high rental growth over the past 12 to 18 months.
“You’re seeing the industrial values staying fairly stable at this point in time, and that’s a clear example of why diversification is useful in this market”.
A recent acquisition
When asked for an example of a recent investment by the fund, Hoskins talks to an industrial facility in South Australia that was built from scratch and completed in November last year – the first asset the fund has been involved with from the outset through to completion.
The facility is purpose-built for the tenant which means that it is specific to their needs. In other words the tenant is highly likely to be sticky. This asset also has very strong ESG credentials, sporting a 100-kilowatt solar panel array. It also has EV charging stations and two large water retention facilities.
“We’re really pleased to have that as part of the portfolio. It’s a brand new A-grade industrial facility, a $41 million fund through development”.
The property has a strong, 15-year lease to a high creditworthy tenant, which has bolstered the fund’s WALE from 4.75 years to 5.75 years, and improved the fund’s allocation to industrial by 18%. As Hoskins puts it, “it’s a bit of a standout and a big positive for the fund”.
As well as being selective and adhering to the process outlined above, Hoskins points to the differences between the Centuria Diversified Property Fund and other, more specialist funds (which Centuria also operates) as a benefit for investors.
The diversified fund is an open-ended, multi-asset portfolio, which is very different from the Centuria single-asset unlisted funds.
“This one’s a little bit different in that this is one fund that has multiple sectors within it. It’s got industrial, office and it’s got social infrastructure in there as well”.
The fund is also a little different in terms of its day-to-day operations with respect to liquidity. Many property funds have fixed terms in the 5-6 year range. This basically means that capital is raised up front, a single asset is bought, and then a liquidity event (sale) occurs 5-6 years later.
The Centuria Diversified Property Fund provides a little bit more flexibility. It provides a limited quarterly liquidity facility that gives investors the ability to apply to redeem out of the fund every quarter subject to the amount available for redemption. This is on top of the major liquidity event offered every five years (the next one for the fund is in 2025), which is the primary way for investors to withdraw money.
As well as the extra liquidity events on the way out, the fund allows investors to enter at any time, “and that’s probably a key thing that differentiates this fund”, says Hoskins. “It has daily unit pricing, which means that investors can jump in at the current value of the fund on a daily basis and withdraw either quarterly or at the liquidity event in 2025”.
“With no minimum or maximum term, investors can enter at any time with as little as $10,000”, adds Hoskins.
Learn more about the Centuria Diversified Property Fund.