When the going gets tough, quality tenants count
by Jason Huljich, Joint CEO
Why tenant relations should never be a footnote
All listed and unlisted real estate funds are reliant on income to generate dividends/distributions for their investors. Without consistent, reliable revenue streams, generated mainly from rental revenue, delivering returns would be a challenge.
Fundamental for a fund manager is the quality of tenant profiles and tenants’ ability to continue paying rent even in adverse market conditions, such as rising interest rates and a potential recession. At Centuria we took a strategic decision to diversify our c.$20 billion1 property portfolio across various commercial real estate (CRE) sectors in order mitigate concentration risks – in short, we don’t put all our eggs in one basket. Furthermore, our tenant customer profiles are also diversified by geography, size, industries and sectors.
This approach has been fruitful with Group rental arrears being a record low 0.7%2.
This is by no means a small feat considering Centuria manages approximately 2,500 tenant customers across Australia and New Zealand. We credit our inhouse management team for being at the coalface of tenant relations and, while some might consider this a small footnote, we believe it is a significant contributing factor to satisfying tenant needs and, therefore, securing better income reliability.
Effectively, what we are talking about is cutting out the middle man. Rather than rely on an agency to communicate tenant feedback on the building, tenants largely liaise with Centuria directly. This means we receive tenant feedback first-hand can make decisions quickly and act promptly.
We have 33 facility managers, 24 property managers and 17 asset managers3 who are responsible for ensuring tenant satisfaction. This team oversee a broad network of c.425 assets across office, industrial, healthcare, agriculture, large format retail (LFR) and daily needs retail (DNR) sectors throughout Australasia. We are exceptionally proud of the services they deliver, which is reflected in our recent tenant customer survey results across our Australian office and industrial portfolios.
The bigger picture is not only about tenant satisfaction but being able to provide suitable accommodation as a business expands and contracts. Having a large portfolio of assets in Australia and New Zealand allows Centuria to offer space solutions to our existing tenants and across different geographies. For example, an existing tenant customer, Multisteps was seeking to relocate from the CIP-owned industrial unit at Noble Park, Vic, to improve efficiencies and create a larger capacity to warehouse its food packaging products. Though the first consideration was to seek a larger footprint, after liaising with our property services team, Multisteps relocated to another CIP facility at the Southside Industrial Estate, which provides the same floor space but increased height capacity. This reconfiguration provides an optimal operation while the location of the facility enabled better transport logistics.
Another key advantage of close tenant relations and scale is being able to facilitate a business’ real estate requirements beyond one building and one asset class. In fact, four out of our top 10 tenants lease property from Centuria across a variety of sectors. For example, Wesfarmers contribute to about 3% of Centuria’s rental income4 which is derived from leases across office, industrial, daily needs retail and large format retail.
Top tenants by income5,6
Centuria services a variety of blue-chip tenants including national and multinational corporations as well as household names that are listed within the S&P/ASX 100 Index. But by far, governments – federal, state and local – are our largest tenant group, by a factor of four. While this tenant profile is mainly attributed to office leases, we also lease industrial, healthcare and daily need retail space to government tenants.
Let me come back to my original comment about reliable income streams. In the current environment, where market volatility prompts investors to look under the hood of their investments with closer scrutiny, to read beyond headlines and see the source of income for an asset would be prudent. Some commercial real estate asset classes have received more negative market speculation than others, but as I have said before, not all assets are created equal. The common themes within all sectors are the underlying tenants and their willingness and ability to continue their occupation and pay rent.
For example, our 2023 tenant survey showed more than 75% of our office tenants expect to retain or increase their office space requirements in the medium term. Additionally, according to our survey, office tenants have considerably pulled back on working from home (WFH) arrangements with only 18% providing fully flexible working conditions, compared with 32% a year ago7. This indicates a strong return to office work culture and an indication of rising physical occupancy. What’s more, it gives a strong indication of tenants continuing to pay their rent, providing continuous fund revenue.
So, at Centuria, we will continue to prioritise tenant relations to ensure consistent revenue streams for our investors. We will achieve this by continuing to be at the coalface of tenant relationships with our best-in-class in-house property services teams.
- As at 31 March 2023
- Rental arrears as at April 2023
- As at 7 July 2023
- As at 31 December 2022
- Tenancy profile is shown aggregated across all funds managed by Centuria and is not representative of any single fund
- Excludes land, Development assets, US syndicates, Centuria Bass Credit, assets exchanged yet to be settled
- Centuria 2023 Office Tenant Customer Survey