Commercial property with liquidity: the best of both worlds

Unlisted property funds have long been recognised for their ability to pool investors’ funds and thereby provide direct access to quality commercial property that would otherwise be out of reach. While the returns of such funds are undoubtedly appealing, the sticking point for some investors has traditionally been the fact that investments are locked up for five or even seven years. Jason Huljich, CEO of Unlisted Property for Centuria, reveals how investors can now achieve the best of both worlds.

Quality commercial property – when purchased well and actively managed – has long been recognised for its investment potential. The potential for attractive, tax-advantaged income along with the potential for capital gain when the property is sold is an appealing combination. The challenge for investors, however, is the cost of entry to quality property – something which puts it out of reach of many.

This is where unlisted property funds, which pool investors’ funds to purchase commercial property, have the potential for attractive returns for investors, typically in the form of tax-advantaged income and capital gains at the end of the trust.

Unlisted trusts have a closed structure in which property assets are valued annually, so unit price movements are not as volatile. In contrast, A-REITs are traded on an exchange, making them strongly correlated with equity markets (and therefore more volatile), and less likely to move in line with the value of the underlying properties, meaning they don’t necessarily achieve the same level of portfolio diversification.

While both listed and unlisted trusts have their advantages – and a sound investment portfolio should incorporate both – the challenge comes in accessing unlisted funds. With cash locked up for a minimum of five years, sometimes seven, and minimum investments as high $50,000 or more, unlisted trusts are naturally more appealing (and accessible) to self-directed high net worth investors, SMSF trustees and the clients of boutique financial planning firms. Furthermore, by not offering daily unit pricing and redemptions, most unlisted funds are not suitable for larger investment platforms, which typically are the starting point for investors that come via most major financial advice firms and aligned planners. This means that a large proportion of investors have lacked easy access to unlisted property trusts and the benefits they bring – a clear market shortcoming.

Meeting market needs

In order to level the playing field, Centuria made the decision last year to create a fund which would offer investors unlisted property exposure, with liquidity. The resultant Centuria Diversified Property Fund (CDPF) invests in a range of unlisted funds as well as some A-REITs and cash in order to provide the daily unit pricing and a limited monthly redemption facility that is required by some investors. In essence, what we have created is an open-ended, diversified commercial property portfolio with target liquidity levels and which aims to provide tax-effective monthly income, coupled with the potential for capital growth.

Initially funded with internal group money in order to thoroughly test the concept, the CDPF became open to direct investors earlier this year. Today, 92% of the portfolio is comprised of units in a number of Centuria’s unlisted property funds, with the remaining 8% in the form of cash and A-REITs, to provide a strong level of liquidity. Already this year we have secured five million units in the unlisted Centuria Sandgate Road Fund as well as an additional 2.6 million units in the Centuria Havelock House Fund, which will be purchased as investment continue to flow into the fund.

Such additional investment will serve to further diversify the fund, reduce its gearing, increase the overall weighted average lease expiry (WALE) and improve distributions, at which point the weighting to cash and A-REITs will also be increased in order to provide enhanced liquidity.

Understanding the changing environment

As investment increases in CDPF, our intention is to purchase property directly – leveraging the investment process and research that has proved successful in the past for purchasing and managing properties for both our unlisted and listed vehicles.

As an asset-specific buyer, we don’t reject markets out of hand, even those with comparatively weak fundamentals (although naturally we take such fundamentals into account). For example, one of the striking features of the market cycle at the moment is the divergent nature of Australia’s different CBD markets. In particular, markets which are heavily reliant on the resources sector (Brisbane and Perth in particular) are much weaker than the east-coast markets of Sydney and Melbourne. This comes as no surprise, as the fading resources boom has impacted demand for office space in these related markets, leading to an excess level of supply. This in turn has been compounded by a strong construction cycle, meaning that supply has continued to grow even as demand dwindles.

If you look at the bigger picture, however, the RBA estimates that non-rural commodity prices have significantly recovered – good news for Perth and Brisbane – while net absorption in non-resource led CBD centres has started to ease, diminishing the gap between CBD markets. There are also green shoots appearing in both Perth and Brisbane as demand starts to pick up. Given that supply is likely to remain limited, we anticipate favourable investment conditions to come, and potentially some strategic buying opportunities in these markets.

Of course, even as market conditions continue to ebb and flow, one thing remains constant and that’s our commitment to actively manage the commercial properties we own in order to unlock greater value. Our ability to maximise returns from our properties, rather than taking a ‘buy and hold’ approach or holding properties as passive assets, remains central to our strategy and competitive advantage. Through a hands-on approach that includes refurbishments, facility upgrades and the development of spec fitouts to appeal to tenants – all conducted by our own in-house leasing and property management team – we are able to proactively add value to properties wherever possible.

Consider and understand the risks to investing

As with all investments, each property trust will have varying degrees of risk that should be considered by prospective investors. Investors should read the Product Disclosure Statement for a Fund carefully to better understand the risks of investing in commercial property and/or unlisted property funds.

The best of both worlds

While we’re still in the relatively early days of what we hope will be a prosperous future for the CDPF, we’re certainly very pleased with its performance so far. Indeed, it’s proved to be a ‘win-win-win’ situation: providing investors with an opportunity for attractive returns; building a much-needed bridge in the market to provide all investors with access to unlisted funds (and direct exposure to commercial property and its potential capital gain); and creating tangible improvements to properties, to the benefit of tenants and users alike. Commercial property with some liquidity is achievable, making this investment class accessible to more.