Andrew Cannane

Property Funds Association (PFA), the peak body representing Australia’s unlisted property funds industry, has appointed Andrew Cannane, Executive Director of Intertrust Australia, as President of its Executive Committee.

Mr Cannane has served on the PFA Executive Committee for 12 years, and replaces Steven Bennett, CEO Direct Property at Charter Hall, who has finished his two-year term.

PFA has appointed Melissa Kingham, Executive Director of the Haben Property Fund, as Vice President of the committee.

Paul Healy, CEO of the PFA, welcomed the new President and Vice President of the PFA Executive Committee. “We are delighted to appoint Andrew and Melissa to the roles of President and Vice President. They each bring substantial knowledge, passion and experience to the committee.

“I thank our previous President, Steven Bennett, for his outstanding leadership and steady hand during the COVID-19 pandemic.”

New President Andrew Cannane said unlisted property funds would continue to provide valuable diversification and returns for investors. “Our industry in Australia includes some of the best property investment funds and managers in the world, and I am honoured to represent them as President of the PFA.

“Direct property has an incredible track record at providing income returns and capital growth. The opportunities to use direct property funds for greater diversification is also a major benefit to investors.

“It’s an exciting time to be in commercial property investment. The innovation we are seeing across the traditional and emerging property asset classes has been inspiring, and will play a key role in the COVID recovery.”

The PFA Conference 2021 will be held in Cairns from 18-20 July 2021. The conference asks Has COVID-19 changed property permanently? The conference will explore pressing property issues including new technology and innovation, leasing challenges, and potential structural changes to the property landscape.

Keynote speakers include:

• Richard Gibbs, Chief Economist and Director, Urbis
• Jason Huljich, Joint-CEO, Centuria Capital Group
• David Green-Morgan, Managing Director APAC, Real Capital Analytics
• Michelle McNally, General Manager Property, Australia Post

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Paul Healy

More self-managed superannuation funds (SMSFs) could benefit from unlisted property funds to access diverse property investments and avoid becoming overly concentrated in just one or two assets, according to Property Funds Association.

‘Concentration risk’ from a lack of diversification among SMSFs was recently in the spotlight as ATO recently reviewed SMSFs using Limited Recourse Borrowing Arrangements (LRBA) where money has been borrowed to buy direct property, often a single asset which represents more than 90 per cent of the fund’s assets.

This followed a report handed down by the Council of Financial Regulators earlier this year, which expressed concern over the “prevalence of property as the main asset purchased under an LRBA, most commonly by low-balance SMSFs (under $500,000) who have little investment diversification and high loan to value ratios (LVRs), making these funds particularly susceptible to shifts in the property market”.

Paul Healy, CEO of Property Funds Association (PFA), the peak industry body for the $125 billion Australian unlisted wholesale and retail property funds sector, said SMSFs can diversify across property asset classes including office property, industrial property, and emerging alternatives such as healthcare, via unlisted funds.

“Many SMSFs are putting their eggs into one basket property-wise, which is a missed opportunity when you consider the huge property investment universe available via unlisted funds.

“Unlisted funds provide access to property assets which are beyond the reach of most direct investors, including commercial and industrial and overseas assets which have performed strongly.

“SMSFs using unlisted property funds also benefit from increased diversification, from being exposed to several different properties and strategies.”

Mr Healy said unlisted property funds have delivered strong returns due to an ability to combine capital growth with income from rents, while showing lower volatility compared with equities and listed property trusts.

Research by Zenith Investment Partners, MSCI, the Property Funds Association and the Property Council of Australia has shown unlisted property has delivered strongly for the last five years, with total returns at 22 per cent per annum (to 31 December 2018) – Australian equities delivered 5.6 per cent per annum for the same period.

About Property Funds Association

The Property Funds Association of Australia is the peak body representing the Australian unlisted wholesale and retail property funds sector, currently worth more than $125 billion.

As the professional association for Australian Financial Services Licensed (AFSL) property fund managers, their advisors, consultants and representatives, we support and promote investment into unlisted property trusts, funds and syndicates, and assist members in developing and operating their businesses.

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Mr de Vos, speaking this week at the Property Fund Association’s 2019 Conference in Hobart, said there are challenges and opportunity in social infrastructure. “An ageing population and proportionately fewer tax payers will create challenges for government funding, but this opens up significant opportunities for the private sector and for investors.”

“As a country Australia is still not seeing how big the social infrastructure sector can be.”

He said social infrastructure investment was rapidly becoming more mainstream. “Social infrastructure is still considered an alternative but when you look at the investment required over the next 20 years it may eventually be considered a core real estate asset class.”

“There are good reasons why investors are taking notice of social infrastructure investments, including early learning centres. It’s a property asset class which is supported by strong macroeconomic themes that relies on bricks and mortar. It will require physical assets for a long time, meaning the obsolescence risk is low.”

“Early learning assets hold long-term value as they typically have long term triple net leases where the rental income is linked to CPI. There is also a land component underpinning the investment, providing the opportunity for capital growth.”

“This contrasts with traditional asset classes such as retail, which is being rapidly disrupted by online shopping.”

Mr de Vos said government is not in a position to fund all of these works. “The private sector has a huge role to play in creating more places, which will bring more opportunities to investors – whether via a pure private investment or via public private partnerships.”

The Property Funds Association 2019 Conference is themed Critical Change: Crisis, Challenge or Catalyst for Property Investment and concludes on 7 May 2019.

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The Executive Committee of PFA recently elected Steven Bennett, Head of Charter Hall Direct, as the new President of PFA’s National Executive Committee, taking over the role from Mark Pratt, Executive General Manager –  Property at Australian Unity.

The Association also elected Andrew Cannane, Executive Director at Evans Dixon as the Committee’s new Vice President.

Formed in 1998 PFA was established to provide the growing number of direct property investors and managers with an organisation to represent their interests, promote their industry and provide a forum for research and education.

Paul Healy, Chief Executive Officer, PFA noted: “We welcome our new President and Vice President to the Executive Commitee. The Executive Committee is the decision-making body of the Association and comprises of PFA members which represent the various areas of the Association’s constituency. Both Steven and Andrew are regarded as experienced direct property professionals in the commercial property space and we look forward to their insights and contribution in growing investor awareness around the direct property sector.

“I would like to thank our previous President, Mark Pratt, for his contribution towards growing the Association’s scope to represent the advisors, consultants and representatives of property investors and managers.”

Steven Bennett, Head of Charter Hall Direct, added: “I am honoured to be appointed in this new role. Having been a member of the Association since 2014, I believe the Association will continue to play an integral role in representing the interests of the direct property industry.

“Over the last two decades, this sector has grown dramatically and has become a core investment class for growing the wealth of Australian investors by providing strong risk adjusted returns and a stable source of regular income.

“Apart from the high levels of ongoing income, what makes direct property so compelling is its low correlation with other asset classes providing effective diversification benefits and lower relative volatility. This means direct property investments react in a different manner to varying economic conditions compared to other major investment classes such as shares and bonds.

“For this reason, we believe, investors will continue to hold direct property as an essential component in their portfolios,” said Mr Bennett.

The Annual PFA Conference for 2019 will be held in Hobart from 5-7 May. It will review the activity in global and local markets and examine whether current times are a crisis, challenge or catalyst for property investment.

Key Conference speakers include:

• David Harrison, Managing Director and Group CEO, Charter Hall
• Simon Garing, Acting Chief Executive Officer and Executive Director, Cromwell EREIT Management
• Justin Smirk, Director – Senior Economist, Westpac Institutional Bank
• Penny Ransom, Group Executive, Head of Investment Management, Investa Property Group
• Rob de Vos, Managing Director, Arena REIT

More information about the Conference.

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Paul Healy

Unlisted property funds need to start considering measures to comply with the government’s recent introduction of product design and distribution obligations, according to Property Funds Association, which also says the new legislation could see fewer choices for investors.

The Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Power) Bill 2019 (Act) was passed into law on 5 April 2019. The product intervention power applied immediately and the design and distribution obligations will apply from 5 April 2021.

Paul Healy, CEO of Property Funds Association (PFA), the peak industry body for the $125 billion Australian unlisted wholesale and retail property funds sector, said the passing of the Act will disappoint many in the unlisted retail property funds industry. “PFA believes the Act mandates a compliance regime which could see managers shun retail products and favour wholesale products, limiting the choices available to retail unlisted property investors.

“Many unlisted property funds will find it more difficult and expensive to bring retail products to market.” The Act does not apply to wholesale products.

Mr Healy said two years is not a long time to implement a significant new compliance framework in property funds management, meaning property fund managers already need to consider their compliance measures.

The biggest looming challenge facing retail funds is the required Target Market Determination when creating new funds. “The Target Market Determination introduces several possible issues which could make bringing new products to market more costly, and delay some projects.

“It is hoped ASIC and industry guidance will provide clarity and ensure the rules are applied consistently.”

Mr Healy said the new Act could be seen to shift responsibility from the financial adviser to the product issuer. “Product issuers may need to take extensive precautions with investors, including potential for needing to put in place fact finding measures, consumer testing or/and ensuring that financial advice is provided to prospective investors, even for simple products which are well understood in the market place.

“It’s possible issuers may outsource some aspects related to the Target Market Determination, which potentially introduces other risks.”

Property Funds Association will be hosting its annual conference from 5-7 May 2019 in Hobart, one of the highlights on the property fund industry’s calendar – this year’s theme is ‘Critical Change: Crisis, Challenge or Catalyst for Property Investment’.

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Most new unlisted property fund vehicles raising funds in the market are providing ‘back-to-basics’ closed-ended syndicates with a single asset and quality tenant and a long weighted average lease expiry says the report “Direct Property Funds Sector Review” by Lonsec Research Pty Ltd.

The report also highlights that pre-tax yields for these vehicles range from 7.5%-10% and that gearing levels are now in the range 40%-55%, down from 55-65%.

Jason Huljich, CEO of Centuria Property Funds Ltd and recently elected President of the Property Funds Association of Australia (PFA), welcomed the report saying, “It is good to see the analysis of what we have known for a while now, that the unlisted property fund sector is in recovery and investors are back in the market supporting managers with quality offerings”.

The report gives an update on the status of funds and managers which have had difficulties but also notes the emergence of new boutique fund managers.  Mr Huljich commented, “It is always a good sign of confidence when new fund managers start to emerge, both in the value of the underlying property markets and in the appetite of investors to reinvest in the sector.”

Results from the Unlisted Retail Property Fund Index, released by IPD, an MSCI Brand, and sponsored by the PFA reinforce the Lonsec Report’s findings that the sector has come a long way from the depths of the property market crisis in 2009.  Total returns over the last 12 months have stayed around 7%-8%, with the latest quarterly result indicating a 7.2% total return for the year to March 2013.

Mr Huljich said, “The PFA is pleased to support rigorous analysis of the unlisted property fund sector, both at the retail and wholesale level.  With these figures, our fund managers can properly benchmark their performance, and we look forward to seeing the results as the sector continues to improve.”

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The PFA is a professional body for the unlisted property sector which exists to provide direct property investors and managers with an organisation to represent their interests, promote their industry and provide a forum for research and education.

Speaking from PFA’s Annual General Meeting (AGM) yesterday, outgoing President Robert Olde welcomed Mr Huljich as his predecessor: “Jason is highly regarded in the industry for his strategic foresight and in-depth sector knowledge. In addition to his role as CEO of Centuria Property Funds, which is one of the largest unlisted fund managers, Jason has been pivotal in supporting the efforts of the PFA as Vice President over the past two years.”

“I am confident that, as President, he will remain committed to the growth of the PFA through awareness campaigns and continued improvement in governance and best practice industry standards.”

Mr Huljich said of his appointment: “I am delighted to be elected as PFA’s President and thank Robert for his dedication in the role over the past four years.”

“The PFA is committed to supporting and promoting investment into unlisted property trusts, funds and syndicates through improving the regulatory environment, enhancements to disclosure and support our members to achieve a more prosperous property managed funds sector.”

Mr Huljich will be responsible for overseeing the efforts of the Association with regards to advancing the property sector as a long-term, sustainable investment class.

“I see the PFA as playing an increasingly significant role in expanding industry research and education around investing in direct property investment vehicles and broadening best practice for members in buying, selling and operating funds.”

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In the current market, Retirees are becoming increasingly concerned with the substantial and sharp reduction in their capital base, which is primarily the result of  exposure to highly liquid investments. 

In a typical portfolio theory, the total allocation to property is 11% and of this allocation, 73% comprises listed property exposure[1]. Due to the close correlation of listed property to equities (currently about 0.7, whilst unlisted property is -0.2), PFA believes that portfolio theory may need to be revised so that listed property forms part of the equities allocation, and property allocation comprises predominantly unlisted, syndicated (or direct) property investments. 

PFA President Robert Olde, said; “Despite  the noise surrounding the property sector and funds that have incurred capital losses in recent years, Unlisted Property and Syndicates remain the strongest performing core asset class inAustralia over the last decade. They have outperformed the Australian equities market by 2.2%pa, but with much lower volatility.  In fact, the volatility is closer to that that experienced by bond investors, providing further proof of the defensive nature of direct real estate investment.” 

“On this basis, one must ask why the investment industry continues to back  lowallocations to unlisted/direct property investments when it appears to be a superior  asset class for long term superannuation investors, especially as the investments trade on fundamentals, not sentiment,” he said.

 Mr Olde said data obtained from Mercer Investment Consulting’s performance surveys also supported a change in thinking in property allocations.  “Results showed that as a defensive component of a portfolio, Unlisted Real Estate provides growth returns with defensive characteristics and Unlisted Property has provided the same Risk/Reward Contribution to a Portfolio than Australian Bonds but with significantly higher returns.” 

Results from Mercer showed that over the 10 years to 30 June 2011:

• Cash returned 5.4% pa
• Australian Bonds returned 6.2%pa, with a 2.9%standard deviation (a risk-reward ratio of 2.1)
• Unlisted Property returned 9.4%pa, with a 4.4% standard deviation (a risk-reward ratio of 2.1)
• Australian Shares returned 7.2%pa, with a 13.3% standard deviation (a risk-reward ratio of 0.5)
• Australian REITs returned 2.2%pa, with a standard deviation of 17.6% (a risk-reward ratio of 0.125).

Mr Olde added, “The current allocations are also particularly interesting when you consider that High Net Worth and Ultra High Net Worth investors hold up to 35-50% of their portfolio in property[2]. Property is seen not only as a way to preserve wealth, but to also augment it and this is particularly relevant when you consider that property investment in most cases is an inflation hedge, given the structure of leasing arrangements. If the sophisticated investors are so heavily weighted to property, why is it that a similar approach is not adequate for the typical Australian retail investor?”

“Australian retail investors simply have too much exposure to listed markets and they should have higher allocations to unlisted real estate.  Historic evidenceover both the short and long term indicates the benefits of having a portion of one’s portfolio allocated to unlisted real estate funds.” 

Recent PFA research also shows that the totalreturns of direct property on an after-tax basis exceeded A-REIT returns over all examined periods. Tax, fees and other costs had a minimal impact on relative total returns from direct and listed property. 

Cumulative returns of direct property and listed property over 25 years also showed direct property supplied higher returns than A-REIT’s, with substantially lower volatility due to the lower level of liquidity, which is inherent in real estate investment.

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PFA Vice President and member of the Sustainability Committee, Adam Murchie, said while there is a significant opportunity for property to play a part in reducing emissions, the Government needs to ensure the scheme does not favour replacement of buildings over upgrades. 

“Commercial and residential buildings contribute over one fifth of emissions in Australia. Given the inputs into property (steel, cement, aluminium, glass, gas, electricity, etc), building owners and occupiers are likely to experience cost increases should a carbon tax be introduced,” he said.

“As a carbon price will place a greater focus on energy usage and the total cost of occupancy, it could inadvertently accelerate building obsolescence where owners are unable to fund upgrades so that their buildings remain competitive.  It is likely that anything other than premium grade real estate will need support to remain competitive.”

Mr Murchie said the PFA firmly believes that a Carbon Incentivisation Scheme for real estate is required to ensure the continued feasibility of existing stock and to avoid having a major gulf between old and new stock across Australia.  

“The carbon scheme, although environmentally sound, is a very real threat to the competitiveness of existing real estate and theiroccupants if the cost of upgrading buildings is left unaddressed.  In particular, it is imperative to address the existing stock as retrofitting existing buildings, given their embodied energy and existing use of resources, is far more sustainable thanbuilding new premises.  If this is not addressed, the negative impact, particularly for secondary grade buildings that make up the majority of the stock, could certainly be a burden on the industry in five years time.  This will affect both property investment as well as business competitiveness and will hurt the smaller investors more than the larger institutional players.”

Mr Murchie added that a transition process needs to be developed now in partnership with the Government.  “The property industry is already a leader in sustainability, but it will need support to react appropriately to the changing economic environment that the Carbon Scheme, as proposed, may bring.  Without support, a potential outcome of the changes could be significantly higher rents for non-residential premises to offset the cost of building upgrades or the rise in outgoings.  With business profitability already at low levels, an added impost could send many businesses to the wall.”

“It’s the occupants of those buildings requiring upgrades who will be forced into higher rents to offset the cost of the carbon price.   This will reduce the competiveness of many businesses.  Alternatively, the outcome could be accelerated obsolescence for existing building stock, which may force values down and in turn, restrict capital investment across the sector.  I’m sure that it’s not the intention of the government to reduce the attractiveness of real estate investment, given its importance to the Australian economy.   A partnership on this issue could in fact achieve quite the opposite, especially as some of the greatest gains, at the lowestcost, are possible from the property sector.”          

Mr Murchie said technology has already been developed that can significantly reduce emissions.  If the government provides support programs that promote the upgrade to low emission technology, this would not only stimulate economic activity, but potentially lead to Australia having the greenest building stock in the world, in addition to a relatively easy and cost-effective way to reduce carbon emissions.” 

“The $10bn Clean Energy fund will support the deployment and commercialisation of renewable energy, low emissions intensity and energy efficient technologies.  Given the potential property has to reduce emissions, the PFA believes that a fair share of these incentives should be directed to property, particularly given the long term life cycle of real estate.”

In addition, the PFA believes the government needs to implement more direct action for property under programs like the Green Building Fund, and deliver on tax incentives under the green tax breaks program. This will help reduce emissions faster and bring other benefits such as increased employment and the development of exportable skills and technologies.

To this end, the PFA has been working for over three years to prepare its members for the inherent changes in the property and investment sector which will be bought about byclimate change.  A dedicated Sustainability Committee has been addressing the risks and rewards of the impact of climate change on property and has been arming its members with tools so they can take meaningful steps to transition. 

“This is about knowledge” says Murchie, “and armed with the right information we hope our members can make the right decisions. Like the Target 155 program or the Green Star ratings tool, whenarmed with relevant information and a benchmark to aspire to, the market typically tends to change its behaviour for the better.”

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