Office property is seeing a high level of interest: Australian Unity Real Estate Investment.

While foreign investors continue to be attracted to all property sectors, office property is seeing a particularly high level of interest, driving up asset valuations in some locations, says Mark Lumby, head of property funds – retail at Australian Unity Real Estate Investment.

But outside of the traditional CBD markets, there are good opportunities for investors seeking an investment in office property, he says.

“Over the last five years, foreign investors’ appetite for Australian office property has gone from being a relatively small component of their overall property allocation in Australia, to being by far the largest sector – almost three times bigger than retail property, which was historically the most attractive.

“More than 60 percent of foreign capital going into Australian property has been directed to office investments since 2005. In addition, a number of overseas residential developers are buying old office buildings and converting them to residential properties.

“On top of this, AREITs are now trading at a premium to their net asset value once again – eight percent as at 31 August 2014. Coupled with strong interest from private syndicates in a low interest rate environment, these factors are all creating competitive tension and increasing asset valuations in some locations.

“This has resulted in high transaction volumes and pricing for office property in some CBD locations to the point where investment returns are too low for some investors, such as institutional investors, to meet their investment objectives. Typically, these return objectives are CPI plus five percent.

“As a result, these investors are now turning to the ‘secondary’ office market, such as in Sydney and Melbourne fringe areas, which contain excellent investment opportunities.

“For example, Parramatta in Sydney, and St Kilda in Melbourne, have both been delivering good stable returns for investors.  We have seen a number of superannuation funds investing in these areas as they offer the potential to better achieve the kinds of property returns they require.”Mr Lumby said that the stable returns for investors in Sydney and Melbourne office property are likely to continue for some time.

“There continues to be reasonable leasing demand for office space in these cities.  Even though the development pipeline is strong – for example, the Barangaroo development in Sydney’s CBD which, on completion, will represent approximately five percent of Sydney’s CBD office space – there are a number of office buildings being converted to residential or hotel use which, when coupled with the moderate levels of tenant demand, should keep a lid on vacancies.

“It’s a different story in Perth and Brisbane, however.  As the mining industry transitions from the construction to the production phase, many big mining corporations are reducing their office space requirements in these cities.  At the same time, there are some major new developments coming online, such as Kings Square and Elizabeth Quay in Perth.

“This is creating a huge amount of supply on the market, and there simply isn’t the demand over the short or medium term.  As a result, we expect vacancies to increase in the short-term in both Perth and Brisbane from their current levels of 11.8 percent and 14.7 percent respectively” Mr Lumby said.

Another positive sign for investors in office property is that business conditions have been improving over the course of the year.

“Office tenant demand tends to lag business conditions by about one year.  At a reading of +4 index points, the latest NAB Monthly Business Survey[1] shows business conditions at close to the highest they have been for four years, so the outlook is pointing towards improved tenant demand.

“And when focusing on secondary office properties, a comparison of industry conditions for SMEs and larger sized firms, taken from NAB’s Quarterly Business Survey[2], suggests that smaller firms are performing better than their larger counterparts in a number of industries – as well as reporting better conditions overall.  This evidence supports the low vacancy rate in many suburban office markets like Parramatta where the vacancy rate is 6.7 percent compared to Sydney’s CBD which is at 8.4 percent,” he said.

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Greater demand for private medical for health facilities will drive up property values.

Putting aside the fight brewing between the states and the Commonwealth over public healthcare spending, there could be a silver lining for investors, says Chris Smith, head of healthcare and retirement property funds at Australian Unity Investments.

“As it becomes more difficult, and more expensive, for governments to fund growing healthcare needs, an increasing number of Australians will turn to the private sector to meet their health and medical needs.

“As a result, there will be even greater demand for private medical centres, private hospitals and other allied health facilities, which will drive up their property value.

“Investors in healthcare property may reap the benefit of this in terms of both capital value and income yield,” Mr Smith said.

He pointed to three main areas that are driving demand for healthcare services –population growth; the increasing proportion of the population that will live beyond 65; and the dramatic rise in lifestyle diseases, which are typically the result of tobacco use, poor diet and lack of exercise.

“There will undoubtedly be ongoing and growing demand for healthcare and medical services that Federal and state governments will increasingly face difficulties in funding.

“According to the 2014-15 Budget papers, 16.1 percent of Federal government spending is provided for health. With this forecast to increase considerably over the forward estimates, it is increasingly likely that governments will move to limit services and expenses provided from the public purse.

“The outcome is that we expect the usage of private hospitals and private medical facilities will continue to rise, and the increased demand will ultimately require more space to expanding existing facilities and build new ones.

“At Australian Unity Real Estate Investment, we are continually seeing opportunities to further invest in developing our existing healthcare property assets. Both the pace and frequency of these developments have picked up substantially over the past few years, and we expect more expansions in the future will play an increasingly important role in the delivery of community healthcare services.”

Mr Smith said that for investors, the opportunities are significant.

“We continue to see a lot of interest in healthcare investments by both on and offshore REITs and institutional funds, which is a good indicator of the strong outlook for the sector.

“With retirees looking for strong and consistent income streams as higher term deposit rates roll off, healthcare property is increasingly worthy of consideration in a well-diversified investment portfolio,” Mr Smith said.

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Chad Padowitz

Australian Unity Investments’ equities fund manager partners agree that while the overall outlook for markets – both domestically and internationally – looks positive, investors need to be selective.

Chad Padowitz, chief investment officer at global equities manager Wingate Asset Management, said 2014 will be a more challenging year than 2013 for investors, although there are still good opportunities around.

“There was a bit of investor complacency in 2013, as the lack of alternative investment options and low volatility enticed investors back into the equities market. Yields have been attractive and valuations have largely been an afterthought.

“This year, investors will need to pay more attention to valuations in order to pick the best opportunities.

“There will also be significant differences in how various economies perform in 2014. For instance, the US is looking very strong, with an improving labour market, oil/shale revolution, manufacturing renaissance and strengthening housing markets. However Europe is treading water, and China is making the difficult transition from investment to consumption, and may experience a credit crisis.”

Mr Padowitz said in addition to the energy sector and selected cashed up corporates, some of the best opportunities for international equities are likely to lie in healthcare, where investors can benefit from improving efficiencies.

Mr Padowitz added that the introduction of “Obamacare” in the US will create both winners and losers for investors.

“Companies with scale and low costs – such as large insurance companies and service providers – will benefit from Obamacare, while those with high profit margins and minimal product differentiation will find the new environment much more challenging. This includes hospitals and medical professionals.

Donald Williams, chief investment officer at Australian equities manager Platypus Asset Management, agreed with the opportunities in healthcare and said there are also a number of positive signs for the domestic market.

“We are now seeing the lagged impact of low domestic interest rates, which are starting to have the effect the RBA was looking for, and the declining Australian dollar is generally positive for earnings.

“Consumers are more optimistic; the property market is improving, resulting in a wider wealth effect among Australians; and the IPO market is back which is often a precursor to M&A activity.

“All these indicators lead us to be reasonably bullish for Australian equities, though the February reporting season could be tough, reflecting the ongoing weakness in the economy last year.” Mr Williams said.

In the Australian healthcare sector, Mr Williams said that there are a number of positives for companies such as Resmed, Ramsay Healthcare, Healthscope and CSL.

“The falling Australian dollar combined with the defensive earnings profile of companies such as Ramsay, Virtus, Resmed and CSL suggest a good outlook for such companies.

“We also anticipate a number of healthcare IPOs in 2014 which will create good opportunities for investors.”

Mr Williams added investors will need to pick and choose where to put their money very carefully.

Chris Smith, head of healthcare and retirement property at Australian Unity Investments, said like the rest of the world, growth in healthcare property and services in Australia is pretty much guaranteed because of the aging population.

“Our aging population and greater longevity, combined with generally increasing prosperity, will lead to greater demand for healthcare, both facilities and services.

“Both the government and the private sector will need to step in to meet this demand over the next few decades,” Mr Smith said.

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AUI is seeking to merge its Australian Unity Fifth Commercial Trust and its Australian Unity Office Property Fund.

Australian Unity Investments (AUI) is seeking approval from investors in the Australian Unity Fifth Commercial Trust (FCT) to merge the trust with the larger, more diversified, Australian Unity Office Property Fund (OPF).

Investors in FCT will be eligible to vote on the Proposal via proxy or by attending a general meeting of investors on Wednesday 11 December 2013, in Melbourne.

OPF is an unlisted property fund, which owns eight quality office buildings in some of Australia’s major centres, with a forecast total asset value of approximately $366 million (30 June 2014).

FCT is a fixed term trust due to terminate in 2015. By making the Proposal now, AUI is seeking to maximise the value of FCT’s remaining properties at 5 Eden Park, North Ryde NSW and 30 Pirie Street, Adelaide SA (already 50% owned by OPF). The Proposal allows FCT to effectively transfer its interests in both properties to OPF at an agreed valuation; which removes the reliance on the risks of a sale process, and involves no selling costs.

Mark Pratt, General Manager Australian Unity real estate investment, said the merger would provide investors with a cost and tax effective option to continue their investment in commercial property.

“We believe the proposal is in the best interests of investors in FCT and will deliver a number of key benefits.

“OPF is forecast to provide higher distribution returns than those forecast for FCT, has greater diversification than FCT, and intends to continue providing regular capped withdrawal opportunities to investors.

“Investors will have the ability to continue their exposure to the property market via an investment in the OPF – a diversified fund open to new investment that has been operating for more than eight years.

“The Proposal ensures certainty of transaction values for the remaining properties in the Trust, no selling costs and the opportunity to consolidate the joint ownership of 30 Pirie Street, Adelaide SA, providing greater control over its asset management strategy.”

Mr Pratt said if the merger was approved, FCT investors would pay lower management fees, as the management fees for the OPF are lower.

“A number of investors in FCT have indicated to us they would like to maintain an investment in the Australian property market beyond FCT’s scheduled termination in May 2015.

“If investors vote in favour of the Proposal, their investment will transfer to the OPF with the dollar value of their investment remaining unchanged at the implementation date,” Mr Pratt said.

If the merger is approved, it provides investors in FCT the opportunity to realise all or part of the investment through an initial $15 million capped withdrawal offer equating to approximately 25 per cent of FCT’s net asset value. They may also have the opportunity to defer any capital gains tax (CGT) on their investment by opting for scrip for scrip rollover relief.

“It is also our recent practice, and future intention, to provide investors in the OPF with the flexibility to withdraw through half-yearly capped withdrawal offers,” Mr Pratt said

Mr Pratt said AUI is experienced in successfully bringing together investment vehicles. Earlier this year it merged the Australian Unity Second Industrial Trust with OPF following strong support from investors, and in 2009 it converted five retail property syndicates and trusts into a single fund, the Australian Unity Retail Property Fund.

“We believe a merger would broaden FCT investors’ diversification of properties by tenant and geography. As the OPF is open to new investment, it can also raise capital and acquire or dispose of assets in order to take advantage of market opportunities in line with Australian Unity’s active asset management,” he said.

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AUI picks up the Direct Property Fund Manager of the Year award for 2013.

Australian Unity Investments (AUI) has been named winner of the Professional Planner/Zenith Investment Partners Direct Property Fund Manager of the Year award for 2013.

AUI manages a range of diversified property funds, covering healthcare, retail, industrial, commercial and office property and has over $1.7 billion in property assets under management (as at 30 September 2013).

The Professional Planner/Zenith Investment Partners Fund Awards recognise excellence in the application of a fund manager’s investment philosophy and process. Zenith selects award nominees and winners based on its robust and comprehensive manager assessment methodology, which focuses on nine aspects of how fund management businesses are organised and operate including organisational strength, investment philosophy and process, risk management and performance.

Direct Property was one of three new fund categories for the 2013 awards and reflects the growing importance of the sector and the increased interest among financial planners in using property in diversified portfolios.

“The awards are recognised as an assessment of excellence in the retail managed funds industry. Being awarded the inaugural Direct Property Fund Manager of the Year award is a strong endorsement of our investment approach and our achievements on behalf of our investors,” says Mark Pratt, AUI’s head of property, mortgage and capital markets.

“AUI has been managing property funds for 14 years, and believes the Australian property market is currently offering investors attractive yields and stable values.

“An investment in property funds can offer investors access to a range of properties diversified by property type, sector, tenant and geographic location. If investors are looking for a consistent income yield then investment in a well-managed property fund is well worth considering.”

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Damen Purcell, AUI’s head of retail distribution, said the changes will allow AUI to further build and expand its adviser and dealer group relationships at a time when confidence is returning to the retail investment market.

“We are seeing a number of changes in the financial advice community as a result of the growing confidence amongst investors and changes in the way they seek to invest, which means that now is the ideal time to enhance the capabilities and resources we offer customers.

“In addition, the strong growth in certain segments of the market, such as family offices, means there has been a change in the kind of information and structures that some adviser groups require from fund managers, which we are well-placed to provide,” he said.

AUI has created three Key Account Manager roles, promoting Theone Star, Huw O’Grady and Allyce Mitchell to the positions. All three will report to Mr Purcell.

Ms Star, previously national account manager, will be responsible for multi-managers, private banks and brokers, family offices and some NSW-based institutions. She joined AUI in 2005 and has held a number of business development roles in the financial services industry including at Bridges Financial Services and Colonial Margin Lending.

Mr O’Grady will look after major national accounts. He was previously AUI’s regional manager for Victoria, South Australia and Western Australia. Before joining AUI, Mr O’Grady was in business development roles at various firms, including Orchard, Asgard, Ord Minnett and Macquarie Bank in Melbourne, and Morgan Stanley in London.

Ms Mitchell will be responsible for managing AUI’s platform relationships. She has held a number of business development roles at AUI since joining the business in 2009, and was most recently national account support manager.

As a result of these changes, Nick Everitt has been promoted to business development manager VIC/SA/WA. Mr Everitt was previously business development associate, providing sales support to the entire AUI team.

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Taking an investment short cut will almost always end in tears: AUI

With the market and investor sentiment on the way up, one lesson investors should remember is that trying to take shortcuts to achieve out-performance is unlikely to be sustainable and will almost always end in tears, says Edward Smith, head of portfolio management at Australian Unity Investments (AUI).

Mr Smith said the current market situation is likely to encourage the introduction of new products and that the investment community is likely to see a rash of investment products promising out-performance at low risk over the next year or so.

“Some people may argue that now is a good time to look at leveraged products to take advantage of market growth. The challenge is that the risks associated with such strategies are not always obvious, and typically are revealed when it’s too late to reverse,” Mr Smith says.

“Good investment practice requires a clear set of objectives and strong governance. Investors should be wary of the promotion of new investment products that tend to follow rising markets and that claim to give over-the-odds returns.

“There is always danger in accessing volatile markets through complex structures. Wise investors are very circumspect about new products or structures that offer tax or other advantages to enhance returns, as they can be as dangerous to their financial health, especially if they are difficult to understand

“Tried-and-true strategies that involve setting objectives and ensuring a diverse portfolio might seem boring, but boring is good when it comes to managing the life savings of most people.

“Experienced advisers will be reflecting this in their client dealings and adopting an appropriate investment approach in their advice, to reflect their clients’ needs,” Mr Smith says.

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Good yields and stable values in the Australian property market.

The Australian property market is currently offering investors attractive yields and stable values, with the spread between property and Australian Government 10 year bonds at 310-550 basis points for prime assets, according to Australian Unity Investments (AUI).

“Overall, there is a case to consider investing in property now, given the widening yield differential and the continuing low interest rate environment,” says Ryan Banting, head of portfolio management at AUI.

“Property capital values have stabilised and yields are now back to longer-term averages.

“In this environment, we believe property represents a less volatile total return investment profile than other risk asset classes,” he says.

AUI’s latest commercial property market outlook found some property sectors performing better than others, with strong domestic and offshore investment demand for quality office property, and healthcare property delivering the highest returns.

“Low interest rates make office property investment compelling, while currency depreciation is encouraging foreign investors,” Mr Banting says.

“Many large foreign pension funds are increasing their allocation to direct property, with Australian office markets comparing favourably to foreign markets due to our higher yield, lower vacancy rates, greater transparency, and more recently our falling currency.”

The returns and outlook make the property market an attractive option for Australian investors as well.

“Subdued tenant demand is offset by low supply under construction, and highly occupied portfolios are continuing to perform well as most tenants are seeking to renew their existing leases at lease expiry,” Mr Banting says.

“Office property returns continue to trend around the long term average of 10 per cent, comprised of 7.5 to 8 per cent income and 2 to 2.5 per cent capital growth.”

AUI says healthcare continued to deliver the highest total returns of the property sector of between 8.6 per cent and 12.3 per cent (after fees) over one, three and five year periods to June 2013*. It also delivered the highest risk-adjusted returns of the property sector, over the seven-year period to 30 June 2013*.

Healthcare property also brings portfolio diversification benefits.

“Australia’s ageing population and greater incidence of disability underpin demand for healthcare services, and there is a strong correlation between age, disability and the requirement for healthcare services,” says Chris Smith, head of healthcare and retirement property at AUI.

“Non-cyclical demand for core medical services has protected the sector from external market shocks. Hospitals display a consistent performance profile and typically have long leases of 15-20 years. This insulates the income stream and provides capital value stability.

“The healthcare sector also has the lowest correlation with other property sectors, making it a desirable addition to a diversified property portfolio,” he says

In the retail space, AUI has found that property returns are generally softer due to weak growth in retail consumer sales.

Total income returns from industrial property have been consistent at 8.5 per cent (after fees) in the 12 months to 30 June 2012 and 30 June 2013*. AUI believes the medium term outlook is consistent with this level of return given subdued demand and little change in yields.

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Cathy Ciurlino

Australian Unity Investments (AUI) has appointed Cathy Ciurlino as healthcare property portfolio manager within its unlisted property funds management business.

Ms Ciurlino will be responsible for managing the properties held by AUI’s flagship property fund, the Australian Unity Healthcare Property Trust (HPT), as well as progressing suitable opportunities for the fund such as continuing a number of brownfield developments.

Ms Ciurlino joins AUI from Stockland where she was fund manager – unlisted property funds, with responsibility for developing investment strategy and managing acquisitions and sales for three property funds.

She has also worked at Pact Group (formerly part of Visy) as corporate real estate manager; MacarthurCook in funds management; and m3property as senior commercial valuer.

Ms Ciurlino is a certified practicing valuer and holds a bachelor of business (property valuations) from RMIT. She is a member of the Property Council of Australia and an associate member of the Australian Property Institute.

Chris Smith, head of healthcare and retirement living property at AUI, said Ms Ciurlino’s diversity of background, including experience as a valuer, will further strengthen the property funds management team.

“Cathy brings a breadth of experience to the position, having worked in the funds management and property management sides of the industry, and as a tenant and manager while at Pact Group.

“In the role, she will also have the opportunity to use her background as a valuer, which will be very advantageous to our business activities,” Mr Smith said.

HPT has over $480 million in gross assets (as at 31 July 2013) and owns 24 healthcare-related properties in New South Wales, Victoria, Queensland and South Australia.

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Liesl Petterd has joined AUI in the newly-created role of senior governance manager and Ronnie Lipp has been appointed senior legal counsel. Both will report to Emma Rodgers, AUI’s head of legal and compliance.

Mr Lipp joins AUI from BlackRock Investment Management (previously Merrill Lynch Investment Managers) where he was general counsel and statutory director. He has also worked at Trust Company of Australia as legal officer, and as a solicitor at Blake Dawson Waldron, Coudert Brothers and Godfrey Stewart Solicitors.

Mr Lipp holds a graduate diploma in applied finance and investment (majoring in investment management) from the Securities Institute of Australia, as well as a bachelor of laws and bachelor of economics (majoring in accounting) from Monash University. He has been admitted as a legal practitioner by the Supreme Court of NSW and as a barrister and solicitor by the High Court of Australia and the Supreme Court of Victoria.

As senior legal counsel, Mr Lipp will support Ms Rodgers as head of legal and compliance, including management of the legal team, providing legal advice across the organisation, and managing relationships with external legal providers and other key stakeholders.

Ms Petterd has over 15 years experience in Australia and the UK, providing legal and tax advice to companies in the financial services industry. Before joining AUI she was with Bell Asset Management, where she held the roles of financial controller, company secretary and company accountant during her nine years with the company. Ms Petterd has also worked at Credit Suisse, PricewaterhouseCoopers, and MFI Furniture Group.

She holds a graduate diploma in applied corporate governance from the Chartered Secretaries of Australia and a bachelor of commerce and a bachelor of laws from the University of Tasmania. Ms Petterd is a member of the Institute of Chartered Accountants.

As senior governance manager, her responsibilities including providing support and advice on corporate governance, risk, compliance and policy matters.

Ms Rodgers said the appointments ensure AUI continues to have the resources and expertise to meet the changing regulatory environment.

“Compliance and governance are key areas of focus in the financial services industry and AUI believes it is important to invest in this area.

“We are therefore expanding our capabilities and resources so we can not only discharge our responsibilities to investors and clients most effectively but also build a high quality risk management platform which supports our commercial and strategic aims into the future,” Ms Rodgers said.

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