WA providing the strongest returns for direct property.

Charter Hall says recent results from Investment Property Databank (IPD) – showing that Western Australia continued to provide the strongest returns for direct property over the year to September 2013 – reinforces the appeal of its latest property syndicate, WorkZone in Perth CBD.

Head of Charter Hall’s direct property division, Richard Stacker, said that while WA’s economy has moderated, as the mining industry begins to transition from construction to output phases, a number of factors that contributed to Perth being Australia’s strongest performing office market over the past decade still remain.

“Population growth in WA was double the national average over the past year and the current unemployment rate of 4.3% is by far the lowest of all states. It is true that WA’s employment growth has slowed since 2012 as the mining investment boom crests, however at 1.4% for the year to October 2013 it remains well above the 0.8% recorded by Australia as a whole,” Mr Stacker said.

Total returns over the year to September showed Perth’s office (11.6%) and retail (10.7%) again performed above the national benchmark for broader property of 9.0% and while September figures for Perth industrial are yet to be finalised, growth over the year to June 2013 was an exceptional 15.4%.

Tapping into the growing demand for investment opportunities in Perth CBD, Charter Hall will shortly launch a new high quality single syndicate for high net worth investors and self managed super funds (SMSFs) seeking exposure to the consistently outperforming resources state and its strong employment growth outlook.

Charter Hall’s ‘WorkZone’, which will open to investors on 1 December, aims to provide investors with sustainable and stable, tax-advantaged income and the potential for capital growth through investment in 202 Pier Street, Perth – a brand new $124.5 million A-grade office building located in close proximity to the Perth CBD. Fully leased with 100% occupancy, the property syndicate aims to deliver investors an average two year income yield of 9.11%[1].

Charter Hall, which is the number one in the unlisted retail sector with a market share of 14%[2], expects there to be continuing demand from SMSFs for investment in direct property in 2014 with SMSFs already making up 60% of their investor base.

“The SMSF sector is the fastest growing area of the Australian superannuation industry. SMSF investors have an appetite for direct investment and a desire for control and transparency. Direct property provides self-directed investors with quality assets with lower gearing, conservative payout ratios and increased transparency.

“According to Property Investment Research (PIR) over the previous three years equity raising from property syndications have grown by 100% each year, from $40 million in 2010, to a forecast $510 million in 2013.

“Over the past three and a half years, Charter Hall Direct has seen new equity flows in the unlisted retail funds it manages averaging $156 million per annum. This significant increase is further evidence that Australian direct property has become a popular home for retail investors looking for alternative investments that have a return profile which is less correlated to equity markets and other asset classes that can be vulnerable to swings in returns,” Mr Stacker said.

A checklist for investing in direct property

Mr Stacker said that those planning to invest in direct property need to be selective on the markets and property sectors they invest in.

“Investors looking to invest money into direct property need to be aware that not all direct property investments are the same. It is important to look for high quality investments with a sustainable yield that will diversify portfolios in a secure framework, rather than being lured into riskier second grade investments that may offer higher yields,” Mr Stacker said.

“There are a number of quality opportunities for investment in this space and investors are voting with their feet when it comes to allocation of funds. By understanding the factors that influence quality, investors can make the most of this attractive and growing market,” Mr Stacker concluded.

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[1] Target average income distribution for the two years to 31 March 2016, assumes participation in the limited offer.

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The property will be developed by the Gibb Group, who will construct a generic 6,994 square metre logistics facility within the Gracemere Industry Park that will incorporate administration offices and a high clearance warehouse, together with extensive concrete paved driveways and truck manoeuvring/marshalling areas. The facility will be purpose-built for leading road transport provider Toll NQX, part of the listed Toll Holdings (Toll Group), which has committed to a 12 year lease with two, five year options and fixed rental increases of 3.75% per annum. Construction is commencing in November 2013 with completion scheduled for April 2014.

Charter Hall’s Head of Direct Property, Richard Stacker, said the acquisition marks the fifth asset to be added to DIF2’s industrial portfolio with a sixth asset acquisition close to being agreed.

“We have received strong investor interest in DIF2, with the fund recently closing oversubscribed a year ahead of its target closing date, and have the capacity grow this portfolio to approximately $200 million.

“The acquisition of the Toll NQX facility is a great fit for DIF2 given the new 12 year lease to Toll and the property’s strategic location being 15 kilometres south west from the Rockhampton CBD with direct access to the new $50 million Gracemere Capricorn Highway overpass bridge. This allows the facility to service Queensland’s growing mining operations, with the Bowen, Surat and Galilee Basins all within a 400 kilometre radius, whilst Gladstone Port is only 110 kilometres away,” Mr Stacker added.

The acquisition increases DIF2’s current portfolio, settled and under due diligence, to $135 million and its weighted average lease term to 12 years. Other key tenants across the portfolio include Australia Post, Coles and OneSteel.

Charter Hall and its managed funds have made a number of investments in the Rockhampton region including Core Logistic Partnership’s recently acquired three hectare industrial site at Mackay which will house a new 13,763 square metre logistics facility pre-released to Blackwoods. Charter Hall Retail REIT also recently completed a $16 million refurbishment of its Allenstown Square shopping centre in Rockhampton.

“The Queensland market, and in particular the Rockhampton region, is an attractive area for Charter Hall and our managed funds, given the region’s link to the mining and agricultural industries and we are very pleased to be adding another quality property to the Group’s property portfolio,” Mr Stacker added.

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Reallocation of cash to direct property expected

Charter Hall is expecting improved equity inflows from retail investors as cash and term deposits are reallocated toward higher income yielding investments such as direct property in 2013.

Direct property provides both stable income yields and the potential for capital growth. Unlisted direct property is expected to be a popular alternative for investors searching for higher yielding investments.

The falling cash rate, currently sitting at just 3%, coupled with renewed investor confidence, has piqued many investors’ interest in direct property which provides a starting yield to investors of approximately 8% for core risk assets with moderate gearing, supported by good tenant covenants and long leases.

Head of Charter Hall’s retail investor division, Richard Stacker, said: “Direct property has a compelling investment case and the asset class is well placed given the historically large positive spread between property yields and debt costs, long leases and sensible debt and liquidity structures.

“Those looking to unlisted property for security and sustainable income need to make sure they have quality long term leased assets in their portfolio, rather than lower grade, shorter lease term investments which offer slightly higher yields however come with a higher risk profile,” he added.

Research manager for Charter Hall, Chris Freeman, said Charter Hall sees the industrial sector as particularly attractive and increased its overall weighting throughout 2012 and has publicly disclosed a strong appetite for long leased industrial property acquisitions during 2013.

“With the strong yields and secure lease terms available on prime assets, the industrial sector is attractive in an environment where investors are seeking income returns and looking to minimise risk from a generally soft labour market.

“The demand and supply fundamentals for industrial look to be accommodating for stable growth, with the real value of development approvals for industrial facilities in the major states approximately 24% below the ten year average. Total leasing activity also saw a strong uplift in late 2012 to end the year in line with the long term trend. Such dynamics led a recent survey of major fund managers to select industrial as the asset class most likely to outperform over 2013,” Mr Freeman said.

Mr Freeman said while the manufacturing sector remains a drag on total industrial demand, due to being under pressure from the high exchange rate, the high dollar is further fuelling growth in internet retailing. This has spurred gross corporate profits for logistics operators to rise by almost 50% over the past five years, which has significantly increased their tenancy requirements.

Charter Hall has recognised the attractive timing for long term industrial investment and has launched a second industrial fund called Direct Industrial Fund No. 2 (DIF2), which provides investors with an attractive 8% initial yield target with defensive investment characteristics such as long term leases, strong tenant covenants and fixed rental increases annually.

With industrial property providing yields of 5% above 10 year government bond yields in Australia, and similarly higher yields to term deposit rates, Charter Hall expects DIF2 to satisfy investor demand following the closure of the award winning DIF1 in July 2012.

The new fund is targeting an initial income return of 8% p.a. coming from prime industrial property on long leases to investment grade tenants. The fund’s initial seed portfolio has a weighted average lease expiry (WALE) of 15.4 years. The two properties in the portfolio, located in Perth and Melbourne, are 100% occupied by high quality tenants Coles Supermarkets and Australia Post. The two assets at a combined value of $55.3 million represent a quarter of the fund’s target total targeted size of $200 million.

DIF2 received a ‘Highly Recommended’* rating from Lonsec.

“Western Australia has been a strong performer over the last two years, with limited stock under development yet the country’s strongest demand drivers. We expect Western Australia to continue to outperform over the medium to long term and while DIF2 is already positioned to capture this performance, we’ll be looking to our investment pipeline to add to the DIF2 portfolio in the major industrial markets around Australia,” Mr Stacker said.

Minimum investment in DIF2 is set at $10,000, with distributions payable quarterly.

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Demand from investors for unlisted property is expected to increase in 2011 as the property sector is likely to provide higher than historical average returns, according to Charter Hall Direct Property. The
group has recently launched a retail property fund aimed at self managed super funds (SMSFs) and high net worth individuals to take advantage of any upswing in the retail property cycle, with retail rents
expected to increase as retail sales strengthen in 2011 and employment and the economy continue to grow.

Superannuation funds and in particular SMSFs are expected to lead the surge in demand for real estate in 2011 across the major sectors of office, industrial and retail assets.

“We expect SMSF appetite to grow as their long term outlook and appetite for income certainty and capital preservation is ideally suited to unlisted property, particularly retail property which is underpinned by major brand tenants,” said Richard Stacker, CEO of Charter Hall Direct Property.

For example, SMSFs account for 75% of the inflows to Charter Hall Direct Property’s funds. “With relatively low growth forecast in equity markets over the next few years, many investors are investing for income. Direct property, with its income growth built into lease structures, should be a good vehicle for investors to achieve this,” said Mr Stacker.

Australian super funds, which typically allocate around 10% to real estate, are also anticipated to have a growing appetite for property due to the strong economy and good property market fundamentals.
Demand for property exposure is expected to increase, in line with inflows into superannuation expected to grow from funds under management (FUM) of $1.3 trillion in 2010 to FUM of $2.5-3.0 trillion by 2020. The positive outlook for property fundamentals and demand for investment grade property should apply upward pressure on capital values, contributing to strong total returns for investors.

Challenges in the unlisted property sector, including some funds still with distributions on hold and high gearing levels, are dispersing as managers sell assets, merge with other funds or managers, and start
to provide some liquidity and exit strategies for investors.

“Property is still an important component in portfolio construction; however we still have a way to go in educating advisers about the role of unlisted property in an investors portfolio and how newly developed
funds have addressed these challenges,” Mr Stacker said.

Retail property to shine despite online shopping challenges

Despite recent suggestion that customers are moving online to do their shopping Charter Hall Direct Property does not see any major impact to retail property, particularly grocery anchored sub regional
and neighbourhood shopping centres.

“Retail property is still a strong area for investment due to a positive outlook for rental growth, particularly if you have exposure to brand names such as the Australian supermarket chains. Values are recovering and growth is expected, signalling a positive property cycle ahead,” said Mr Stacker.

Charter Hall has recently launched an unlisted retail property fund, the Charter Hall Direct Retail Fund (DRF) targeting high net worth and SMSF investors. The new fund has established an initial portfolio of
six properties with a total value of $177 million, a diverse portfolio with locations in New South Wales, Victoria and Queensland, with tenants including Woolworths Supermarkets, Coles Supermarkets, Big
W, Bunnings, JB Hi-Fi, The Good Guys and Spotlight. Charter Hall will look to acquire further suitable investments. DRF has been awarded Lonsec’s second highest rating, ‘recommended upper end’. The
launch of DRF follows the strong investor interest in Charter Hall’s Direct Industrial Fund (DIF), which has raised $43 million of equity since its launch in July 2010.

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David Harrison, Managing Director of Charter Hall, said the positive retail investor sentiment to commercial property shown in the survey was very encouraging, and called for investors to follow the lead of savvy institutional investors who are taking advantage of emerging opportunities in the listed sector (where REITs are trading at a discount to NTA) and also in the unlisted (direct) property sector.

The Charter Hall survey found 60% of those intending to invest in the next 12 months planned to invest sizable sums of more than $50,000. The survey showed 36% of respondents favoured listed property, another 11.71% favoured unlisted (direct) property while 6.35% favoured residential property.

“We believe the commercial property market has reached the bottom of the cycle post GFC and for investors considering their re-entry to this sector, now is the time to do it to take advantage of property values we expect will continue to rise.

“Charter Hall is hearing reports from our agencies that institutional investors such as superannuation funds, high net worth individuals and syndicators are in the market looking for homes for mandates up to and in some cases in excess of $1 billion as confidence returns,” Mr Harrison said.

Overall, investors surveyed had a conservative allocation to commercial property with 47% of those holding a less than 10% allocation in their portfolios. Respondents also showed a strong preference for office space, with one third of investors preferring this sector.

Mr Harrison said the strong preference for office space suggested retail investors may be overlooking opportunities available in the retail and industrial sectors which are also expected to perform strongly owing to attractive characteristics such as lower volatility and higher prospective returns.

“Institutional investors are returning to the market on the strength of excellent buying opportunities, in a climate of reduced competition and rising tenant demand in the industrial space. Retail investors should
take the lead set by institutional investors as a reference point for their own portfolio allocations,” Mr Harrison said.

The CEO of Charter Hall Direct Property, Richard Stacker echoed Mr Harrison’s comments saying successful capital raisings by Charter Hall this year confirmed investors’ return to the market.

“Since January this year, Charter Hall Direct Property has raised more than $110 million in capital for the since closed Macquarie Martin Place Trust; the open Stirling Street Trust; and the Charter Hall Direct Industrial Fund. The success of these raisings is confirmation of increasing investor appetite and our ability to offer retail investors access to institutional grade property at the right point in the cycle,” Mr
Stacker said.

The survey found that investors’ primary motivation for investing in real estate was regular income with 43% citing this as their number one driver. Mr Stacker said retail investor demand for income was a key
consideration in the development of Charter Hall Direct Property’s Direct Industrial Fund (DIF) launched in July this year.

“We developed DIF in response to demand from advisers, investors and in particular SMSFs, looking for simple products that deliver steady income over the long term.

“The survey results show the fundamental characteristics of unlisted property, which include reliable income and capital preservation on a long term basis, continue to be attractive to retail investors and
SMSFs,” said Mr Stacker.

Reflecting the defensive investment strategies taken by many investors during the downturn, investors also revealed significant holdings in cash and term deposits with nearly one third of respondents holding more than $200 000 in these assets. However, investors also signalled their rising confidence with 74% of those surveyed believing the Australian sharemarket would rise in the medium term.

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In his new role, Mr Cannon is the primary contact for financial advisers in Western Australia and Queensland where he will be responsible for communicating the business’ offering in these markets and servicing and keeping the financial advisers and investors up-to-date on property markets. Mr Cannon joined Charter Hall in 2007 as Development Manager for the Group’s Brisbane operations.

Mr Richard Stacker, CEO of Charter Hall Direct Property said: “Brendan’s excellent relationships with the business community in Western Australia and Queensland, coupled with his knowledge and experience in property, means he is a great asset to the Direct Property business.

“Charter Hall is very positive about the opportunity in these two growth states, having historically had a solid support base for our previously launched property funds and having seen very good inflow of equity in our recent office fund offerings, including strong initial demand for our industrial fund,” Mr Stacker added.

Mr Cannon said: “I am excited to extend my four years with Charter Hall into the Direct Property business at a time when the property sector is showing early signs of what we expect will be a strong recovery phase. We are seeing increased investor interest in our high quality products and I look forward to working across Western Australian and Queensland – two states in which I represented in rugby for over eight years.”

Mr Cannon will be Master of Ceremonies at the Charter Hall Investor Forum, available to the more than 50,000 retail investors, to be held in September across all Australian states.

Mr Cannon is well known for his contribution to Australian Ruby Union having represented Australia in 42 Test Caps, 106 Super Rugby games and also his insightful commentary on Fox Sports.

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