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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Centuria Property Funds has received overwhelming support from industry and financial planning groups following the introduction of a series of initiatives to increase the rights of investors in direct property.

The peak industry body representing the direct property investment industry – the Property Funds Association of Australia – has welcomed the initiatives, as have some of Australia’s largest financial planning groups.

Geoffrey Gedge, CEO of the Property Funds Association of Australia said the initiatives would help the industry restore faith with investors.

“Centuria is leading the market in demystifying property as an asset class and this benefits not only investors but the sector as a whole,” Mr Gedge said.

“The Investor Rights initiatives address an issue that the industry has long been criticised for and that is not effectively and explicitly aligning the interests of the manager with the underlying interests of investors. The two are inextricably linked.

“There are different components that make up a good property investment – and choosing a manager that is clearly committed to act in their best interests is an important element. These new initiatives will help investors get it right.”

Mr Gedge said, “we’ve also had discussion with The Financial Planning Association who have  backed the initiatives, welcoming the increased transparency and investor protection.”

The Centuria initiatives, announced last week, are to be incorporated into all Centuria’s property funds, including its latest unlisted single-asset fund, 8 Australian Avenue, include:

Investor control over the Responsible Entity: Under the Corporations Act, the support of 50 per cent of all units held is required to remove the Responsible Entity. Centuria has reduced the voting level to 35 per cent of all units, and 50 per cent of units who actually voted – a far more realistic and achievable benchmark should investors wish to remove a manager.

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CEO of Century Property Funds, Jason Huljich, also noted that there has been an overwhelmingly positive response from financial planning groups.
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“Financial planning groups are increasingly recognising the benefits of commercial property as an asset class – steady returns, low volatility and genuine diversification – and are looking to boost allocation to property in client portfolios,” Mr Huljich said.
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“We completed the capital raising for 8 Australian Ave last week and received overwhelming interest from a number of large financial planning groups.
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“These initiatives are aimed at increasing transparency in this sector so planners and their clients are able to invest with confidence in the commercial property market.”

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