Mark Lumby

The Australian Unity Diversified Property Fund has purchased an industrial property in Melbourne’s south-east for $15.1 million. The price reflects an initial yield of 7.6 per cent.

The property, 19 Corporate Avenue, Rowville, is a 20,950 sqm site which incorporates a modern, 12,300 sqm corporate office and warehouse facility. It is in a well located, tightly held industrial pocket and is leased to Regal Beloit Corporation until April 2022.

The acquisition adds to the strength of the existing holdings in the Diversified Property Fund, which also purchased an A-grade commercial office building at 200 Victoria St, Carlton in November 2014.

Mark Lumby, head of property funds – retail at Australian Unity Real Estate Investment, said the Fund is well positioned to provide a sustainable and growing level of income to investors.

“Quality income investments are highly sought after in today’s market. The Fund continues to build on its core strength of diverse commercial property to deliver on its objectives for investors,” said Mr Lumby.

As a result of the new purchase, the Fund’s asset diversification is 30 per cent industrial, 33 per cent retail and 37 per cent office property, with assets spread across New South Wales, Queensland, Victoria and Western Australia.

For the year to 30 June 2016, the Fund is forecasting a distribution range of between 8.0 and 8.3 per cent*.
Since taking over management of the Fund from Westpac in 2010, Mr Lumby said Australian Unity has actively managed the portfolio to improve its diversification, bolster its financial position and improve investor benefits.

“We’ve recently launched a capital raising offering units at a 5 per cent discount to the Fund’s net asset value,” said Mr Lumby.

“Raising equity at a discount to fund withdrawal requests provides a greater level of liquidity to those investors electing to exit their investment than the current capped withdrawal offer.

“It will also enable us to maintain the quality and diversification of the Fund’s assets, and support its sustainable growth—making it more attractive to new investors over the longer term.”

The Fund is seeking to raise a maximum of $50 million during a limited capital raising period that is expected to remain open for up to 12 months.

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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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The DPF offers a diversified property portfolio with a balanced sector and geographic allocation providing a stable income return from earnings achieved through high occupancy and a strong weighted average lease expiry.

If the option is exercised, settlement of the property will occur in late October 2014. The property purchase will be accretive to DPF’s income return and will be funded by capacity within the existing debt facility of the fund, which has a current gearing level of 38 percent.09

The property at 200 Victoria Street, Carlton, Victoria is a high quality, seven level, A-grade office building with associated retail and car parking leased primarily to the Environmental Protection Authority and Trinity College, the University of Melbourne. It comprises 7,490 sqm office accommodation over six levels, 422 sqm of retail space over three tenancies on the ground floor, and eight secure on-site car parking bays. The lease expiry is 7.7 years weighted by income and area.

Mark Lumby, head of property funds – retail, at Australian Unity Real Estate Investment, says: “The acquisition will enhance DPF’s geographic, sector and tenant diversification as well as the earnings and distribution return for investors by providing stable, secure long term cash flow – enhanced by fixed annual rental increases – through high quality calibre tenants.

“The property was substantially refurbished in 2009 to become one of Melbourne’s most environmentally sustainable office buildings with a 5 star National Australia Building Energy Rating and a 6 star Green Star rating for office design.

The property will improve the fund’s sector allocation moving closer to the fund’s strategy of a neutral allocation for office, retail and industrial – the weighted average lease expiry will also be improved to be greater than 5 years.

“Following settlement, more than 50% of the fund’s income will be derived from national tenants” Mr Lumby says.

The deal was negotiated off-market by Leigh Melbourne of Colliers International.

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