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Commercial activity driving CBD values; The real estate investments that are working for me & that I love investing in personally

Snapshot / Markets

Australia

Sep 21 2018

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One of the things that are really important to me is to build a solid financial future for myself, my family and everyone around me. 

At MP Funds Management, our fees are primarily based on performance and are back-ended, which means that for us to make money, our investors have to make their principal and base return back. Once an investment performs well or outperforms, then we share in that performance. This means we are aligned with equity preservation in the first instance and our investors capital performing doing well.

This fee structure is the same regardless of if our investment partners are institutional, high net worth, family office or individual investors.

I really love this structure because it fosters long-term relationships with our investor clients. 

With uncertainty surrounding the up and coming federal election, it feels like the nation is taking a pause – especially with respect to residential property.

Getting investment exposure to Australian real estate, in the form of buying a house or apartment, is increasingly and significantly more difficult. This is as a result of the mortgage lending restrictions which have been implemented on the back of the APRA initiatives and the Royal Commission into the banking system.

The threat of Labor getting into power means that negative gearing could be removed and that means that any tax offset benefits will be removed.

In addition to this, on the superannuation side of things, quite a few of the majors, like Westpac and ComBank have announced that it's no longer possible to obtain a loan in a Self-Managed Superannuation Fund to buy property.

For me personally, I don’t love the idea of buying a property just to capitalise on the benefits of negative gearing, because I feel like that is the tail wagging the dog.

In the first instance, I don’t think buying a house or an apartment as an investment is attractive because you are putting a significant chunk of capital into one asset, with a very low yield and also likely having to leverage that asset. If you are busy, like me, there is no value- add strategy in buying a house or apartment as an investment. I see this as just a 'set- and forget' and wait for the market to go up, and hope it doesn’t fluctuate too much in the interim, so you don't have to top up your equity for the bank loan. 

To me, this is all just gambling on the market going up, which I believe it absolutely will due to the Australian residential supply-demand fundamentals (read more here). However, I prefer to see my capital working a bit harder, have a bit more control over the return profile and I like to have the ability to be more diversified.

Over the last several years MP Funds Management has invested c. $287m over 21 real estate based loans and direct investments, and for the investments that have completed we have produced a net return of 21% across the board. A number of these MP Funds Management investments have been syndicated and several of our investors invest via their Self Managed Superannuation Funds because the syndicated nature of the deal enables better opportunity for diversification. 

For me personally, I prefer to invest in high-quality, unlisted and institutional-grade real estate assets that are syndicated. This means generally a smaller exposure than buying a house or apartment and there is often a clear value-add strategy which creates more visibility around the target investment return. This method also enables better diversification across real estate sectors (commercial, retail, residential, etc) as well as diversification across actual investments. Additionally, there is no need to get a loan because the asset already has its own structured finance in place. The process is simple and easy, and the investment is managed for me, with distributions into my bank account from the investment, in accordance with the timings set out for that specific investment. ?

Whilst the residential sector is cooling its heels for a minute, the commercial sector is showing strong ongoing growth and we also see opportunity in the retail shopping centre sector, due to the changing dynamics of retail, online shopping and the evolving behaviors of Millennials, who now represent the largest sector of Australia’s population.

Some of the recent investments MP Funds Management have been involved in and successfully come out of are here.

Asian investment is still driving up commercial asset prices.

Interestingly CBRE has reported that between July to September this year in the sub- $100m price range in Melbourne, a value of over $570 million property has transacted across 41 properties, with $200 million of that being to local Asian buyers.  

In Sydney, a Hong Kong-based family, Longbow Enterprises, has purchased an 11 story office tower at 400 Kent street for $120 million and a yield of 4.5% with vendor Credit Suisse doubling their money after acquiring the property for $58m from Charterhall in 2014. 

The sharp yield represents the high demand of both Asian domiciled and local capital for high-quality CBD assets. Other comparable deals include the sale of 20 Hunter Street on 3.92 percent and 130 Pitt Street on a 3.79 percent yield. Mirvac's acquisition of an $850 million half stake in 275 Kent Street this year, backed by ISPT, represented a rate of over $20,000 per sqm.

I put some of my Self Managed Superannuation Funds into a deal that MP Funds Management co-invested into with Ashe Morgan at 9 Hunter Street, in Syney CBD, which was acquired in the fourth quarter of 2017 at $13,000 per sqm and a passing yield of 5.2%, based on rents of c. $800 per sqm. We anticipate that the asset will yield our MP Funds Management investors an equity IRR in the double digits and a cash multiple in excess of 1.5 x.   

According to Cushman & Wakefield research, Asian investment volumes during Q3 have been led by M&G Asia Fund's purchase of Brisbane's 80 Ann Street for $418 million and Japanese investment into Daibiru's purchase of Sydney's 275 George Street for $240 million. In addition, Hong Kong's KHI Holdings acquired 277 William Street, Melbourne, for $93.9 million.

According to a report by Savills Australia A-grade office rents in Sydney have passed $1000 and sales rates are at $20,000 per sqm on average, which is a testament to the boom in Sydney's office market.  This growth has driven investment returns for major listed players such as Dexus, the country's largest office tower owner, and fund manager GPT.

Global private equity groups like Blackstone and Canada's Oxford Properties are bidding to get hold of Investa Office Fund's $4.4 billion portfolio, which is heavily weighted toward Sydney and poised to capture any further uplift in values.

Sydney CBD's vacancy rate compressed to 4.6 percent from 4.8 percent in the six months to July, with the expectation that vacancy will drop to well below 4 percent.

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