Oct 30 2018Add to Favorites
Whilst Australia talks about how difficult bank funding is to buy a property, the question is; How can you gain quality real estate investment exposure in this market? And which real estate sectors are going to produce the best risk-adjusted return?
MP Funds Management is a specialist real estate funds manager and has provided funding for real estate assets with a gross value in excess of $1.1bilion, producing an average (annualised) investor internal rate of return of 21%. Our fee structures are transparent and ensure alignment with investors receiving their principal and return in the first instance, performance fees are paid to MP Funds Management once the investor has achieved their return.
I set up my own Self-Managed Superannuation Fund last year to invest in the investments that MP Funds Management makes and talking to others around my age, in the 30-40 age bracket, it is interesting to see how many others are doing the same thing, especially on the back of the Royal Commission findings.
During the course of 2013-15 we were focused on taking advantage of the strength of the residential market and invested in a number of mezzanine funding deals, which provided finance for construction of residential apartment buildings and land subdivisions. These investments were structured as debt and ranked second to the bank. The bank provided the senior debt for the construction of the project with the first ranking mortgage as security, and we would have a second ranking mortgage security or a springing security in these structures.
Investment terms ranged from 6 months to 3 years and investment returns were in the order of 18%-25% with interest compounding monthly and capitalised to the end of the term.
During this period, we financed the construction of 7 or 8 residential apartment blocks and land subdivisions in Sydney. In Brisbane, we have funded two boutique townhouse developments of c. 26 townhouses each, one high rise of c. 200 apartments on the waterfront at West End and another of c.650 apartments in Fortitude Valley. All were very successful investments.
Interest on these deals was capitalised to the end of the term. This meant that the return compounded monthly and principal and interest was paid when the project was completed, and sales revenues had settled for the project.
We also co-invested in the acquisition of a c. 13,500sqm office tower in North Sydney, which had the benefit of rental income, which was distributed quarterly and then the capital gain on the sale, which produced an (annualised) investment internal rate of return of c.40%.
At this same time, we co-invested in the unlisted headstock of a real estate manager, which listed on the ASX, producing an investment return net of fees of about 21%. The return profile of this investment paid dividends on a six-monthly basis and the gain was made on the exit at the IPO.
We were also involved in two mixed-use, core-plus investments, which had a repositioning and value-add strategy. One forecast an annualised investment return of 21%, which was achieved on the exit of the asset. The other is still ongoing and whilst the target investment case was anticipated to be c.17% it’s likely that based on current progress actual return will be upwards of 30%.
Both of assets provided an initially patchy rental income due to high levels of vacancy, however over time capex works and leasing activity enabled both to be stabilised assets, meaning investors receive regular rental income and a significant capital gain on the sale.
The capital gain was achieved as a result of the active value-add works and active leasing and management strategy. Both of these assets would have been considered lower quality C or D grade assets on acquisition and upgrades during the investment term repositioned and improved to a c. B grade. The investment terms on these two assets were c. 3-5 years.
Our investment activity slowed considerably over the 2016-17 period on the basis of being amidst an adjusting market. Having the benefit of income from existing investments and maturing/ repaying investments, meant that although we looked at a lot of opportunities, we couldn’t establish a level of comfort, so we waited.
2016 saw two investment transactions with 9 Hunter Street, close to the corner of George Street in Sydney, being one of them. The 15,500 sqm building was acquired at $13,000 per sqm and although a stratum, it was very under-rented with rents in the order of $700 per sqm. The building was 98% occupied by high quality tenants such as Macquarie Bank. A significant amount of capex had already been spent by the outgoing vendor which meant the building already presented to an exceptional quality. The themes of low vacancy, high demand and off-takes of commercial space for residential conversions and the metro made the investment story a compelling one when considering the growth potential. The light rail completing along Georg Street, the $3bilion upgrade to Wynyard Station together with all of the private development towards Circular Quay means growth for the buildings in the vicinity and is evidenced by recent transactions with trades being made at $20,000 plus per sqm and rentals in excess of $1000 per sqm.
I invested in 9 Hunter Street via my SMSF and receive monthly rental distributions. The growth of the CBD and active asset management strategy will enable significant capital uplift and investment returns in the double digits.
We really love retail property at the moment at MP Funds Management because we see opportunity in the disruption. Australia’s population is growing, our living is getting denser and whilst the advent of online shopping is creating change in the sector, human behaviour causes us to gravitate towards food and entertainment. Whilst some of the retail tenants may be outmoded or a centre underperforming as a result of this evolution, it’s fair to say that well-located and underperforming CBD- located centres, which have a strong demographical catchment area can be turned around with some TLC and well thought out repositioning.
November analysis released by both UBS and Macquarie Bank highlight that potential buyers have become very cautious and expect prices to fall further. Both reports highlight that whilst borrowing capacity has declined, most borrowers don’t borrow at their maximum. The RBA recently showed that relatively few households would have been constrained by the tightening in lending standards over recent years.
Each of the primary property investment sectors, residential, commercial office, industrial warehouses, retail shopping centres has an investment cycle and a market cycle. Its useful to have the ability to move across sectors so that when one isn’t performing so well, others which are performing better can be capitalised on. Also, investing across sectors can build up diversification.
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