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MPFM Value Hunting & Benchmarking Wk 6 May 2019

Value Hunting / Markets

Australia

Apr 22 2019

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From 2012 to 2017, MP Funds Management focused on investing in loans to finance the construction of residential apartment blocks. Over this period, we made 15 to16 deals (loans) delivering a combined investment return of around 15% to 26% pa with Leverage to Loan Ratios (LVRs) up to 85%. In most instances, we made sure that presales (excluding GST and agents’ commissions) covered our principal and interest with each loan meeting or exceeding the forecasted return. 


In late 2016 we decided to stop making new investments into this space as we felt (at the time) that the market may turn and no longer deliver the returns that we had seen over the past five years. The first warning actually came from a meeting with one of the board members of Lend Lease, who gave us the ‘heads up’ in early 2016 that some American hedge funds were shorting our Aussie bank stocks. These hedge fund managers believed that our housing market was starting to overheat and may indeed collapse, much like what was seen in the US during the Global Financial Crisis (GFC). Under this scenario, Australians would hand back the keys and as a result our banks’ share prices and valuations would fall over due to their ‘overexposure’ to mortgages. This actually wasn’t the case: Australia’s property market still had supportive fundamentals and the economy remained ‘healthy’ delivering GDP growth albeit at a lower rate. It’s also common for negative media coverage to closely follow any ‘shorting” activity’ and there were many Australian media articles predicting the ‘worst’ which started to impact investor sentiment. The credit rating agency S&P then downgraded Australia’s overall credit rating and as a result the Australian Prudential Regulation Authority (APRA) introduced new loan restrictions and then the 2018 Banking Royal commission ensued. 

Read more on our view of the residential market HERE

Our last investment in this space was redeemed in full (principal and interest) in December 2017. Our position was a blended equity and mezzanine debt structure in Tim Gurner’s FV, a 65-apartment development in Fortitude Valley in Brisbane. We were subordinated to ANZ, who had clubbed a c$120 million senior debt facility with MaxCap and Apollo each providing around $25 million in mezzanine funding, our position with a blended mezzanine and preferred equity investment with Thakral Capital Australia. 

Value hunting:

Bulk discounted residential acquisitions

As a result of this shift in the market, MP Funds Management (MPFM) is now moving its focus from construction financing to residual stock loans and bulk discounted acquisitions. Our investment strategy is to focus on very low LVR for residual stock loans and bulk acquisitions with a significant discount. When it comes to selecting potential investment opportunities, the key focus is the location, quality of the build and reputation of the developer/builder for longer term build quality.

We are targeting a return of between 8% to 20% on a risk-adjusted basis on a 12-24 month and up to to a 5 year period. 

One of the listed stocks that I quite like personally, and that we are doing some research into is 360 Capital’s Total Return (TOT) Fund, which is paying a c.10% dividend and the underlying asset base is in keeping with the theme mentioned above with a mandate for residual residential stock loans. Being listed, it means that there is a low entry dollar size for exposure to this sector of the market, whereas most unlisted syndicates require minimums of $100,000 - $500,000. Being listed, any investment exposure will be subject to the natural volatility of the stock market, but there is also the benefit that the investment has better liquidity than an unlisted exposure.  Click here for more about the 360 TOT Fund.

In terms of recent market activity, Altis Property Partners has this month acquired 61 unsold apartments (out of 130) at a brand new residential project in Sydney's Epping for $32 million, a 32% discount to the $52 million book value. In December last year, a private investor acquired 25 apartments at a discount of 20% at Consolidated Properties' high-rise Spire development in the Brisbane CBD after the original buyers defaulted on the settlement. Most of the original off-the-plan buyers were Chinese investors. Other opportunistic high-net-worth investors such as Former Macquarie banker Andrew Hooper-Nguyen and his business partner, the co-founder of ASX-listed Excel Coal, Chris Ellis have been reported to be active in the space, specifically in Brisbane’s Fortitude Valley. Len Ainsworth, who’s wealth is estimated by the AFR to be c$4 billion has reportedly acquired bulk residual stock in Brisbane (at a significant discount to market). Given these acquisitions are for brand new product there is the benefit of attractive tax and deprecation advantages. 

High-quality& well located retail (with value-add or repositioning ability) 

We also have our eye on retail with the view to actively ‘value manage’ and reposition the asset(s). We believe there is investment opportunity in the retail space given the currently subdued and negative investor sentiment, especially with high quality and well-located assets that may be currently ‘undervalued’ and have repositioning potential. 

Exemplifying sentiment, retail redemptions have been rife across the sector with Lend Lease reporting over $2 billion of investor redemptions from its unlisted retail fund. The fund is seeking to sell its half stake in Adelaide’s biggest mall, Westfield Marion. Westfield Marion is the country's 11th largest centre by size with a total gross lettable area of 136,837 square metres. It owns 50% of the asset with co-owner Scentre Group at a reported book value of $737.5 million for its 50% stake.

According to recent analysis by Citi, as much as $11 billion worth of malls could hit the market in coming months as landlords trim their portfolios. Citi suggests this may lead to an oversupply of retail assets to the institutional market, resulting in reduced valuations.

According to Citi’s report the potential for retail disposals totals $13 billion across the industry. About $1.8 billion of that total has been sold so far, suggesting another $11 billion sales are still to come, which Citi estimates is 2.5 year’s worth of sales volumes "We believe potential buyers are now spoilt for choice, and expect some will bid accordingly".

MPFM takes the view that under this scenario, net tangible assets and consensus net asset values for listed landlords with retail holdings should drop, placing pressure on retail REIT share prices. Cap rates will blow out and mean that well located assets with the ability to be repositioned or with value-add opportunity will likely be able to be acquired well on this basis. 

Cross Roads Homemaker Supercentre, our recent co-investment

MPFM recently co-invested in the acquisition of the Cross Roads Homemaker Supercentre at the beginning of this year. The property is located at the junction of the M5 and M7 Motorways and within 15 minutes’ drive of the proposed Western Sydney Airport. The area has seen significant infrastructure investment in the recent years and is set to experience strong forecast population growth. 300,000 new residents are forecast to move into the area in the next 30 years, in line with the greater Sydney projections of a forecast population growth to 8 million in the next 40 years, supported by the NSW governments c$85 billion infrastructure spend commitment. 

The asset has the benefit of an initial 3.3-year WALE and a strong occupancy rate of 93% enabling opportunity to maximise the income on the asset through progressively bringing tenancies to higher market rents as expiries and market reviews occur. Additionally, re-configuring various areas of the subject property will maximise value over time. The existing gross passing rent averages approximately $285 per sqm. According to Savills, comparable space within Sydney achieves rent of $300 to $325 per sqm. The asset is located on the intersection of three major arterial roads, which services up to 168,000 vehicle movements per day giving accessibility to a catchment of over 1 million people within a 30-minute drive. 1500 on-site car spaces and co-location with international retail warehouse Costco (which does over $200 million in trade annually), provide foundational elements for strong trade and highly visited location. The starting annual distribution from rent is forecast to be 6% moving to above 10% during the investment term with total return forecasted in the high teens. Click here for more

High-quality and well-located commercial office 

MPFM also sees value in well located commercial office spaces across the eastern seaboard on Australia. MPFM’s 9 Hunter Street, Sydney co-investment is progressing in line with forecast and on course to deliver return double-digit returns. To read more on our 9 Hunter Street Sydney investment. Click here for the latest update

Mandi Prager is the principal of MP Funds Management. MP Funds Management has provided investment funding for over $1.1bn of real estate-based investments across 22 transactions and produced an average annualised investment return of 21-22% (IRR).

 

·     Want to invest with us? Register for Golden Goose Capital HERE

·     Subscribe to the MP Report HERE

·     Find out more about co-investing with MP Funds Management Here.

·     Visit MP Funds Management HERE.

 

 

Disclaimer

The information on this website is for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered legal practitioner or financial or investment adviser. No material contained within this website should be construed or relied upon as providing recommendations in relation to any legal or financial product. MP Report Australia, MP Funds Management, MP Group International, Golden Goose Capital (together MP Group or the Information Providers) do not purport to contain all the information that may be required to evaluate any potential transaction or investment. The Reader and its advisors should conduct their own independent review, investigations and analysis of any Opportunity mentioned and of the information contained, or referred to, in this document including the merits and risks involved. Information Providers have not had regard to the investment objectives, financial situation and particular needs of the Reader. The Reader should make its own investigation and assessment of the Investment, verify to its own satisfaction the accuracy, reliability and completeness of the information in this Information memorandum and obtain independent and specific advice from appropriate experts. The estimates and projections contained on this website involve significant elements of subjective judgment and analysis, which may or may not be correct. There are usually differences between forecast and actual results because events and actual circumstances frequently do not occur as forecast and these differences may be material. The Reader and its respective advisors should make their own independent review of the material assumptions, calculations and accounting policies upon which the accompanying estimates and projections are based. To the fullest extent permitted by law, the Information Providers disclaim and exclude all liability for any loss or damage suffered or incurred by any person as a result of: 1. Their reliance on the information contained in this information; 2. Any errors in or omissions from this information.

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