Tell me a bit about the fund
The Centuria Capital Group is buying the 80 Grenfell Street Tower, which is a modern office tower on sale for roughly $200m. The fund is a new unlisted single asset investment trust and is being sold by the Blackwood group. It will be done via a 50/50 co-investment with one of Centuria’s clients. So the investment is for $92.3m. The building is known as one of Adelaide’s top-class towers and buying it would fit well with Centuria’s unlisted business. The Tower has a secure and stable tenant, the Bendigo and Adelaide Bank with a remaining lease term of 7.3 years. It is also located above the Rundle Place Mall which is Adelaide’s main retail district and well known for food and high end fashion. It also has a full-line supermarket. Next door is David Jones, Myer and Apple. Public transport is located within walking distance.
Here are few of the features of the fund:
- Secure yield focused investment opportunity.
- Fund is purchasing a $200m top-class tower in Adelaide.
- $92.3m purchase prices, 50% interest.
- 96% let to the Bendigo & Adelaide Bank
- Long 7.3 year lease expiry.
- 5 Year investment term.
- 40% p.a average distribution over the initial 5 year term.
- The cap rate is 6.27% with a IRR of 8.51% and NTA of $1.05
- LVR of 45%.
- NTA of $0.93 per unit.
- Cornerstone offer closes 25 May 2018
- Money due 6 July 2018
- Fund established 23 July 2018
The reason we think this fund is attractive, is not just the because of the prized asset but it’s the attractive and stable monthly distributions of around 7.40% p.a. that carry over the 5-year term. Here is our checklist as to why we believe this property fund ticks the right boxes:
- Asset quality – Is the underlying asset of good quality? Yes it is. The 80 Grenfell Street Complex is located in prime grade CBD district. Adelaide is a booming city with price growth across the city forecast to hit 6.0% next year, according to Property Planning Australia. The building is situated above Rundle Place Mall which is a well know and premier retail space.
- Gearing – Is the gearing conservative or aggressive? Anything above 50% should be considered on the risky side. The gearing strategy here is 45% based on a valuation of $92.3m. We think anything between 30%-50% is ok. So in this case gearing is a little high but not too bad.
- Fees – Are the fees high and is the performance fee on a reasonable hurdle? In this case there are a few fees that an investor must consider. Most funds charge acquisition and disposal fees, so the preference is to avoid these fees, but its standard practice for a 2.0% fee on both acquisition and disposal. Performance fees are usually around 10%-15%. With the Centuria Capital Group fund there is the 2.0% acquisition fee on plus a 1.0% disposal fee of the gross asset sale price. The performance fee is 20% over 8% IRR. The hurdle rate is a little low and the fees are on the high side.
- Distributions – What is the yield and is worth the risk? With unlisted property funds liquidity is not a high priority. But investors must understand that real estate is a long term investment and shouldn’t be a short term yield chasing asset. In this case the average distribution is 7.40%, starting off lower than increasing towards the end of the five years. This is post fees.
The Centuria Capital Group fund provides retirees and investors looking for a stable and consistent income stream that is more than double the current bond yield. Centuria are a reputable real estate manager and the tenant in the building is a blue chip client. The fees are however a little on the high side but we think they are reasonable given the risk. The performance fee is also appropriate as it rewards the manager for real outperformance not just for turning up for work. Investors should note that unlisted property is not like list listed property. This is a long term investment. If you are concerned about short term liquidity needs, then you should consider investing in listed real estate. The closing date for this specific fund is 25 May 2018. If you are interested in investing in this fund, please contact a Wattle Partners adviser today.