Unlike many fund managers, Australian Unity Investments has emerged from the recent turmoil in property funds with its reputation enhanced.
The $142 million* Australian Unity Property Income Fund was one of only two in its category to remain open to investors and offer regular liquidity throughout the global financial crisis.
Furthermore, this fund was a top performer by a wide margin, recording a return of -1.6%# in the year to October 2009, compared to an industry wide average of -15.6%#†.
So when Australia Unity Investments’ long-standing Head of Property, Martin Hession, says there has probably never been a better time to invest in commercial real estate, smart investors pay attention.
“We have a very optimistic view about the property market. We are saying you should be investing in all sectors of the market - industrial, retail, office and healthcare - on the basis there will be very, very good growth in values. It may not be in the first six months of this year, but certainly after that.”
Martin says Australian property markets have moved past the GFC-led problems of the past two years much faster than expected.
“This has been a very different downturn to the previous one in the late eighties and early nineties, when there was a huge oversupply of commercial property that weighed on the market for years. The recent turmoil in the property market was created by disruption in the lending sector, not an imbalance in property supply and demand.
“In fact, supply is set to become tight quickly because banks have not been financing property development for almost two years. When you combine this with an economic recovery in Australia and solid growth in white-collar employment, you get the conditions for bust to swing to a boom. One of the leading property forecasters is predicting 20% total returns from Melbourne CBD prime office buildings in 2012.”
He says opportunities for investors are exceptional at the moment because many property values are still priced at levels set when the markets believed Australia was going into a recession.
“Industrial property is a great example. It became overpriced in about 2007. Yields fell to around 6.5% to 7.5% - this was crazy stuff. When the GFC hit, the yields suddenly went to 9% and even as high as 10.5%, which was too far the other way. The market took the view there would be a recession; a lot of warehouse space would not be needed because retail sales would plummet and other companies would go out of business. But of course we escaped a recession and retail sales have remained strong. We see yields on industrial property coming back pretty dramatically to about 8.5%, which is a long way above the levels of 2007. Even on a five-year view, we expect they will come back to 7.5% to 8%, so we are going to see quite a rise in values.”
However, Martin has some words of caution about debt, the lingering effects of the GFC on the banking industry and the hazards these create for property investors.
“The banking industry and financial markets are returning to more normal operations, but the availability of cash is still constrained. Banks are still cautious about lending outside of their blue chip customers.
“Finance is hard to get for developers and the cost of borrowing is high. Property funds and business generally did not get any of the benefit of the sharp decline in cash rates last year. It was offset by an increase in the risk margins that banks added on top of the basic cost of the loan.”
Martin says that in this environment, property funds with significant amounts of debt are still going to struggle.
“As a guide, a conservatively managed property fund would cap its borrowings at about 50% of the value of its properties. That’s actually a very conservative level of gearing because the debt is being measured against property values that have already come down by an average of 15%. If your debt is only 50% of a bottom-of-the-market value, where’s the risk?”
A conservative approach to debt ahead of the global financial crisis was one of the reasons Australian Unity Investments’ property business came through the crisis in such great shape.
The Property Income Fund has no debt and has never used borrowings. The Australian Unity Investments Healthcare Property Trust has borrowings representing 43% of the assets of the trust, while the Australian Unity Investments Retail Property Fund is at 53% gearing with a focus on reducing this even further in the near term.
Martin says investors have plenty of choices about how to participate in the upswing in property values, with unlisted property vehicles, hybrid funds and listed property trusts all providing exposure.
Investors can also take a sector-specific approach with their choice of investments, although Martin believes that values in all sectors are set to improve, with industrial property leading the way.
“The only thing you must insist on is prime property. Funds with lesser quality properties, especially those with high or even moderate levels of debt, will not be a great place for investors.
“The coming six to 12 months will be a time when the market really starts to see the difference between quality managers and the rest.”
Martin added that his optimistic outlook for the property market was also supported by a number of one-off factors that were unique to the current cycle.
“Listed property trusts have recently raised billions of dollars to strengthen their balance sheets and they’re ready to invest again. They were badly burned by their investments in the US and Europe, where the global economic recession hit hardest. As a result, they are saying they will focus on Australian property, where losses average about 15% compared to 40% and even higher for many of their assets overseas. I talked recently to the manager of a listed property trust who said he had $800 million in cash waiting to invest in Australia.
“We are also seeing overseas-based property funds saying they want to increase their exposure to Australia because of its stand-out economic performance.
“In the last two years we haven’t built any property to speak about. So you can see what’s going to happen. We will have all this money chasing too few properties because they now only want to buy in Australia. It’s going to create a lot of competition for existing property in Australia.”
Martin said the other positive factor on the horizon was the scale back of the government guarantee on bank deposits.
“The wholesale deposit guarantee ended on 31 March and the retail deposit guarantee will be reviewed at the end of next year. That’s a still a way off, but at some stage investors will start leaving bank deposits as they realise these will be one of the worst investments over the next three to five years.
“That trend will help revive interest in the property investment market and can only add to what we believe will be an exceptional growth story for investors over the next few years.”
* as at 30 April 2010 # Adviser Edge Independent Assessment - Australian Unity Property Income Fund (Wholesale) dated February 2010. † Peer group of hybrid property funds as determined by Adviser Edge. Returns are calculated after fees and expenses and assume the reinvestment of distributions. Past performance is not a reliable indicator of future performance.
Important Information
The information in the Market News Centre has been prepared by the product issuers Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No 234454; Australian Unity Property Limited ABN 58 079 538 499, AFS Licence No 234455; and Australian Unity Finance Limited ABN 35 114 646 070. It contains general information only and does not take into account your individual objectives, personal circumstances, financial situation or needs. While every care has been taken in the preparation of this information, we reserve the right to make corrections. You should seek your own financial advice from a financial services licensee or an authorised representative and you should read the relevant, current Product Disclosure statement (PDS) or Prospectus before making any investment decisions. You can obtain a copy of the current PDS or Prospectus by visiting australianunityinvestments.com.au or by calling 13 29 39.