Key reasons why unlisted property funds are attracting investors

27th September, 2021 | No Comments

Unlisted property is attracting investor interest due to its reputation as a steady performer and stabilising element in investment portfolios, with unlisted property funds outperforming all other asset classes for annualised returns over the last five years.

Unlisted property investments combine income returns from rents and capital growth in the value of the underlying properties, a combination which is becoming more attractive as interest rates dwell at record lows.

Investors also value unlisted property’s diversification benefits, to diversify away from the volatility and stretched valuations seen in many equities markets, and the continuing underperformance of cash and bonds.

Consistently strong performance
Australian unlisted property was ranked the best performing asset class for annualised returns over five years, according to the latest Fact Sheet from MSCI, Zenith, PFA and PCA, delivering a 17.8% annualised return.

This outperformed Australian listed property, Australian equities, global equities, and cash – during the same period Australian listed property delivered an annualised 2.4%, Australian equities 11.1%, global equities 15.3%, and fixed income 3.6%.

For the year to 30 June 2021, unlisted property funds returned 18.7%, with returns underpinned by tighter capitalisation rates and recovering rental income from COVID-impacted assets, according to the Fact Sheet.

Dan Cave, senior investment analyst at Zenith Investment Partners said: “Despite challenges in early FY2021, it is pleasing to see an impressive recovery across listed, unlisted and direct property, against a backdrop of GDP growth, lower unemployment, climbing vaccinations and retail confidence returning.”
Growing commercial property investment

Australian commercial real estate investment rose by 15% in Q2, 2021 when compared with Q2 2020, according to Real Capital Analytics.

While volumes are down around 18% compared with 2019, most likely impacted by the pandemic, Real Capital Analytics says the current trend is upwards. It reported $13.4 billion transacted across the second quarter 2021, driven mainly by larger deals and portfolio deals, with year-to-date levels up 11% year-on-year.

Cross-border investment accounted for 26% of transactions in the quarter, showing that offshore investment has proven resilient following a particularly strong corresponding quarter in 2020, according to Real Capital Analytics.

Significant fund inflows
Unlisted property funds have reported significant fund inflows. Centuria Capital Group reported growth in unlisted assets under management to $11 billion for the 2021 financial year, up from $4 billion for the 2020 financial year.

The manager recently raised $133 million in three weeks for a single-asset unlisted fund, which was Australia’s largest single-asset fundraise in 15 years.

Charter Hall also reported strong inflows into direct property of approximately $90 million each month across the 2021 financial year.

The unlisted property inflows are part of a global trend: US$41.06 billion made its way into global unlisted real estate funds during Q2 2021 alone, according to the Realfin State of the Market Report for Global Real Estate Q2 2021.

Charter Hall said investors are valuing the certainty of cashflows in the current low interest rate environment, along with the capital appreciation unlisted property has brought to real estate portfolios.

Castlerock achieved the largest capital raise in its 18-year history, raising $90 million to fund the acquisition of the $142 million Icon building in the Ipswich CBD in just seven weeks for its Auslink Property Trust No.2.

Anecdotally, the volume of application submissions for recently launched funds has exceeded expectations, resulting in funds being over-subscribed and closed early. This suggests pent-up demand for these unlisted property investments, especially where the fund manager can demonstrate experience in the asset sector.

Recent transactions of note
Some major property transactions have been announced in the last three months, including Charter Hall’s $410 million office development in Swan Street, Richmond, which secured a 10-year pre-lease agreement with Australia Post as the anchor tenant in the building.

Centuria recently announced it had acquired a Footscray Office building for $224 million, and a Visy Glass Industrial facility in New Zealand for $167 million. It also secured a $63 million A-grade office building in Port Adelaide.

Haben announced the acquisition of Casey Central Shopping Centre for $225 million.

Quintessential Equity bought a $71.5 million office building in Adelaide, noting the city’s growing reputation as a liveable and high-tech city.

Cadence Property acquired a large format retail property in Sunshine for $39 million.

In healthcare, Centuria Healthcare recently acquired seven assets worth a combined $167 million, which nearly doubles its Centuria Healthcare Property Fund portfolio.

The unlisted Dexus Healthcare Property Fund has made circa $600 million of acquisitions in the last financial year.

Optimism through vaccination
Vaccination provides cause for optimism in property markets across the board.

Charter Hall says office property is seeing improved investor sentiment, reporting “…high quality, long WALE office assets trading at firm capitalisation rates and elevated prices”.

Unlisted retail property has outperformed the ASX 200 Index and Core REIT index for three and five year annualised periods, according to MSCI data released for June 2021.

Savills says the experience in London and New York shows higher vaccination rates are linked to higher office occupancy rates, which should also be positive for CBD retail. Analysis by Savills shows “…increased vaccination leads to increased mobility, investment and declining commercial vacancies”.

Savills reported leasing activity in Manhattan “…increased by 48.6% over the 12 months to June 2021, with relocations and new leases making up 74.6% of activity and renewals and expansions accounting for 25.4%.”

AMP Capital takes a similar view, expecting vacancy rates to drop sharply over the next two years – AMP says office occupancy rates historically bounce back faster than expected following downturns.

Image – Charter Hall

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