Raising and Deploying Capital in a Pandemic
The challenges of raising and deploying capital in a pandemic was the theme for a recent PFA Learning Series, which brought together three different perspectives on unlisted property funds, via Ben Harrop, Head of Distribution at Centurial Capital, Steven Bennett, CEO Direct Property at Charter Hall, and Mark Pratt, Executive General Manager of Property at Australian Unity.
Changes in the advisor landscape
Centuria Capital’s Ben Harrop said Centuria has broadened its activity during the pandemic, creating investment opportunities in agriculture, daily needs retail, large format retail, and real estate debt funds, along with acquiring three businesses.
Harrop said property fund managers need to think about where their product sits within the advice solution. “A lot of dealer groups now find their professional indemnity insurance will not allow them to invest in products where gearing levels exceed 50 per cent. If you take gearing up to 55 or 60 per cent, you take out a whole segment of the advice community.”
He said there have been massive structural shifts in the financial services and advice industry following the Hayne Royal Commission and recent changes by ASIC including the new Design and Distribution Obligations (DDO). “Advisors now have greater flexibility to make investment choices than they ever have, and the clients they are retaining are in a stronger financial position than they have ever been.
“There has been an increase in wealth despite an increase in the cost of advice, coupled with fewer advisors and fewer investors seeking advice.”
Harrop said there are challenges in having unlisted, illiquid investments on the platforms, but in many cases the advisor channel is worth pursuing over institutional and direct investors. “Each of the channels have their own strengths and weaknesses. While the advice channel is getting smaller in scale, the sophistication is increasing.
“The wealth being generated is creating tremendous opportunities for our industry. You’ve got to have your wholesale and institutional plays and your family offices, but the advisors are increasingly controlling a large number of assets.
“It’s expensive to engage and get on the platforms, but there will be a natural barrier that you reach by staying wholesale.”
The rise of the off-market transaction
Charter Hall’s Steven Bennett says the manager’s convictions were only strengthened by the pandemic. In the 12 months to 30 June 2021 Charter Hall posted $10.1 billion in gross transactions, $2.1 billion of sales or divestments, and $8 billion of net acquisitions – this was over 130 separate deals since COVID-19 emerged.
Bennett said more groups preferred to engage off-market throughout the pandemic – partly this reflected more people were gun-shy due to potential risks with running a sales campaign on market. “We saw a larger number of groups willing to engage on an off market basis. The keys to success in doing off-market deals are your own reputation and your ability to complete the deal in a timely manner. You need to have the trust of the agency world and the vendors.”
Working from home proved a challenge during deals and Bennett says there is a greater need for people in the office when transactions flow. “Working from home for short periods of time is fine when you’re working on a linear deal, or the matter is something straightforward. But groups which had their teams back, like Charter Hall did, who could collaborate and crunch things out in short time periods had a major advantage.”
Bennett also offered some insights into acquiring assets during a disruptive period. “Making decisions quickly, having buy-in from senior team members and screening deals quickly are important. Also having the resources – we benefited from having Charter Hall people on the ground, which was very helpful when borders shut. Finally, having strong relationships across all parts of the stakeholder group.”
Bennett says the entire industry has put more time and resources into compliance to meet new demands including the DDO. “Whether it’s going to stop or reduce the equity inflows from certain channels is too soon to say – I don’t expect it will, as the groups who are raising money in this space have well thought-through target market determinations.”
Managers need to be targeted
Mark Pratt from Australian Unity says there has been a greater focus on raising capital for transactions. For example, the 20-plus-year-old Australian Unity Healthcare Property Trust has changed the way it has sought to raise equity and engage with advisors and investors. “We’re focussing more on raisings which have a specific purpose, whether it’s pre-positioning the balance sheet, funding of developments, or acquisitions.
“Australian Unity has been very active in launching new strategies in the social infrastructure space. We raised capital for a development fund to convert the old Australian Unity head office into aged care and assisted living, which is a very exciting project.
“The other one has been specialist disability accommodation, which is providing a high quality of living to the community who are supported through the NDIS. We started that fund about 18 months ago, trying to bring vendor and operating partners along with us, as we’re a new operator in that industry, and also bringing in equity partners. That certainly had its challenges, but transparency with clients, and active engagement and development of relationships and partnerships was important.”
Pratt said it’s difficult to achieve these initiatives via on-market transactions in healthcare. “Ninety per cent of our healthcare transactions, a lot of which are develop to own, come through off-market.
“Relationships, partnerships, stakeholder management on all sides are absolutely critical. Particularly where the operations of the business are imbedded in the real estate, such as hospitals.”
The cost of acquiring new retail investors will increase with DDO and other compliance measures, but Pratt said unlisted property funds were an important asset class for these investors. “The property funds management industry has a role to play in helping people get to their retirement.
“We are a more prominent source of tax effective distribution income than we ever have been. Retail investors really value that. While there might be a high cost of acquiring retail investors at the start, if you say what you do and do what you say retail investors will stick by you.”
Image: Charter Hall
¬¬¬