By Paul Rickard

The listed property trust sector has been one of the best performing sectors on the ASX over the last few years. For the three years to 31 May, it has returned 15.09% pa (distributions plus capital growth), compared to the overall market’s 6.03% pa. So far in 2017, it has been largely flat with a return of 1.20%, with distribution yields offsetting a mild pullback in unit prices. The major listed property office trusts such as GPT or Dexus continue to be well bid, with forecast distribution yields starting with a big figure of “4”. The search for yield continues.

An alternative to investing in listed property trusts is through an unlisted trust. Typically, these pay higher yields than listed trusts, are either single asset or own a less diversified mix of property assets and are smaller in size. The trade off, of course, is that there is no liquidity, so investors typically agree a timeframe for the fund with the aim of selling the assets and winding up the fund around this time to provide an exit path. 

There are several property managers who develop unlisted property funds, including Charter Hall and Centuria. One of the latest unlisted funds is the Centuria Sandgate Road Fund.

Centuria Sandgate Road Fund

The Centuria Sandgate Road Fund is acquiring 1231 Sandgate Road, Nundah, a modern A-grade office building in Brisbane’s northern suburbs.

Built in 2012, the seven-floor office building comprises large floor plates of 1,557 sqm to 2,150 sqm, 144 car spaces, and a total net lettable area of 12,980 sqm. It is located on Sandgate Road at Nundah, adjacent to the Nundah train station and Nundah Village shopping centre. The Nundah metropolitan area is an eight minute drive to Brisbane Airport, 16 minute drive to the CBD and eight minute trip by train to the CBD.

1231 Sandgate Road, Nundah Qld

The building is fully let, with a weighted average lease expiry (WALE) of 9.4 years. Queensland State Government owned corporations (Energex and Powerlink) are responsible for 80.9% of the rent, with the balance of 11.5% from a gymnasium and 7.6% from seven retail tenancies. Rents increase by average at a fixed rate of 3.5% pa.

Asset Stacking Plan

The purchase price for the building of $106.25m represents an implied capitalisation rate of 6.66%.

Fund Metrics

With stamp duty and other costs, the total transaction cost is just over $116.6m. $68.9m is being raised by the issue of 68.9m $1.00 units in the Fund to investors, and $47.8m through a debt facility. The debt facility will be fixed for five years at an interest rate of 3.9%. Based on an independent valuation of the property, the Fund will have an initial loan to valuation ratio (LVR) of 44.3%, and an initial net tangible asset value (NTA) per unit of $0.90. 

For unitholders, Centuria forecasts the following distributions:

Distributions will be paid monthly to unitholders. They are also expected to be tax advantaged to the extent that they will be 85% tax deferred in 17/18 and 70% tax deferred in 18/19. (Tax deferred income is not assessable for income tax, but does reduce the cost base for CGT purposes).

Investment Rational 

In addition to the property’s stable long-term income and long WALE underpinned by government owned tenants, Centuria sees upside for the Nundah precinct as well as an improvement in Brisbane’s office market fundamentals.

Nundah is in Brisbane’s north, strategically located close to the airport and the Brisbane CBD. It is a thriving metropolitan area for office workers and residents, with superior road and rail connectivity and strong retail amenity. Accordingly, quality office accommodation like Sandgate Road stacks up favourably to the other northern metropolitan office markets of Chermside, Hamilton or the airport itself.

Centuria says that the outlook for the Brisbane office market is improving, driven by a growing Queensland economy, limited supply of new stock and a decline in the forecast office vacancy rate.

Brisbane Office Supply

Further, as a modern A grade building with a high 4.5 star NABERS energy rating, minimal capital expenditure is required.

Fund Term and Manager

The Fund has an initial term of six years. Investors can vote to extend this by a further year, but after seven years, it can only be extended by a unanimous resolution of all investors. 

The Manager, Centuria Property Funds Limited, is incentivised to maximise returns for unitholders by potentially earning a performance fee of 20% of any excess return over an internal rate of return of 10% to unitholders (in cash). The Manager is also entitled to a base management fee of 0.80% pa of the gross asset value and a disposal fee of 1.0% of the sale price.

My view

With a long WALE and strong tenant mix, the forecast distribution yield of 6.5% rising to 7.0% is attractive. Longer term capital growth will largely be dependent on the attractiveness of the Nundah precinct and tightening in the Brisbane office market. While the initial LVR of 44.3% is a little on the high side, investors should note that the interest rate on the debt facility is fixed for five years and that the forecast interest cover ratio of 3.5 times is comfortably above the facility’s covenant of 2.0 times. 

Like all unlisted trusts, it is an illiquid investment. There is no liquidity. The minimum investment is $50,000, and as there is no cooling off period, potential investors should read and consider the Product Disclosure Statement very carefully. This is available from Centuria at www.centuria.com.au. The offer is scheduled to close on 23 June. 

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.