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Netwealth portfolio construction series - Why investing in commercial property can be for everyone
- 2. âą âą âą
- 5. 5 âȘ About APN Property Group âȘ The differences between commercial and residential property âȘ Australian commercial property market âȘ Broaden your diversification to Asia Outline
- 6. 6 A specialist real estate investment manager since 1996 âŠfocussed on income and lower risk
- 9. 9 Residential âȘ 1 year leases âȘ Individual tenants âȘ Legal protection favours the tenant âȘ Costs borne largely by the landlord âȘ Market based rents Commercial âȘ 5+ year leases âȘ Corporate tenants âȘ Balanced legal protection âȘ Costs borne largely by the tenant âȘ Rental ratchets
- 10. 10 Real Estate Investment Trusts (REITs) âȘ Low upfront capital âȘ Liquidity âȘ Diversification
- 11. 11 Diversification/ Access Liquidity Expertise High yields Low entry threshold Comparatively low costs Capital growth Tax effective REITs Features of REITs
- 12. 12 The lease contract provides a level of protection âCertain income is superior to uncertain growthâ 1. Rents and their cash flows give property its important defensive portfolio characteristics 2. Rent is paid in advance by tenants - ahead of salaries, taxes, debt and dividends to shareholders 3. High quality tenants: national, multi-national, ASX 100, government bodies 4. CPI, fixed or market based increases result in growing rental streams 5. Predictable cash flows, similar to interest on debt / finance leases
- 13. 13 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 AREIT 19.7% AREIT 14.6% AREIT 11.8% EM 56.3% AREIT 32.0% EM 34.5% Sm Cap 34.3% EM 39.8% Gov Bnd 19.2% EM 79.0% EM 19.2% Gov Bnd 13.4% AREIT 33.0% Intâl Stk 23.3% AREIT 20.7% AREIT 14.3% AREIT 13.2% Lg Cap 8.3% Lg Cap 10.8% Corp Bnd 7.4% Intâl Stk 39.2% Sm Cap 26.8% Lg Cap 22.6% AREIT 34.0% Sm Cap 17.3% Corp Bnd 12.5% Sm Cap 61.8% Sm Cap 13.9% Corp Bnd 10.1% Lg Cap 22.0% Lg Cap 22.1% Gov Bnd 11.0% Sm Cap 10.2% Sm Cap 13.2% Corp Bnd 6.7% Corp Bnd 7.0% Gov Bnd 6.8% Sm Cap 31.9% EM 26.0% Sm Cap 19.8% EM 32.6% Lg Cap 16.0% Cash 4.3% Lg Cap 36.2% Intâl Stk 8.2% Cash 4.5% EM 18.6% AREIT 7.1% Corp Bnd 8.6% Corp Bnd 2.9% Lg Cap 10.9% Gov Bnd 6.2% Gov Bnd 6.8% Cash 4.8% Lg Cap 12.5% Lg Cap 25.8% Intâl Stk 14.0% Intâl Stk 26.9% Intâl Stk 11.6% Lg Cap -35.8% Intâl Stk 32.5% Corp Bnd 6.9% AREIT -1.5% Intâl Stk 17.9% Corp Bnd 4.6% Lg Cap 5.3% Gov Bnd 2.5% EM 8.6% Cash 6.1% Cash 4.2% EM -6.0% AREIT 8.8% Intâl Stk 20.7% AREIT 12.5% Lg Cap 22.9% Cash 7.3% Intâl Stk -43.1% Corp Bnd 6.3% Gov Bnd 5.8% Lg Cap -9.0% Corp Bnd 11.0% Cash 2.6% Cash 2.5% Cash 2.4% Corp Bnd 4.0% Intâl Stk -14.0% Sm Cap 0.9% Sm Cap -7.8% Corp Bnd 7.1% Corp Bnd 7.2% Corp Bnd 6.2% Cash 6.4% Gov Bnd 3.3% EM -53.2% AREIT 7.9% Cash 5.0% Intâl Stk -11.7% Gov Bnd 6.7% Gov Bnd 1.2% EM -1.8% Lg Cap 1.0% Gov Bnd 2.8% Sm Cap -14.2% EM -2.4% Lg Cap -10.4% Gov Bnd 6.3% Gov Bnd 6.7% Gov Bnd 5.8% Corp Bnd 3.6% Corp Bnd 2.6% AREIT -54.0% Cash 4.2% Lg Cap 0.4% EM -18.2% Sm Cap 6.5% Sm Cap -0.8% Sm Cap -3.8% Intâl Stk -3.3 Cash 1.8% EM -30.6% Intâl Stk -21.2% Intâl Stk -15.7% Cash 5.5% Cash 5.4% Cash 5.7% Gov Bnd 2.0% AREIT -8.4% Sm Cap -54.6% Gov Bnd -1.0% AREIT -0.4% Sm Cap -21.6% Cash 3.0% EM -2.3% Intâl Stk -4.1% EM -17.0 Intâl Stk -1.9 Source: Bloomberg * Rank is determined by each asset class having its return ranked for each year. The sum of these rankings over the 16 year period (2000>2016) has then been used to rank each of the asset classes. Asset class return comparison 2000 â 2016 AREITs are in the top 3 performers for 10 of the last 16 years 9.5% average annual return over 16 years
- 15. 15 Income from Australian commercial property sector âȘ Highest barriers to entry âȘ <1% vacancy âȘ Retail sales growth continues âȘ Support from housing growth, tourist arrivals & falling oil price âȘ International retailers continue to take up large space âȘ Online sales growth compliments good retailers âȘ Outstanding rental growth: Sydney 17.6%; Melbourne 10.5% âȘ The market is favouring landlords âȘ Previously elevated incentives are falling âȘ Strong offshore investor demand âȘ Lower barriers to entry Retail Office APNâs forecast FY17 dividend yield for the APN AREIT Fund is around 6%* *Yield is calculated daily by dividing the annualised distribution rate by the latest entry unit price. Distributions may include a capital gains component. Distributions are not guaranteed and past performance is not an indicator of future returns
- 16. 16 Investment case studies Below are two stock investment case studies we believe highlight key aspects of the Fundsâ investment style and positioning: âȘ GMF listed in December 2014 at an initial price of $2.00 per unit and a market capitalisation of c.$250m âȘ Its portfolio comprised six commercial office assets located in metropolitan office locations in Sydney, Melbourne and Brisbane âȘ We initiated our investment at IPO with a substantial holding equating to 6.95% of all units on issue âȘ We were attracted to the trustâs focus on deriving passive rental income, its metropolitan office mandate, the quality of its external manager (GPT Funds Management) and in particular the quality of the underlying real estate âȘ In April 2016 Growthpoint Properties Australia (GOZ) proposed to acquire all units in GMF. A competing bid was subsequently made by Centuria Capital Limited (CNI) who had also taken a c.16% stake âȘ GOZ were ultimately successful and acquired the trust through a transaction which provided GMF unitholders $2.50 per unit âȘ We maintained our initial investment earning an IRR of c.22% and a cumulative absolute total return of c.38% (XPKAI c.15% over the same period) GPT Metro Office Fund (GMF) âȘ VVR listed in August 2016 at an initial price of $2.20 per unit and a market capitalisation of c.$1.5b âȘ Its portfolio comprised 425 petrol stations located across Australia âȘ Key selling points for this trust were its long-term leases to Viva Energy (15.3 year WALE), annual fixed rental increases (3.0%) and non-traditional asset class âȘ We did not elect to participate in the IPO despite VVR fitting within our Fundsâ mandate âȘ Upon listing VVR immediately traded to a high of $2.60 but by November 2016 had sold-off almost 20% to trade below IPO price âȘ We made the decision to initiate a position in VVR at this time which appeared to coincide with enhanced liquidity in the stock driven by trading from existing substantial holders âȘ Our Fundsâ positions in VVR were established at levels below the initial issue price and closer to the stockâs dividend payment date. In December VVR traded at $2.45. Viva Energy REIT (VVR)
- 17. 17 Diversificatio n Liquidity Expertise High yields Low entry threshold Comparativel y low costs Capital growth Tax effective REITs âȘ ~6%2 forecast FY17 dividend yield for APN AREIT Fund âȘ Healthy spread of market yield to risk free rate of 220bps3 (10 year Bond) is significantly ahead of long term averages (capital buffer) âȘ APN valuations imply capital upside at current pricing levels âȘ Favourable credit spreads make acquisitions accretive (and enhance value) âȘ Demand for underlying assets should support capital values âȘ Strong balance sheets; conservatively geared âȘ Diversified and intensively managed borrowings âȘ Steady GDP growth and economy still expanding âȘ Lower AUD a driver, resource prices deliver an unexpected fiscal benefit âȘ Forecast GDP growth: ~2.5% is OK for property High yields GDP growth Capital growth Defensive âȘ Total return of ~9%4 expected for the next 12 monthsReturn Outlook âȘ Transparent and secure property markets - High occupancy and steady rental growth; âȘ Further NTA growth anticipatedFundamentals 1. RBA 2. APN models, May 2017 3. May 8 2017 4. Expected total returns after all fees and expenses. Assumes distributions are reinvested. Investors' tax rates are not taken into account when calculating returns. Outlook for AREIT investors
- 19. 19 âȘ Diversification; over 150 REITsâŠâŠand growing âȘ Access a portfolio of quality commercial real estate in Asiaâs gateway cities in 100% liquid format âȘ Ability to invest in markets where physical real estate may be inaccessible âȘ Secure cash flows backed by long lease terms and strong tenant covenants, as well as potential capital growth âȘ World class corporate governance (Singapore, Japan and Hong Kong) Why listed Asian commercial real estate?
- 20. 20 But consider Asia for the attractive growth prospectsâŠ.
- 21. 21 - 50 100 150 200 250 300 Japan Singapore Hong Kong Significant growth in the Asian REIT market: Asian market capitalisation 2001-2016 Source: APREA Research / Bloomberg, December 2016 $AUS bil Asian growth has enhanced the rise of an asset class âŠ
- 22. 22 Asia Equities Asia REITs Aust Equities Aust REITs APN Asian REIT 13% 14% 14% 15% 15% 16% 16% 9% 10% 11% 12% 13% 14% Source : Bloomberg Superior risk adjusted returns â 5 years annualised to 30 June â17 Higher risk, low return High return, lower risk Return Risk
- 23. 23 âȘ Core overweight position in the Asian REIT Fund âȘ Portfolio of 6 suburban shopping centers in Singapore. âȘ All malls located next to or near MRT stations or bus interchanges âȘ Includes Causeway Point which is the largest mall in Woodlands, one of Singaporeâs most populous residential estates âȘ 1Q17 rental reversion 6.9%. Has maintained positive rental reversions through economic cycles. âȘ 1Q17 shopping traffic up 2.7% yoy âȘ Portfolio occupancy rate1 91.3% (AEI affected) âȘ Dividend ratio1â 6.0% âȘ Total return over 5 years1 â 17.2% p.a. vs Index 16.4% p.a. (in A$) Investment case study: Frasers Centrepoint Trust, Singapore 1. As of 28 Feb 2017
- 24. 24 âȘ Core overweight position in the Asian REIT Fund âȘ Office investments primarily in Tokyo (87%), with 50% portfolio concentration in Tokyoâs central 5 wards âȘ Well positioned to capitalise on falling office vacancy rates in Central Tokyo as well as rising rents âȘ This trend has resulted in 6% DPU growth over the past half. âȘ Sponsor provides potential pipeline of acquisition opportunities for external growth âȘ Tokyo is the commercial centre of Japan, and it is the worldâs largest office market âȘ Portfolio vacancy rate1 of 1.0% âȘ Dividend yield 1 of 3.6% âȘ Earnings forecast growth1 of 2.1% âȘ Total return over 5 years1 of 18.1% p.a. vs Index 16.4% p.a. (in A$) Investment case study: Japan Excellent 1. As of 28 Feb 2017
- 25. 25 Delivering relatively high, sustainable income APN AREIT Fund APN Asian REIT Fund 6.4%pa* Current running yield as at 5 Jul â17 6.5%pa* Current running yield as at 5 Jul â17 Paid monthly Paid monthly * Current running yield is calculated daily by dividing the annualised distribution rate by the latest entry unit price. Distributions may include a capital gains component. Past performance is not an indicator of future returns.
- 26. 26 âȘ Commercial property is primarily an investment in an income stream âȘ Commercial property is a defensive asset class: - Long lease contacts - High quality tenants - Rents increase year on year âȘ Predictable, repeatable & sustainable cash flow, similar to Fixed Interest âȘ Asia Pacific region provides diversification and access to growing, strong markets Property for income
- 27. 27 Contacts APN Property Group Level 30,101 Collins Street, Melbourne, Vic 3000 www.apngroup.com.au Investor Services Hotline 1800 996 456 @apngroup APN Property Group Limited apnpropertygroup Follow us⊠Mark Mazzarella Fund Analyst, Real Estate Securities APN Property Group
- 28. 28 This investor presentation (Presentation) has been prepared by APN Property Group Limited (ACN 109 846 068, APD.ASX) (APN). This Presentation contains summary information about APN and one or more of the funds managed by APN Funds Management Limited (APNFM) (ACN 080 674 479, AFSL No. 237500). APNFM is a wholly owned subsidiary of APN and the responsible entity and issuer of the APN Property Group products. Information contained in this presentation is current as at 10/7/2017.This Presentation contains summary information about APN and one or more of its funds. The information in this Presentation is of general background and does not purport to summarise all information that an investor should consider when making an investment decision. It should be read in conjunction with APNâs other periodic and continuous disclosure announcements lodged with the Australian Securities Exchange (ASX) which are available at www.asx.com.au or APNâs website www.apngroup.com.au. Not all assets depicted are necessarily owned by APN or any entity managed by APN. Figures may not sum due to rounding. Currencies are generally presented in Australian dollars and times are references to Melbourne times except where the context requires otherwise. This Presentation is for information purposes only and is not financial product or investment advice or a recommendation to acquire entitlements or shares in APD or interests in any fund managed by APNFM. This Presentation is not a prospectus or a product disclosure statement under the Corporations Act 2001 (Cth) (Corporations Act) nor is it an offering document under any other law, does not constitute an offer, invitation, solicitation or recommendation with respect to the subscription for, purchase or sale of any security, nor does it form the basis of any contract or commitment and has not been lodged with ASIC. The information in this Presentation has been prepared without taking into account the investment objectives, financial circumstances, taxation position or particular needs of investors. Before making an investment decision, prospective investors should consider the appropriateness of the information having regard to their own objectives, financial situation and needs and seek appropriate legal, financial and taxation advice appropriate to their jurisdiction. Except as required by law, no representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information, opinions and conclusions, or as to the reasonableness of any assumption, contained in this Presentation. By reading this presentation and to the fullest extent permitted by law, APN and its related bodies corporate, shareholders or respective directors, officers, employees, agents or advisors (collectively, Related Parties): do not accept any responsibility for any interpretation that any recipient or any other person may place on this Presentation or for any opinion or conclusion that any recipient or any other person may form as a result of examining the information contained in this Presentation; and do not accept any liability, whether direct or indirect or consequential, for any loss, damage, cost, expense, outgoing, interest, loss of profits or loss of any kind (Losses) suffered or incurred by any person (whether foreseeable or not) as a result of or by reason of or in connection with the provision or use of information contained (or not contained) in this Presentation, or of any recipient or its representatives or advisers acting on or relying on any information provided or referred to in or omitted from this Presentation or any other written or oral opinions, whether the Losses arise in connection with any negligence, default or lack of care on the part of APN and its Related Parties or any other cause. Each recipient of this presentation acknowledges and agrees that: they will rely entirely upon their own assessment and advice in relation to the business, assets, financial position and affairs of APN, including conducting independent inquiries, due diligence or analysis with appropriate legal, financial, taxation and other advice, as required; and any opinions expressed in this presentation are based on the knowledge and approach of the persons forming the opinion at the date that the opinion was formed and may have ceased or may in the future cease to be appropriate in the light of subsequent knowledge or attitudes. This Presentation contains âforwardâlookingâ statements. Forward looking words such as, âexpectâ, âanticipateâ, âshouldâ, âcouldâ, âmayâ, âpredictâ, âplanâ, âwillâ, âbelieveâ, âforecastâ, âestimateâ, âtargetâ and other similar expressions are intended to identify forwardâlooking statements. Forwardâlooking statements, opinions and estimates provided in this Presentation are based on estimates and assumptions related to future business, economic, market, political, social and other conditions that, while considered reasonable by APN, are inherently subject to significant uncertainties and contingencies. Many known and unknown factors could cause actual events or results to differ materially from estimated or anticipated events or results reflected in such forwardâlooking statements. Such factors include, but are not limited to: operating and development risks, economic risks and a number of other risks and also include unanticipated and unusual events, many of which are beyond APN's ability to control or predict. Past performance is not necessarily an indication of future performance. The forwardâlooking statements only speak as at the date of this Presentation and, other than as required by law, APN and its Related Parties disclaim any duty to update forward looking statements to reflect new developments. To the fullest extent permitted by law, APN and its Related Parties make no representation and give no assurance, guarantee or warranty, express or implied, as to, and take no responsibility and assume no liability for, the authenticity, validity, accuracy, suitability or completeness of, or any errors in or omission, from any information, statement or opinion contained in this Presentation. Disclaimer