Australia is an attractive destination for S-REITs. Pre-Covid, the continent was also an attractive tourist destination and an education destination for Asian students. In fact, a standing joke among economists used to be that the Australian economy comprised three sectors, resources, tourism and education.
Keppel REIT was perhaps the first commercial REIT to dip its toes in Australia. Its first Australian asset was a 50% stake in 275 George Street in Brisbane in 2010. In July, Keppel REIT’s manager announced the divestment of this property to Charter Hall Prime Office Fund for A$275 million ($267.7 million). The divestment price was 7.8% above the last valuation and 59% above the original purchase price of A$166 million in 2010. That is as good a reason as any to buy and sell a property. No surprise then that other S-REITs have sought their fortunes down under.
ARA LOGOS Logistics Trust (ALOG) is this year’s best S-REIT performer in terms of total unitholder returns. In unit price alone, ALOG has returned 48%. In April, ALOG completed the acquisition of five logistics properties located in Australia, a 49.5% interest in the New LAIVS Trust and a 40% interest in the Oxford Property Fund. The balance 50.5% interest in the New LAIVS Trust and the balance 60% interest in the Oxford Property Fund are held by funds indirectly managed by LOGOS Property Group, ALOG’s sponsor.
Including a development in Brisbane known as the Heron Property, the total acquisition cost was $441 million. The acquisition was announced in 2020 and ALOG raised $50 million in a placement of 90.5 million units in November, issued $70 million of new units to Ivanhoé Cambridge China Inc, a fund manager that owns stakes in the two funds, and $18.7 million of new units to LOGOS. ALOG also raised $50 million from a preferential equity fundraising of 91.1 million units priced at $0.5525. ALOG is trading at 88 cents as at Dec 8.
CICT ventures into Sydney
On Dec 3, Tony Tan, CEO of the manager of CapitaLand Integrated Commercial Trust (CICT), surprised the market by announcing the acquisition of two office buildings in Sydney from the main shareholder of its sponsor, CLA Real Estate. One of the buildings, 100 Arthur Street is in North Sydney, and the second building, 66 Goulburn Street is located at the southern edge of the Midtown Project of the Sydney central business district.
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On Nov 30, Keppel REIT’s manager announced it is acquiring a building to be completed in 2023 in North Sydney. The building, Blue & William, is a five-minute walk from one of CICT’s proposed acquisitions, 100 Arthur. Both 100 Arthur and Blue & William come with freehold leases but 100 Arthur is around 14 years old.
Blue & William is being developed by Lendlease into a Grade A building with 14,000 sq m of net lettable area (NLA) which works out at around A$23,407 psm. Keppel REIT gets paid a coupon by Lendlease, including a rent guarantee. This works out at an NPI yield of 4.5% a year. The state-of-the-art Blue & William will be completed in 2023.
100 Arthur is an old building which is just 63% occupied. Its NPI yield including A$7 million of rent guarantee works out at 5.1%. Excluding rent guarantee, the NPI yield is just 3.2%. However, the psm valuation is just A$13,736. On the other hand, Tan indicates that around 25% of the vacant space by NLA is in various stages of discussion.
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As a comparison, Suntec REIT first entered Australia in 2013 with a site at 177 Pacific Highway with NLA of 423,915 sq ft or 39,383 sq m in North Sydney which was completed in 2016. The purchase price was the equivalent of $457.5 million. This translates into a cost psm of $11,616. The property has been revalued to $655.7 million of $16,649 psm.
North Sydney seems to have a lot going for it. The North Sydney CBD is part of the Harbour CBD in the North District Plan by the Greater Sydney Commission (GSC). This is a long-term vision and plan to accommodate Sydney’s anticipated population growth of 1.7 million people, 725,000 new dwellings and 817,000 new jobs by 2036. Transport infrastructure is also being drawn in. A new metro station, Victoria Cross Station, will link the existing North-West Metro line to the Sydney CBD and South West. This should result in new occupier demand.
“The completion of the new Victoria Cross Metro Station in 2024 also enhances connectivity to North Sydney and supports future demand in the market,” JLL Research says. For instance, once the rail links are ready in 2024, indicative time travel from North Sydney to Barangaroo Station is just three minutes, while travel time to Sydney metro’s Martin Place Station is five minutes and travel time is all of nine minutes to Central Station. “When travelling and commute times are reduced you get a lot of efficiency gain,” Tan of CICT indicates.
North Sydney is New South Wales’ second-largest office market after the Sydney CBD, according to Property Council of Australia’s Office Market Report July 2021 and is a location of choice for diverse industry sectors including technology, media and telecommunications, as well as the professional services and insurance sectors. “Notwithstanding the pandemic, North Sydney recorded its third consecutive quarter of positive leasing demand in 3Q2021, with new and refurbished buildings continuing to be drivers of leasing activity,” says JLL Research.
“With no new significant supply anticipated for North Sydney until 2024, the market is well placed to absorb the current availability of stock and drive vacancy down,” says Knight Frank in a North Sydney report.
In Sydney’s Tech Central precinct, a government-backed innovation and technology hub is likely to be developed over a 24ha rail corridor between Central and Eveleigh stations. This should help to future-proof and diversify the economy while positioning this sub-market as a leader in FinTech, cyber, digital and deep technology as well as creative industries. CICT’s second property 66 Goulburn, is in this vicinity. Unlike 100 Arthur, 66 Goulburn is leased from Masonic Investments, which holds the freehold title. The lease runs till 2116. As a result, the NPI yield of 5.4% based on occupancy of 95.3%, is a little higher than freehold buildings.
“The CBD is going to be catalysed by major infrastructure development with the Sydney metro cutting all the way from central to the north-west and that will strengthen entire CBD whether North Sydney or the main island,” Tan says.
The move to Sydney provides CICT with the opportunity to announce a modification to its portfolio strategy. “We [need] maximum optionality to deliver a portfolio that will have consistent financial numbers that any action will not disrupt the income stream of CICT,” Tan says, alluding to potential redevelopments or extensive asset enhancement initiatives. “Whatever action we take, we cannot take it in isolation. So this transaction should not be looked at in isolation. We want to have a portfolio that will be 80% in Singapore and not more than 20% outside of Singapore,” Tan says.
As he sees it, acquiring the two Sydney buildings is a good opportunity “from a timing perspective as well as asset-specific” to get into Sydney. “We are entering into the Sydney CBD in two sub-markets which are going to see significant growth in next five to 10 years,” Tan reckons. “It gives CICT a beachhead and two assets which can capture growth in years to come.”
An attractive place for S-REITs
In addition to CICT and ALOG, at least five more REITs acquired properties in Australia since Keppel REIT entered that market in 2010. One of these is AIMS APAC REIT (AA REIT), which in October announced the completion of the acquisition of the Woolworths’ HQ in Sydney.
For AA REIT, the acquisition is more asset-specific. “The acquisition gives us access to a new strategic business park and data centre precinct, with medical, pharmaceutical and banking businesses,” says Russell Ng, CEO of AA REIT’s manager. He points out there is excellent connectivity between Woolworth’s HQ and Macquarie Park, where AA REIT owns 49% of Optus Centre. The property is anchored by Woolworths and its WALE is 10 years.
“In addition to excellent credit, Woolworth’s has spent capital expenditure on office fit-outs and the property has gone through a progressive upgrade. It recently completed an upgrade on the ground floor and improved lighting and solar panels on rooftops and security systems,” Ng says.
In addition, the property is in a 9ha site which provides AA REIT with redevelopment potential and the ability to build possibly a data centre sometime in the future, he adds.
More importantly, the property is freehold, which is what is driving S-REITs to Australia. “The acquisition will increase AUM by 26% to $2.2 billion. With this acquisition, we are rebalancing our portfolio to Australian freehold assets from 21% to 38% by value and it raises the business park segment from 23% to 40%,” Ng elaborates. As a result, AA REIT’s ground lease lengthens to 57 years from 45 years.
Although the Woolworths acquisition is DPU accretive by 4.7%, the concern among some investors is the manner in which the property is financed — with an additional $250 million in perpetual securities. AA REIT issued $125 million of perpetual securities last year to finance an industrial property in Bulim in Jurong and the latest issuance this year takes total perpetual securities to around 25% of AA REIT’s capital structure, which is on the high side.
Ng defends the use of perpetual securities to fund the acquisition, though. He points out that the building’s WALE is 10 years and with rent escalations, NPI yield rises to around 5.8% from a headline NPI yield of 5.2%. Besides, Woolworths’ credit metrics are very strong, he claims.
The major problem with logistics and industrial S-REITs is the short land lease in Singapore. For instance, Ascendas REIT ventured to Australia as early as 2015, with the acquisition of a A$1 billion logistics portfolio from Frasers Property (FPL) and GIC. At the time, the portfolio had an NPI yield of 6.4%.
This year, Ascendas REIT completed the acquisition of a completed building and a site known as MQX4 in Macquarie Park. The site is being developed into a suburban office to be completed in 2022. This year, Ascendas REIT also divested three logistics properties in Australia for A$125.1 million, 16.8% higher than their market valuations of A$107.1 million as at Dec 31, 2020. They were acquired as part of the portfolio acquisition in 2015.
CapitaLand acquired Ascendas-Singbridge (ASB) in 2019 and with it, the property group inherited 100 Arthur and 66 Goulburn and became the sponsor of Ascendas REIT.
CapitaLand, Australand, Frasers Property
Ironically, CapitaLand divested an Australian subsidiary, Australand in 2014 so that it could privatise CapitaMalls Asia (CMA), which owned retail malls in China, Japan, India, Malaysia and Singapore. Subsequently, FPL acquired Australand for $3.1 billion and renamed it Frasers Property Australia (FPA). FPA carved out its logistics assets to be listed as Frasers Logistics and Industrial Trust. This REIT merged with Frasers Commercial Trust and became Frasers Logistics and Commercial Trust (FLCT). The Australian logistics portfolio is still the largest part of FLCT’s asset base, but it has diversified into Europe.
“I can’t comment on Australand. Bear in mind it was a different sector, industrial, logistics and housing. The market may have changed over time. We think the Sydney office sector continues to be important notwithstanding the pandemic,” Tan says.
Since CapitaLand’s acquisition of ASB took place months before the pandemic, it appeared to correct the misstep of divesting Australand. In all fairness, in the 2000s, Australand had to lean on CapitaLand for support in two rights issues.
In the meantime, The Ascott Ltd, CapitaLand’s lodging business acquired a 20% stake in Quest Apartment Hotels in 2014, increasing this to 80% in 2017. Quest was the largest provider of serviced residences in Australasia, a position now held by CapitaLand Investment.
Ascott Residence Trust had diversified into Australia as far back as 2006, with the acquisition of Somerset Gordon Heights in Melbourne.
FPL appears to have sweated its investment in Australand. After partially monetising this investment through the IPO of FLT, Australia is a major contributor to FPL’s asset base and earnings. In FY2021, Australia accounted for 26% of FPL’s $34 billion in assets and contributed 44% to FPL’s profit before interest and tax (see Chart 1).
In FY2021, FPA sold 2,787 residential units and 0handed over 2,327 residential units. FPL reported a pre-sold revenue of $1.3 billion for Australia as at Sept 30.
“Real estate is cyclical in nature and our platform is ready to capture suitable growth dynamics when the market is right,” says group CEO of FPL Panote Sirivadhanabhakdi during a results briefing in November. One of the initiatives he highlights is FPL’s partnership with the Queensland government.
In FY2021, FPL and the Queensland government partnered in a build-to-rent project for 366 apartments with target completion in FY2024. In addition, in 1QFY2022 ending December, FPL is likely to complete the acquisition of 263,000 sq m of land bank across two sites, which will add around 1,150 units to its residential pipeline in Australia.
In April, FPL raised $1.16 billion through a dilutive rights issue that was not fully subscribed. At the time of the rights issue, FPL’s group CFO Loo Choo Leong says: “$700 million is earmarked for investment, acquisition and capex of logistics, industrial and business park assets, $250 million is earmarked for the establishment of private equity funds, joint ventures or similar arrangements to grow assets, and the rest is for general corporate purposes.”
For investors looking to invest in Australian property through a listed vehicle, FPL is the best proxy. However, it trades almost permanently at a hefty discount to its net asset value (NAV) of $2.44. Its P/NAV as at Dec 8 stood at 0.46 times.
More than just resources, tourism and education
Some attractions of investing in Australia are universal to S-REITs — AAA-rated economy, plentiful and often freehold land title, rule of law and strong regulatory framework. The properties are often DPU-accretive. In recent months, the low cost of debt has been an attraction. Keppel REIT’s cost of debt for Blue & William is just 1.97% all-in. CICT took over a loan for its two properties at below 2%.
Increasingly, Australia — though still heavily resource-based — is attempting to move away from its dependence on resources, tourism and education.
“Sydney is a good city to be in because it is the financial hub of Australia and the core driver of Australian GDP,” Tan notes. “Technology is one of the growth areas. Australia is an interesting market, it has always been very blessed. It’s never suffered a major recession, is resource-rich and has a very dynamic economy. And Sydney is the major beneficiary.”
Look no further than ALOG, which is also a beneficiary of a pivot to Australia. Karen Lee, CEO of ALOG’s manager, credits the Australian portfolio for its performance. “This strong performance is credited to incremental revenue from the completed Australia portfolio acquisition in April, the commencement of new leases and a relatively stronger Australian dollar. Distribution also rose by 21% to $90 million on the back of higher NPI and contributions from the two LOGOS managed funds,” she said during the REIT’s 3QFY2021 ended September results briefing in October.
“We also achieved a lower gearing of 37.8% and lower all-in financing costs of 2.77%. ALOG’s NAV per unit has also grown 19% to 68 cents since December 2020 on the back of higher valuation for our Australia portfolio,” Lee says. To be sure ALOG has outperformed all its benchmarks. Earlier this year it was included in the FTSE EPRA NAREIT Index. The inclusion in the index is likely to further enhance trading liquidity, attract the attention of institutional investors and has already led to a lower cost of capital.
Australia is not a panacea
In July this year, ALOG — formerly known as Cache Logistics Trust — divested a property in South Australia known as Kidman Park — for A$41.5 million. In 2015, Cache acquired Kidman Park for A$62.5 million.
Clearly, FPL is unlikely to approach its NAV no matter how strong its Australian contributions are. And Suntec REIT has issues as well. With aggregate leverage of slightly higher 44% and an interest coverage ratio (ICR) of just 2.7 times, it is skating on thin ice with respect to regulatory ceilings and floors. REITs can only record aggregate leverage of above 45% if ICR is above 2.5 times.
ART along with two other hospitality trusts — Frasers Hospitality Trust and CDL Hospitality Trusts (CDL HT) — also have a presence in Australia. No surprise because Australia used to be a popular tourist destination. Of course, hospitality trusts have experienced significant challenges this year and CDL HT is pivoting towards longer stay properties such as a build-to-rent property in Manchester, UK.
Keppel REIT is rarely a market leader. However, it was a trailblazer into Australia. Having reaped a hefty profit on cost from its first investment in Brisbane and recognising a $10 million gain as the property was revalued upwards throughout the past 11 years, other REITs are treading this path.
Clearly, Australia has a lot more to offer than resources, tourism and education.
