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Listed Developers Widen Net to Catch More Revenue


Listed real estate investment trusts are increasingly pivoting towards a funds management-led model to allow them to compete in the market for property assets in partnership with their unlisted peers.

While transactions have so far centred on logistics and office assets, experts are waiting for retail assets to start trading in this way.

“There have been periods when the REIT sector has been quite depressed, especially when Covid-19 hit,” explains Tom Bodor, director, equities research analyst real estate, UBS.

“But as the market has bounced back, and even in strongly-performing property sectors such as industrial that are very well supported, it can be hard for REITs to buy assets and compete with unlisted capital.

Listed real estate developers are often waylaid by their share price, which can affect their ability to buy assets.

Bodor says share prices can vary based on a range of factors beyond real estate fundamentals and sometimes their cost of capital is more competitive than wholesale capital.

“But at the moment, on average, they’re not as competitive as wholesale capital. So a number of REITs are taking the view that if they have a funds management business, they can partner with investors and provide management expertise, even if they’re only buying a minority stake in the asset themselves.

“The capital partnering model is a way for groups to participate in the market and grow earnings without having to buy 100 per cent of lower-returning assets themselves.”


▲ HomeCo recently spent $160 million on supermarket-anchored shopping centres driven by non-discretionary spending. 

Will the capital find a home in malls?

An example is Dexus’ acquisition of the AMP Capital Diversified Property Fund management rights and listed fund manager APN Property Group.

Stockland’s logistics joint venture with JP Morgan Asset Management, and GPT’s logistics joint venture with the QuadReal are other examples.

“Many of the local REITs are seeking a funds management capability so when they can’t buy assets, because they can’t pay the highest price, they can partner with the group that can and then manage the assets on behalf of their partner,” says Bodor.

“Most of the action is happening in logistics because that’s the most competitive asset class. But it’s likely to be extended into office assets, where super funds and wholesale capital are very aggressively buying assets and the listed market is more cautious.

“Where it hasn’t yet played out is in shopping malls and large-scale retail. That will be interesting to watch because that’s where both the listed and unlisted markets are particularly challenged at the moment. If you see capital deploying into malls, the listed market will take notice because we haven’t had any transactions in that area.”

For instance, GIC Singapore is looking to sell its interest in Sydney CBD retail assets owned in partnership with Vicinity. Dexus is also believed to be looking to sell stakes in some of the AMP Capital Diversified Property Fund shopping mall assets owned in partnership with Scentre.

“We expect these assets to transact, subject to demand, in the next year,” says Bodor.

“The market will be very interested in the prices these assets realise because we haven’t seen a major mall transact since the Lendlease-managed APPF Retail Fund sold its half share in Adelaide’s Westfield Marion property in 2019.”

SG Hiscock director Grant Berry says although traditional office and retail assets may be out of favour, it’s important to understand the nuances of these sectors and their future potential.

“Large centres with tenants like Harvey Norman, Bunnings, Nick Scali and Petbarn are attractive assets,” he says.

For example, acquisitive property group HomeCo recently spent $160 million buying shopping centre assets in Queensland, which it will house in its HomeCo Daily Needs REIT.

Berry says neighbourhood shopping assets anchored by a Coles, Woolworths or Aldi are attractive because returns are driven by non-discretionary spending.

As well, the retail sector is evolving as features such as click and collect become more popular. So, while retail property may not be at the top of its cycle, many assets still offer solid future returns and REITs have an opportunity to add value to these assets.

REITs move from ‘rent collectors’ to developers

This latest shift in the REIT sector towards a hybrid funds management model is the continuation of a 30-year transformation of a sector that was once predominantly a rent collecting function managed through listed property trusts.

“Now the REIT sector in Australia is made up of rent collectors, which are both internalised and externally managed,” explains David Harrison, CEO of Charter Hall.

“It’s made up of REITs that combine development earnings with owning real estate. Our model combines funds management, owning real estate and also property development.”

There are 35 REITs within the $120-billion ASX 300 REIT index, ranging from small funds with a market cap of just $200 million up to the $36-billion Goodman Group.

“The vast majority of REITs that have come into the sector in the past 10 years are externally managed because you need a sponsor to create the portfolios for an IPO,” Harrison says.

“A lot of the large-cap REITs have worked out their earnings growth and total return is not going to match those REITs with active earnings from funds management and development.

“That’s why a lot of them are moving down this path of creating earnings other than the rents they collect.”

Centuria’s acquisitions of the former 360 Capital listed REITs and Primewest are examples.

Harrison assumes the metamorphosis of the sector will continue; he is expecting a spate of transactions at the smaller end of the listed REIT market.

“The poor-performing REITs that are either very diversified or with a significant exposure to large shopping malls have to create free cash flow earnings above the return they receive on invested capital,” Harrison says.

“They need to improve their return on equity, otherwise they’re not going to trade well and will be acquired by a larger listed business or an unlisted fund, with a wall of wholesale capital looking to deploy in real estate globally.”

Down the track, Harrison expects REITs to become more involved in property development.

“This used to be done by businesses outside REITs, which bought projects once they were finished,” he says.

“Now, REITs with development capability are building their own. A thematic called develop-to-core involves REITs buying and developing assets to hold them rather than develop to sell.

“That’s going to be quite a common thematic that keeps playing out with the active REITs.”

As for the future, expect to see REITs diversify their activities to create earnings growth, with super and wholesale funds increasingly interested in acquiring real estate assets and more public-to-private transactions.


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RBA holds rates at August meeting, experts call for stamp duty changes


The RBA has held interest rates at a record low 0.1 per cent at its August meeting.

RBA Governor Philip Lowe’s comments on the housing market were much the same, noting all markets continuing to strengthen, with prices rising in all major markets.

He did cite an increase in borrowing by investors, and that given the environment of rising housing prices and low interest rates, the Bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.

The experts and economists surveyed in’s RBA Cash Rate Survey all called the cash rate hold, with 75 per cent predicting the increase won’t happen until 2023.

Tony Makin of Griffith University was the lone expert predicting the rate to rise before 2022.

“In coming months a clearer picture will emerge of underlying inflation trends both in the US and [in Australia]. The recent US inflation spike is unlikely to be temporary given the massive money supply increase, recovery from the pandemic, and substantial US fiscal expansion.”

AMP Capital’s Shane Oliver said the RBA is still a long way from meeting its conditions for a rate hike – namely inflation sustainably back in the 2–3% target range which will require full employment and wages growth sustainably above 3%. And the latest coronavirus outbreaks and lockdowns risk delaying progress towards its goals.

Over a third of experts (71%), called for a change in stamp duty.

They agree that changes need to be made to either stamp duty or government stimulus in order to help buyers enter the property market.

Just over half (54%) think that only stamp duty should be changed, while another third (29%) think neither should be changed.

Finder’s insights manager Graham Cooke said an easing of stamp duty could reduce the burden for first time buyers and establish a more even playing field.

“Stamp duty is essentially a tax that slows down the turnover of property. It discourages current homeowners from downsizing, which locks up some of the market. “A long-term land tax would provide a fairer long-term solution, while adding liquidity to the housing market,” Cooke said.


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Lockdowns more detrimental to buyers than hikes in fixed interest rates: mortgage brokers


Mortgage brokers say that lockdowns are far more detrimental to prospective homeowners looking to take out home loans than any potential fixed-rate hikes.

Some banks have already begun raising their fixed interest rates despite the Reserve Bank of Australia holding the cash rate at 0.1 per cent at its July board meeting, saying its central scenario was to keep it there until 2024.

But that rate increase will make no difference to buyers’ borrowing power if their pre-approval has since expired or they are looking to take out a home loan now, experts say.

Instead, the lockdowns have had far more wide-reaching impacts on affected buyers shopping around for a home loan, with some delaying plans for months and others shelving their plans altogether as more than half of the country’s population faces some restrictions across three states.

In NSW, Sydney entered its fifth week of stay-at-home orders, which has shut down a range of industries, including construction and retail, and has placed five entire local government areas into stricter conditions, banning residents from leaving for any work unless they are in essential services.

This has stopped many hopeful home owners from taking out a loan, said Rob Lees, Mortgage Choice Blaxland, Penrith and Glenmore Park principal.

“There is no doubt that for people in affected industries, they will not be able to get a loan. There is no way a bank will give a loan to a tradie if they’re not working during a lockdown,” Mr Lees said.

While banks have not changed policies, as they did last year, Mr Lees said, they do still ask for more information than usual, including whether applicants have been impacted by COVID-19.

Since the latest outbreak, he has placed several applications on hold until trades – from plumbers to beauticians – return to normal.

Fixed-rate increases were almost a “non-issue” as banks were assessing buyers’ borrowing power against the variable rate plus an extra 2.5 per cent as the serviceability buffer, he said.

Victoria’s snap lockdown – the fifth one for the state – is adding to the pent up demand for many house hunters who have put their plans on ice for months now due to the ongoing uncertainty.

Foster Ramsay Finance principal and mortgage broker Chris Foster-Ramsay said applicants need an uninterrupted six-week run of earning income to be able to apply for a home loan.

“There’s a whole lot of people who have sat on their hands in Melbourne for up to six months, if not more. Their plans are on hold, and that is very common down here,” said Mr Foster-Ramsay, adding that it was a responsible lending requirement since the Royal Commission into the financial sector.

“It’s not hard to find those [hopeful home owners] in affected industries – travel, hospitality, live performance – where they are doing whatever they can do to survive.”

But some banks are more understanding when it comes to some industries compared with others, according to Melbourne-based mortgage broker and Pearse Financial director Tom Pearse.

White-collar workers in accounting or legal industries were better placed to have a home loan application approved if employers were willing to write a letter outlining the length of reduced hours due to COVID-19, he said.

Meanwhile, in Queensland, the state has been barely affected by lockdowns, leaving most buyers with the same borrowing power even if fixed rates have increased since they began their house hunting months ago.

“The reason it doesn’t impact borrowing capacity as much is that the banks assess it on the ongoing variable rate, most of the time. It’s not assessed on the fixed-rate itself,” said Caroline Jean-Baptiste, Mortgage Choice Fortitude Valley mortgage broker.

She said the bigger impact for Brisbanites was that some banks were changing their assessment on expenditure around health insurance and private school fees.

“That had more of an impact than a rate change. Somebody, who a month ago could have borrowed $650,000 can now borrow $550,000 if they’re sending their children to a private school or have private health costs,” she said, adding that it was postcode-related.

“So, some lenders use a postcode to determine the benchmark living expenses that they will apply to a certain application.”


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How to calculate total return on an investment property

investment property

I am aged 56. My salary is $100,000 a year and I have a $400,000 mortgage on my home. I purchased a three-bedroom investment property in a regional area for $130,000 in 2008. My deposit was $30,000. The rent is $200 per week, expenses $7400 annually, so the property is about $3000 positively geared per year. How do I calculate the return on an investment property? Is it the profit from my initial deposit $3000/$30,000 x 100 = 10 per cent? Or is it the gross return $10,000/$130,000 = 8 per cent? The property over that time has gone up in value to about $280,000 and my mortgage has reduced to some $70,000. How can I, and should I, allocate the capital appreciation in the return, and then should I be factoring in the capital gains tax that I would pay if I sold the property? D.C.

British economist Ronald H. Coase once said you can play around with numbers and, if sufficiently tortured, will confess to anything.

The usual figures presented to a purchaser are a “gross yield” i.e. total income on total value, or $10,400/$280,000 = 3.7 per cent, or a net yield after expenses or $3000/$280,000 = 1.1 per cent, which indicates just how overpriced property is today.

However, a purchaser would only be presented with necessary expenses e.g. council rates, strata levy, etc. You, as an investor, would be interested in your net return on equity or capital. The latter is the sum of your original $30,000 plus an additional $30,000 that you paid off from the mortgage, plus, say, $4550 stamp duty, less CGT, plus any other capital costs for which you have not claimed a deduction against annual income over the years, which we will assume is zero.

To calculate CGT, half of your $150,000 profit would be added to your taxable income and, since you are in the 34.5 per cent tax bracket, extra tax would come to about $28,350.

Most people would say “I bought for $130,000 and sold for $280,000 for a 115 per cent return, or 6.1 per cent a year compound over 13 years,” which is how the Australian Taxation Office would see it.

However you, as an investor, should say, “I’ve put $64,550 of my capital into the house and am walking away with $280,000, less a $70,000 mortgage and $28,350 CGT for a cash profit of $117,100, which is an 81 per cent return, or 4.7 per cent a year compound”.

It’s still not the whole story as it doesn’t take into account your net income gain (or, more commonly, net loss) over the years.

I am aged 68 and on long-service leave at half pay until early January, when I intend to retire. I will be 70 in December, 2022, and have $360,000 in superannuation. My wife is aged 61, earning $90,000 a year and will work for another 1-2 years, when her Public Sector Superannuation Scheme defined-benefit pension will be about $43,000-$45,000 a year, plus a lump sum of $30,000. We have a mortgage of $220,000 at 2.35 per cent interest on our home, valued at $1.75 million. I expect to inherit $200,000 in cash, plus a share portfolio valued at about $360,000. Is it best to put the inheritance into our mortgage, or into my super before January to purchase a pension or other annuity? Also, will any pension I might receive be affected by my wife’s PSS pension? R.P. 

If you accept that a prime goal is to retire with a debt-free home, then your inheritance is a timely boon. So, put the cash into the mortgage and decide whether you want to keep the entire share portfolio, or sell some $20,000 worth and pay off the mortgage completely.

You will probably be eligible for a part age pension (its tests would ignore the family home and any remaining mortgage) when your wife retires, which would result in a drop in family income and a likely fall in expenditure.

The age pension granted would count your combined assets and income and so, yes, your wife’s pension would reduce your married pension, but her PSS pension would be the basis of your retirement income and you will be grateful for it.

The completion of my late sister’s estate is expected soon and our inheritance is expected to be $450,000-$500,000. I am aged 83 and my wife is 82. Downsizing in the future is not out of the question, possibly into a retirement village, with the costs unknown. I expect our monthly pension payment to be affected and would appreciate any suggestions you may make for a safe investment of this inheritance to minimise the loss of the pension. D.D.

It is hard to say without knowing whether you have half a million dollars in other assets, or none. Assuming the latter, then the question is “How is your health? Can you see yourselves spending another decade in your home before downsizing? Or perhaps a year or two?”

Again, assuming the latter, you cannot afford to take the chance of placing the money into a diversified managed fund, especially at the high valuations now being seen in the stockmarket and the historically low interest rates, plus the uncertainty of whether higher inflation is likely coming and here to stay. That would normally require a 3-5 year time horizon.

ME Bank has a savings account offering 0.8 per cent interest for 12 months. That is one of the best rates being offered by a large regional bank.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.


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