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Finance

Listed Developers Widen Net to Catch More Revenue

Developers

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.”

 Developers

▲ 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.

 

Article Source: www.theurbandeveloper.com

Finance

Property Refinancing Hits Record Highs

Refinancing

Mortgage refinancing hit a record high in August, surpassing the record set in June 2020 when the Reserve Bank of Australia’s double rate cut impacted activity.

The Pexa index showed refinancing activity has steadily increased since 2019 with approximately 300,000 refinances completed in the past financial year, up around 10 per cent on the previous year.

Pexa Insight head of research Mike Gill said the index stood at 187 points for the week ending August 29, 2021, up 46.9 per cent on last year.

“Whether it is the forced downtime to reassess finances during Covid-19 related lockdowns, or speculation surrounding a potential interest rate rise as early as late 2022, refinance activity has reached new heights nationally,” Gill said.

“We anticipate a dip in property sale transactions as a result of the extended Covid-19-led lockdowns in New South Wales and Victoria, however, refinance activity is expected to remain elevated in the near future based on the current trend line.”

The reserve bank decided to hold the cash rate at 0.10 per cent this week, as the delta outbreak had interrupted the economic recovery.

Governor Philip Lowe said they would not increase the cash rate again, until actual inflation is sustainably within the 2 to 3 per cent target range, which was estimated to be in 2024.

“Housing prices are continuing to rise, although turnover in some markets has declined following the virus outbreak,” Lowe said.

“Housing credit growth has picked up due to stronger demand for credit by both owner-occupiers and investors.

“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.”

 

Article Source: www.theurbandeveloper.com

 

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Finance

Developers Big Winners in Lending Battle

Developers

First, the bad news. A wave of increasing construction costs is hitting Australia’s property development sector.

Now, the good news.

According to Barwon Investment Partners head of property finance Jonathon Pullin: “It has probably never been a better time to be a developer or property owner wanting to take on debt”.

Pullin, who was a speaker at The Urban Developer’s recent Construction and Finance webinar, said Australia’s lending landscape had become increasingly competitive during the past 12 to 18 months.

Record low cash rates are prevailing and there are large amounts of capital available out in the market both on the debt side and also coming through on the equity side.

“The major bank lenders in Australia that have had a rough time of it over the last five or six years, they’re coming out the back of the Royal Commission, they’re coming into a bit more certainty through the Covid journey,” he said.

“And what we’re seeing across the country and in all sectors, they’re starting to become a little more front-footed in terms of wanting to get back into the market and claw back some of that market share that they lost to the larger non-bank lenders.

“Also, on the equity side of things, we’re not only seeing valuations hold up but improve—particularly in the residential side of the market—and a strong level of confidence from buyers.

“Put all that together … as a property owner or a developer it’s probably never been a better time for you in terms of financing your project and moving it forward.

“There are a whole lot more options out there in the market than what there and all of those options are broadly cheaper than where they were a few years ago.”

Pullin said the major banks had started to loosen some of their traditional covenants to win back business.

“Going back three years, across the market it was a 100 per cent pre-sales requirement for any residential project but you’ll see that’s now more a conversation around 80 per cent coverage and even in some cases lower than that,” he said.

“Funding limits also are increasing. At its worst, only a few years ago, the major banks were typically stopping at 65 per cent, maybe 70 per cent, of total development cost… we’re now seeing it coming up to 75 per cent of total development cost, sometimes 80 per cent.”

Pullin said institutional-grade mezzanine debt lenders were becoming an increasingly accepted part of the capital structure with the major banks working in conjunction with them to win business.

He said non-bank lenders, particularly institutional non-bank lenders, were “very hungry to do business” and broadening their sector and location coverage.

“Non-bank lenders are going up and over where the traditional bank will go to because they know their cost of capital is higher … but they will bring with it a lesser requirement around pre-sales.

“Typically, we’re seeing them look for 30 to 50 per cent pre-sales just to validate that project is accepted into the market.

“The benefit of these slightly higher cost solutions is projects can get going earlier and it allows developers to potentially lessen further increases in costs that are sitting on the horizon, like that wave of increasing construction costs.

“We are seeing a lot of developers really wanting to get their skates on at the moment and get projects under construction. So, if they don’t have pre-sales yet they’ll make as decision around whether they need to go with a non-bank solution with a lower pre-sales cover.”

Developers

▲ The major banks are loosening traditional covenants to claw back business lost to non-bank lenders.

Pullin said he expects the lending landscape to become even more competitive over the next 12 to 24 months with the possible emergence of alternate funding structures and some opportunistic lending coming into the market around sectors heavily Covid-affected.

“What does that mean for developers and property owners?

“An increased focus on hard costs from financiers in terms of looking at feasibilities and scenarios, further reductions in lending costs and loosening of covenants around the edges in a requirement to deploy capital.

“So really what you get at the end of day is more options available to developers that hopefully leads to better projects and better outcomes for them.”

Pullin said institutional-grade mezzanine debt lenders were becoming an increasingly accepted part of the capital structure with the major banks working in conjunction with them to win business.

He said non-bank lenders, particularly institutional non-bank lenders, were “very hungry to do business” and broadening their sector and location coverage.

“Non-bank lenders are going up and over where the traditional bank will go to because they know their cost of capital is higher … but they will bring with it a lesser requirement around pre-sales.

“Typically, we’re seeing them look for 30 to 50 per cent pre-sales just to validate that project is accepted into the market.

“The benefit of these slightly higher cost solutions is projects can get going earlier and it allows developers to potentially lessen further increases in costs that are sitting on the horizon, like that wave of increasing construction costs.

“We are seeing a lot of developers really wanting to get their skates on at the moment and get projects under construction. So, if they don’t have pre-sales yet they’ll make as decision around whether they need to go with a non-bank solution with a lower pre-sales cover.”

Pullin said he expects the lending landscape to become even more competitive over the next 12 to 24 months with the possible emergence of alternate funding structures and some opportunistic lending coming into the market around sectors heavily Covid-affected.

“What does that mean for developers and property owners?

“An increased focus on hard costs from financiers in terms of looking at feasibilities and scenarios, further reductions in lending costs and loosening of covenants around the edges in a requirement to deploy capital.

“So really what you get at the end of day is more options available to developers that hopefully leads to better projects and better outcomes for them.”

 

Article Source: www.theurbandeveloper.com

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Developments

Developer Contributions ‘Inflating New House Prices’

Developer

Developer contributions are having an inflationary effect on housing affordability and impeding supply, according to new research.

The National Housing Finance and Investment Corporation’s (NHFIC) research report on developer contributions has found that the infrastructure charges are increasingly acting like a “tax on new housing”.

Developer contributions, or infrastructure charges, are levies charged by local and state governments to help pay for local infrastructure, focusing on water, drainage, footpaths, parks and community facilities.

NHFIC cites the unpredictability and opaque nature of infrastructure charges as a core issue in developers’ feasibility studies.

It also says often this charge becomes an on-cost for homebuyers or end-users, impacting housing affordability significantly.

According to NHFIC, developers have to factor in infrastructure charges at around 10 per cent of total development costs—but generally higher in New South Wales, and up to $85,000 per greenfield dwelling development in some areas.

Greenfield developer contributions (per lot)

Region Indicative cost Developer contributions (% of total cost)
NSW $58,000 11%
Vic $52,000 11%
Qld $32,000 8%

^Source: Developer Contributions report, NHFIC

Housing Industry Association chief executive of industry policy Kristin Brookfield said development contribution schemes had become a significant hindrance.

“This is partially due to the large range of infrastructure now included and the gold-plated standards being sought by local and state governments,” Brookfield said.

“A conscious decision to shift the majority of the upfront costs on to new housing developments emerged in New South Wales almost two decades ago … Sydney is the most expensive [but] other states have taken the same approach and we are starting to see costs increase in most other states.”

Brookfield said the upfront charge was the least efficient way to recover infrastructure costs and was impacting the costs of new homes.

“The HIA would support further research to assess the unintended impacts of high and poorly functioning development contribution systems nationally and the implications these taxes are having on new homebuyers,” she said.

NHFIC said it was a “concern that the application, scope and administration of developer contributions is a relatively opaque area of public policy” and that there was little information available to compare states and territories.

An analysis of Sydney councils showed up to 88 per cent of all funds raised through developer contributions between 2017 and 2020 were earmarked for social infrastructure.

Around one-third, on average, was earmarked for essential infrastructure with a stronger nexus to new housing developments.

According to NHFIC, improved policy co-ordination and optimising risk to share cost arrangements between councils and developers would increase new housing supply.

 

Article Source: www.theurbandeveloper.com

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