quarterly update · 2018-08-24 · want to no more fsre.om.au 1 fort street real estate capital...

Want to know more? fsrec.com.au

1 FORT STREET REAL ESTATE CAPITAL FUND I | QUARTERLY UPDATE FOR PERIOD ENDING 30 JUNE 2018

(ARSN 163 688 346)

QUARTERLY UPDATE FOR PERIOD ENDING 30 JUNE 2018

All data is at 30 June 2018 unless otherwise stated.

FUND HIGHLIGHTS – Distribution of 2.14 cents per Unit– Portfolio occupancy ended the quarter at 99%– The Fund’s Weighted Average Lease Expiry (WALE) is 4.6 years

PORTFOLIO UPDATECapital managementThe Fund announced a distribution of 2.14 cents per Unit during the June quarter, representing an annualised distribution yield on invested capital of 5.4%.1

Asset management241 O’Riordan Street in Mascot, NSW, maintained full occupancy at 100%. During the quarter, a new license agreement for the roof signage was executed, generating additional advertising revenue from an existing tenant in the building. The priority for the management team moving forward will be to manage upcoming lease renewals to maintain a healthy occupancy level. The NABERS upgrade has continued as scheduled, with 93 KW of solar panels to be installed (completed during the December quarter), and air-conditioning upgrades on multiple levels due to commence. Further upgrades include improvements to the mechanical services, electrical metering and LED lighting. Ensuring that the building meets current energy efficiency requirements will be integral to retaining the NSW Government as a tenant. Roads and Maritime Services (RMS) and the airport authority are carrying out works to reconfigure the direction of traffic in the area. The management team is working with all stakeholders involved to deliver the best outcome for the asset over the long term.

FUND FACTSKEY FUND DETAILS

Inception December 2016

Structure Unlisted unit trust

Sector Australian commercial property

Currency AUD (unhedged)

NTA per Unit $1.482

Gross assets $237.4 million

Weighted average lease expiry 4.6 years

Gearing ratio 30.7%

Distribution frequency Quarterly

ONGOING FEES3

Responsible Entity fee 0.08% p.a.

Fund Manager fee 0.69% p.a.

Trustee fee 0.1% p.a.

Property Manager fee 3% pa of the gross income of the Trust

Performance fee 20% with hurdle rate of 8% p.a.

1Distribution yield based on initial offer price, adjusted for special distributions. 2Unaudited. 3Excluding GST.

For more information on fees and costs associated with the Fund, please refer to Section 4 of the Product Disclosure Statement dated 13 February 2018.

DISTRIBUTIONS ANNOUNCED (LAST 12 MONTHS)

June 2018 2.14 cents per unit

March 2018 2.14 cents per unit

December 2017 1.82 cents per unit

September 2017 1.82 cents per unit

PORTFOLIO SUMMARYPURCHASE DATE OCCUPANCY (%) COST (INCL. CAPEX) ($m) VALUE ($m)

241 O’Riordan Street, Mascot, NSW

May-17 100% 140.9 143.9

Toormina Gardens, Coffs Harbour, NSW

Jan-18 98% 87.8* 83.3

Total 99% 228.7 227.2

*Includes stamp duty and acquisition costs



Toormina Gardens is the most recent acquisition for the Fund and has maintained a strong occupancy rate of 98%. The focus for the asset management team since acquisition has been to stabilise the asset in accordance with the acquisition strategy. The priority for the quarter has been executing lease renewals with existing tenants, which will be key to maintaining the performance of the asset over the long term. Moving forward, the management team will target new local hero operators for the centre and continue to focus on lease renewals with existing tenants. Consultants have been engaged to review the car parking at Toormina Gardens to develop a strategy for improving convenience and accessibility to the centre. Following the acquisition, management has also been proactive in establishing relationships with the local community, which will be very effective in supporting future leasing deals and building customer support for the centre.

WEIGHTED AVERAGE LEASE EXPIRY (BY GROSS INCOME)

0%

10%

20%

30%

40%

50%

60%

70%

2018 2019 2020 2021 2022 2023+

REAL ESTATE MARKET UPDATERetailAustralian retail turnover growth stabilised at 2.7% during the second quarter of 2018 (2Q18). NSW and Victoria continued to outperform other states in terms of retail spending growth, underpinned by strong economic fundamentals. The Westpac Melbourne Institute Index of Consumer Sentiment delivered an increase of 3.9% in July, demonstrating a clear improvement from the previous month. The majority of this improvement comes from a balancing of growth across the states, as a stabilising mining sector is driving recovery in Queensland and WA.1

Discretionary retail spending continued to come under pressure from inflation and soft wage growth, affecting household disposable income. Conversely, non-discretionary spending categories, which is where the Fort Street retail portfolio is focused, continued to dominate performance with general food, restaurants, and takeaway food retailing all recording steady growth over the current and previous quarters.

As the lifestyle in Australia evolves, there becomes a greater need for convenience-based shopping centres. This is primarily being catalysed by increasing residential density in urban areas, demand for convenience from time-poor consumers and increasing competition from mixed-use developments.2 Tenant mix strategies are maturing, including expanded fresh food offerings, additional services, food and beverage, and entertainment.

Rental growth remained consistent with previous quarters, with neighbourhood and sub-regional centres recording marginal rental growth on the eastern seaboard. Tenant mix changes have been a key lever for driving rental growth, particularly by reducing exposure to fashion tenancies and increasing the volume of non-discretionary tenants. This is in line with the Fund’s overall strategy to target non-discretionary retail in order to reduce risk and drive returns.

Australian retail property has continued to attract both domestic and international capital due to its safe-haven status.3 Total transaction volumes totalled $2.1bn over the quarter, with the supply of retail stock on the market increasing. A two-tiered market formed in the sub-regional space, with investors favouring prime quality sub-regional assets in metropolitan locations.4 This has caused a divergence in yields and an opportunity for value where active tenant mixing can be implemented to replace discretionary retailers with non-discretionary categories. Meanwhile, pricing for neighbourhood assets remained underpinned by demand from all investors types, causing a compression of yields by 25 bps in the upper end of the market.

Despite the current challenges facing the retail sector, the outlook for wage growth and a strengthening labour market has improved this quarter. This will be an important driver in the performance of retail in the short term. Over the medium to long term, a rise in interest rates could apply further pressure to household discretionary spend. The management team is cognisant of this and will continue its strategy of investing in a non-discretionary retail to minimise risk.

OfficeThe latest NAB Business Survey continued to indicate positive sentiment in the office sector, driven by robust business conditions across most states and industries. Employment experienced a hiatus in growth, however, this is expected to be temporary, with the ANZ Job Advertisement Series (May) rebounding over the month to be 11.5% higher than the preceding 12 months.5

Sydney CBD recorded positive net absorption of approximately 50,000 sqm over 2Q18, driven by strong tenant demand and growth of white collar employment. As a result of positive tenant demand and negative net supply, Sydney has experienced a supply drought, with vacancy declining to record lows of 4.6%. Prime gross effective rents are therefore forecast to increase by 12.3% over FY17/18. The supply and demand imbalances in the CBD have also bolstered the performance of sub-markets across Sydney.

TOORMINA GARDENS



In Melbourne, demand remained positive, with vacancy forecast to decline to below 5%. Victoria recorded the strongest employment growth across Australia, which helped drive the current tenant demand in Melbourne.6 Prime gross effective rents are forecast to increase by 2.7% during 2Q18, with the new supply pipeline coming into effect from 2020.

In other national markets, demand has been more subdued. Brisbane and Canberra are expected to experience a negative net absorption in 2Q18. Small and mid-sized organisations were most active in Adelaide, whilst the outlook for Perth improved, impacted by positive sentiment in the resource sector.

Prime office assets remained highly sought after by investors, with many CBD assets – particularly in Sydney and Melbourne – remaining tightly held. Rental growth expectations for these areas remain firm, with investors having the confidence to underwrite positive reversions. In the first half of 2018, the national office market will record transaction volumes of approximately $5.8bn as investors become more competitive for assets.7 As a result, yields have compressed approximately 12.5 bps for high-quality assets in Sydney and Melbourne. Brisbane has also experienced a compression in yields, with investment activity dominated by off-shore investors.8 Improving economic conditions in Perth have attracted the attention of counter-cyclical investors seeking to capitalise on an improving leasing market, however, a large degree of caution is still required.

IndustrialThe industrial market continued to perform well, with supply and demand forecast to increase over the next 12 months. Key drivers of the market were significant investment into infrastructure, changes in planning and zoning regimes, a sustained low interest environment and international retailers seeking to expand their brands into Australia. The growth of e-commerce and changing consumer behaviours have become both an opportunity and a challenge for the industrial market.9

Rents in 2Q18 remained relatively stable in the Sydney and Melbourne markets after witnessing some growth in the previous financial year. Meanwhile, improvements in the Brisbane and Perth markets were seen over the quarter. The national prime average weighted net face rent grew by its strongest quarterly rate (1.0%) in two years, now at $115 per sqm. Leasing activity was predominantly driven by tenants who preferred to be in proximity to major roads and infrastructure, with most activity being directed at existing assets (63%).

Construction activity over the quarter remained steady, with 340,000 sqm of developments reaching practical completion – 48% of which were in Sydney, demonstrative of the current strength of the Sydney industrial market. Speculative development has become more common in buoyant markets such Sydney and Melbourne, where underlying tenant demand is present.

Total transactions volume reached $832m in Q218 – a very strong quarter for the market. This was driven largely by the Sydney market, which represented more than half of the transactions. Yields are forecast to compress to cyclical lows in the later part of the year, with tightening already slowing. In turn, this will also result in capital value appreciation being more subdued.

There continues to be strong investor demand for industrial product, with many prime land parcels and assets being tightly held. Market sentiment is expected to remain positive for the short term as well as for demand, which will be driven by the merchandise trade, construction and logistics sectors.

Notes: 1 Westpac Institute Index of Consumer Sentiment – Westpac (2018) 2 M3 Commentary Shopping Centres – M3 (2018) 3 Briefing National Retail – Savills (2018) 4 Australia National Category Retail Report – JLL (2018) 5 Australia Office Preliminary Overview 2Q18 – JLL (2018) 6 Melbourne CBD Office Market Overview – Knight Frank (2018) 7 Australia National Preliminary Overview – JLL (2018) 8 Brisbane CBD Office – Knight Frank (2018) 9 M3 Commentary National Industrial – M3 (2018)

TOP TENANTS (BY GROSS INCOME)

NSW Government 24%

AbbVie 10%

Woolworths 6%

Coles 6%

Landis Gyr 6%

Retail

SECTOR DIVERSIFICATION (BY CURRENT VALUE)

NSW

GEOGRAPHIC DIVERSIFICATION (BY CURRENT VALUE)

100%

63%

37%

Office



INVESTMENT TEAM MEMBERS

David Rogers Director, Investments

Jason Hay Head of Asset Management

Richard Hunt Chairman, Fort Street Real Estate Capital

INVESTMENT OBJECTIVEThe Fund aims to provide investors with attractive and stable rental income through exposure to a portfolio of Australian-based commercial property assets and potential for capital growth over the long term.

ABOUT THE FORT STREET REAL ESTATE CAPITAL FUND SERIESFort Street Real Estate Capital is an experienced specialist in property investment and asset management, with the ability to draw upon extensive networks to help access opportunities, as well as manage and reposition assets. The Fort Street Real Estate Capital executives have more than 50 years’ combined experience in real estate. Their extensive knowledge in this sector has assisted them to transact more than $2 billion of commercial property in recent years.

Fort Street Real Estate Capital targets real estate opportunities with strong underlying rental income and the potential for long-term capital growth through value-add opportunities or repositioning potential.

ABOUT WALSH & COMPANYWalsh & Company is a multibillion-dollar global funds management firm founded in 2007, with assets under management across global equities, residential and commercial property, private equity, fixed income, and sustainable and social investments.

Walsh & Company Investments Limited is the Responsible Entity of the Fund and is a wholly owned subsidiary of the Walsh & Company Group.

RISKSLike all investments, an investment in the Fund carries risks which may result in the loss of income or principal invested. In addition to the general risks of investing, specific risks associated with investing in the Fund include, but are not limited to, substantial uncommitted funds, illiquidity risk, potential decline in property values, gearing, vacancy and tenant default risk. For further information about the risks of investing in the product, please refer to Section 5 of the Product Disclosure Statement dated 17 October 2016.

FUND CONTACTSAdam Coughlan – Head of Distribution T: (02) 8662 9792 E: [email protected]

QLD/WAEmmanuel Vergara – Key Account Manager T: (07) 3565 9305 E: [email protected]

VIC/SA/TASCharlie Wapshott – Key Account Manager T: (03) 9411 4066 E: [email protected]

NSWReuban Siva – Business Development Manager T: (02) 8662 9790 E: [email protected]



IMPORTANT INFORMATIONThis document relies on actual property data from JLL Research current as at 30 June 2018 (unless otherwise stated). This commentary has been produced solely as a general guide and does not constitute advice. JLL, its officers and/or its employees shall not be liable for any loss, liability, damage or expense arising directly or indirectly from any use or disclosure of or reliance on such information.

This Quarterly Update (Update) has been prepared by Fort Street Real Estate Capital as Investment Manager of Fort Street Real Estate Capital Fund III (Fund). An investment in the Fund is subject to various risks, many of which are beyond the control of the Investment Manager and the Fund. The past performance of the Fund is not a guarantee of the future performance of the Fund.

This Update contains statements, opinions, projections, forecasts and other material (forward-looking statements), based on various assumptions. Those assumptions may or may not prove to be correct. None of the Investment Manager and the Fund, their officers, employees, agents, analysts nor any other person named in this Update makes any representation as to the accuracy or likelihood of fulfilment of the forward-looking statements or any of the assumptions upon which they are based.

This Update may contain general advice. Any general advice provided has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider the appropriateness of the advice with regard to your objectives, financial situation and needs, and consider obtaining advice from a financial advisor. You should obtain a copy of the relevant PDS or offer document before making any decisions to purchase the product.

quarterly update · 2018-08-24 · want to no more fsre.om.au 1 fort street real estate capital...

Documents