Capital gain aim for commercial property

Author: Christine St Anne
Date: 22/05/2006
Publication: IFA Magazine
Section: Property

Property has been the darling asset class for
many investors . Demand for commercial property has
been particularly strong with investors. According to
:he 2006 Australian property funds industry survey,
:he sector has grown from $4 billion in 2000 to $19
billion.

While investors have a plethora of property
products to choose from, Century Funds
Management managing director John McBain
says the focus has always been on yield and not
on maximising total returns . With the demand for
property so strong, such demand has pushed asset
prices up while lowering yields.

In the current environment it is important to focus
on other aspects of property investment that go
beyond yield, McBain says.

"Everyone is yield focused . Capital growth is
almost by accident . Yield, however, is only one
component of property returns," he says.

Century Funds Management focuses on maximising
the capital value of property . "Our concept is totally
different . We approach the selection of a commercial
property asset almost totally in regard to its potential
increase in value," McBain says.

"If your focus is solely yield you will get into
trouble as you don't address the fundamental
characteristics in property valuations ."

The manager adopts an active management
approach to investing in properties.

"An active approach to property management
is more than collecting the rent. We look at an
asset and assess where we can add value, which
sometimes may not be obvious to other property
managers," McBain says.

For example, the manager developed a coffee
shop at its office space located in North Sydney.
For McBain the total cost for the development was
$100,000, however, the end result meant a $700,000
increase in the overall property value of the building.
This is but a small example of how we maximise
the value of our properties," he says.

Indeed, all three properties in the Century Balanced
Fund have increased their property valuations.
According to research house Lonsec, Century
delivered an average total return of 16 .8 per cent
since January 2000 . This compared to an 11 .5 per
cent a year total return by the Mercer Unlisted Index
benchmark over the same period.

McBain adds that by focusing on capital gain
and property value unlike listed property trusts the
portfolio is not captive to the movement of the share
market . "It doesn't matter what the share market
does, our risk is in the property market," he says.

To address interest rate risk, Century fixes its
interest rate for an average of five years.

The fund's initial properties are located in New
South Wales, exposing the portfolio to the risk of a
slump in the NSW property market . Recognising the
need to diversify, McBain says the manager has a
mandate to increase its exposure to property through
further acquisitions.

Century's executive team includes four members
with in-depth property management experience,
including positions held with large property groups
such as Knight Frank and Colliers Jardine . McBain
says this level of experience further positions the
manager to source and manage suitable property
developments.

The group undertakes an extensive research
process to ascertain the viability of the commercial
market . This strategy can also mean using data
from social demographers such as KPMG's Bernard
Salter. This approach paid off for the group when it
recognised the value of NSW's North Sydney market
before other property developers . North Sydney
is now the fourth largest commercial quarter in
Australia.

Recently there has been a chorus of praise for
investing in offshore property markets . Much has
been discussed about the merits of global property
particularly given the perception that opportunities
for property in the Australian market are drying up.
McBain says this view is reinforced by managers
and researchers.

"Because of the rush to make fees, it is a
convenient decision that perhaps anywhere but
Australia is good to buy property," he says.

For McBain it comes back to being a specialist and
leveraging off what you do best.

"We have been careful to stick to our knitting . We
don't believe we can be an expert at everything and I
doubt some of these managers can know about their
investments in every part of the world," he says.

Century's approach is to focus on reasonably
large property transactions with a smaller number
of investors, he says . He says a small client base
lends itself to a "club-like" atmosphere where the
manager gets to really know and understand its
clients and helps them understand more about their
investments .

RESEARCH FOCUS

The Century Balanced Fund is a new
open-ended unlisted property fund
formed from the stapling of the two
existing Century managed trusts, Epping
Investment Trust and the 35 Bessemer
Street Unit Trust.

Commencing with property assets
of $72 million concentrated in
metropolitan Sydney, the manager
intends to grow the fund to about
$250 million of high quality commercial
and industrial properties on Australia's
eastern seaboard.

The portfolio has a comparatively
short weighted lease expiry profile at
2.5 years (compared to a Lonsec trust
average of 7.6 years), exposing it to
vacancy risk in 2007-2009. We note,
however, a number of tenants have
been in occupation for an extended
period with a propensity to renew.

The manager has experience in
successfully extending lease profiles
and has made adequate allowance
for downtime and re-leasing . There is
limited initial diversification. two asset
classes and geographic concentration
in metropolitan Sydney. This latter
factor exposes the portfolio to the risk
of the underperformance of the New
South Wales economy/property market.
However, the manager intends to
redress this with future acquisitions.

Century Funds Management
compromises an experienced team of
seasoned property professionals with
a proven track record of delivering
investors strong investment returns from
astute property selection and judicious
property involvement.

The portfolio of assets is well
positioned to benefit from major
infrastructure projects, such as the Lane
Cove tunnel, M7 motorway and a new
underground railway line, currently
under construction for anticipated
completion in mid-2008.

Lonsec

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