Categories: Investment

White & Partners acquired the Property in December 2016 for $25.6 million, representing a passing yield of 9.6%, (or 10.5% excluding vacant land component).A key plan of the investment strategy is to identify the benefits of the significant land holding and hurdles associated with the 8,000m² hotel building. The required amount of capex works to optimize the tired building and ongoing maintenance would have posed a daunting proposition to many publicans.

Following settlement, the Hotel was subjected to a number of improvements resulting in a jump from 8th to 2nd in the gaming rankings during the month of April 2017. The implemented measures included new management, more efficient staffing, new Electronic Gaming Machines (EGMs) and improved customer service resulting in a 13.3% increase in Gaming turnover over the previous year.

In order to address the hurdles set by the Hotels large size, White & Partners developed a scheme that will effectively demolish half of the Hotel, moving the motel component into the disused function space.

This strategy retains half the existing building and will also make the Hotel more efficient to operate whilst providing new amenities for patrons. The refurbishment works will modernize the Hotels existing shell and improve the gaming room, TAB and bottle shop, with the successful motel operation being relocated to the obsolete function rooms.

Once complete, this strategy unlocks 9,000m² of land for redevelopment into a bulky goods offering to compliment the Hotel. The refurbishment and reduction of the buildings size will make the Hotel more widely appealing to future purchasers of the asset at the time of disposal.

In September 2014, White & Partners acquired an englobo land holding in the residential suburb of Belmont, located approximately 13 kilometres South-east from the Brisbane City centre.

The strategy was to obtain a development approval for a residential subdivision comprising 29 vacant lots and to sell down the lots either individually or in-one-line. On receipt of the DA in early 2016, a marketing campaign commenced to sell the lots.

Given the timing of the launch, there was speculation that the market commentary around an oversupply of residential apartments in Brisbane, would impact the broader land market.

By August 2016, the estate was fully sold without much if any reduction in the original price list. Despite the market concern, the success of the sales campaign identified the resilience that well located, well design estates have even in somewhat nervous markets. More specifically, feedback from both buyers and agents revolved around:

• The estates desirable location nearby to retail shops, local schools and public transport
• Limited current and future supply of vacant residential lots in the immediate and surrounding area created a healthy buyer urgency, especially amongst first home buyers
• The infill nature of the development appealed to many investors aware of the lack of developable land in the surrounding regions.

On completion of the development the equity return was approximately 25%p.a with investors realising a unit distribution of $1.65.

Our Head of International Capital Transactions, Matt Budden recently returned from Shanghai and Hong Kong to visit some of our key investment partners and discuss investor attitudes to Australian real estate.

There is a widespread belief that the Renminbi may devalue in the future. People whose fortunes have greatly increased in China’s booming economy will want to get their money beyond the reach of Chinese regulators. Australia and Sydney in particular, is perceived to be an ideal destination for inbound Chinese investors because of its geographic location, rule of law, relative ease of doing business and a favourable Renminbi-Aussie dollar exchange rate.

Capital inflows to China between 2005 and its record high against the USD in Jan 2014, saw the RMB appreciate by 37%. A reversal of such flows is now occurring as Chinese investors seek to diversify their assets offshore. China’s economy has gradually slowed from more than 9% annual growth to a still respectable 6%. For the central government to maintain strict control of its capital account and domestic interest rates, the PBOC undertook a gradual weakening of the currency. Yield hungry Chinese investors believe that interest rates in developed economies will increase from their historic lows.

Australia is likely to continue to benefit from Chinese investment in large scale property and agricultural enterprises. Australia continues to attract strong FIRB applications. For the third year in a row, China was the largest source of approved real estate investment ahead of the United States, mostly in off-the-plan apartments in Sydney and Melbourne.

The risks to continued Chinese investment in Australia includes:

• a major economic slowdown in China affecting household wealth
• Renminbi – Aussie dollar depreciation
• further PRC capital controls for offshore investment
• changes to Australian migration policies or domestic events that meant Chinese investors were less attracted to Australia as a destination for migration, investment or study

Our Chinese investment partners are attracted to Australian commercial property and opportunities in the industrial and debt funding sectors. Chinese investment is increasing in the context of growing foreign investment generally in Australian property.

Chinese investors understand commercial property and are attracted to Australia’s freehold property tenure. Potential Australian yields of more than 6% per annum compare favourably to Shanghai and Hong Kong which are densely populated, highly priced and where property yields are low. On a per-square-metre-basis, Sydney and Melbourne appears fairly priced next to property yields of 3%.

White & Partners in partnership with JDA hotels, identified an opportunity in an under performing hotel lacking suitability to a changing demographic. The General Gordon Hotel was acquired at a favourable yield of 10%, well above the current market yields of circa 8.5%, as achieved in multiple sales in Sydney over the past 6 months.The Hotel is located in the Inner West region of Sydney, approximately 7km west of the Sydney CBD. Part of the town centre, the Hotel is positioned directly opposite the Sydenham railway station, a major stop along the expanding Bankstown line.

Although licensed by the Office of Liquor, Gaming and Racing (OLGR) to trade until 3am, the Hotels approved trading hours from Council had lapsed in 2010 under the previous ownership. No other applications for extended hours had since been submitted introducing a unique aspect to the transaction.

During the due diligence process, White & Partners had discovered that although there was a discrepancy with the licence hours, there had been a consistent history of Council approving extended hours spanning 34 years. Along with this precedent, it was also noted that there have been no serious incidents recorded against the Hotel. With these factors under consideration White & Partners understood the regulatory risk leading to the notably above market acquisition yield.

Post settlement, White & Partners has engaged town planning consultant Design Collaborative to review licensing consents previously approved by Council and submit a new application to bring licensed hours inline with Council approved hours.

The Manager is also working on reinventing the Hotel to exploit the changing demographics of the area. Stay tuned for further details.

White & Partners has sponsored a new state of the art off-site modular manufacturing business called Bedrock Offsite, located in the northern suburbs of Sydney. Bedrock manufactures fully completed bathroom, kitchen and laundry modules for residential, aged care, student accommodation and hotels.

White & Partners is observing throughout the construction and development industry widespread cost, delivery and risk pressures. Prefabricated construction completed ‘off-site’ in a controlled factory environment, and installed on-site, provides a significant step towards addressing these challenges. This solution is ideally suited to large scale projects.

What’s interesting is that this technology is by no means new. Prefabricated construction makes up 70% of the total construction spend in Sweden, 50% in Japan and 30% in the UK; however it makes up just 3% in Australia. Despite being late adopters, interest in Australia is now increasing exponentially.

Many construction risks are mitigated. It is quicker, cheaper, and safer, less waste, more sustainable and superior quality.

Some ways prefab can improve the construction process:

• Waterproofing – in a factory, waterproofing is completed under controlled conditions with rigorous quality assurance procedures that ensure it is applied correctly, and cured correctly without the risk of another tradesman accidentally comprising its quality.
• Program risk is reduced – room modules, are ‘built’ whilst the site early works are underway and stored ready for installation as soon as the structure is ready. The onsite coordination and delay challenges normally associated with the various finishing trades are significantly reduced.
• Quality is high and consistent from a manufactured product: the process allows a more rigorous and consistent quality control before completed and fitted out before the pod leaves the factory. This eliminates defect rectification on site.
• Cost is cheaper, particularly when program is considered. Manufacturing labour costs circa $25 per hour compared to $75 plus on site.

Ideally in order to maximise the opportunity, developers and builders need to contemplate and engage in the incorporation of modular manufactured solutions in the DESIGN stage of projects. For more information or a tour of our facilities please contact David Michel at Bedrock Offsite on 0408 865 717.

The Hiranandani Group is one of the largest real estate developers in India. In the past three decades, it has built townships across India that incorporate retail, hospitality, healthcare, education, entertainment and residential developments. The Hiranandani Group is distinguished by their ability to convert suburban sprawl into well-planned urban communities. The philosophy of the Group is to deliver projects with leading edge engineering and design, with many of their townships containing a Greco-Roman influence. Their current projects such as ‘The Powai’ and ‘Thane’ encapsulate an area of more than 2 million square metres.

White & Partners is proud to have established a long term strategic partnership with The Hiranandani Group, which originated with their investment in Union Place, Jannali. We were fortunate to be invited to tour their eye opening projects in Mumbai, India. We look forward to partnering with The Hiranandani Group in our future projects and welcoming them to our family.

White Box recently completed its first major project being the acquisition of a modern logistics warehouse in the established industrial area of Broadmeadows in North Melbourne for $25.55 million. The asset was purchased on behalf of a Singapore based institutional investment group and includes a modern office and warehouse facility totalling 22,707m² of net lettable area. The transaction was negotiated off-market from a local private developer Pelicano and provides an 8.0% net initial yield with the facility occupied by a Modern Baking Corporation a biscuit manufacturer for their production and distribution activities.

White Box was attracted by the following key attributes, which should underpin long term value;

• Long term lease over 13 years
• Significant investment by the tenant into the specialised baking equipment fitout inside the warehouse
• Surplus land allowing the tenant to expand the warehouse to accommodate future business growth

Large scale modern warehouses are increasingly being sought after as more investors are looking to diversity their existing portfolio of Retail and Office investments. Modern warehouses are generally higher yielding than other commercial asset types and also take advantage of the changing retail landscape and additional need to store consumer goods remotely from shopping centres. The significant growth of online shopping, development of new technologies and the entry to Australia of major retail groups such as Amazon and COSTCO is further driving demand for new warehouse facilities.

The White Box partnership was formed at the end of 2016 with the principals of Box Capital, Matt Woodman and Sam Vincent. The business provides tailored investment solutions for institutional and high net worth investors in the Australian logistics sector. The specialist industrial team has a strong logistics track record and reputation with large institutional investors for the delivery of industrial investment products in Australia and Asia; for general advisory, investment transactions, development management and ongoing asset management.

             
Matt Woodman                Sam Vincent

Construction has begun at Union Place with demolition works commencing in the last week of January.

Fresh activity on site has enticed renewed interest in the project with another 3 apartments sold since the first weekend post construction commencement, taking total sales to 64 apartments. Despite 72% of the project now sold, it is clear that sales aren’t all that is needed to secure construction funding. The resilient and highly active residential market in Sydney has imposed additional hurdles for developers to overcome in order to secure senior debt funding.

Due to offering over 100% debt coverage, and a strong balance sheet of a reputable builder Duffy Kennedy, White and Partners was able to secure funding from Bank of Queensland. White and Partners found that the majority of lenders, although supportive of the project, could not provide construction funding due to already reaching their lending caps under BASEL 3. These measures although prudent to certain parts of the world may not necessarily be favourable to the Australian market given the relatively small number of banks. Lenders are also adopting a more conservative approach to lending due to the continued increasing activity in the residential property market.

Further to the hurdle of cautious ‘capped out’ lenders, is an increasing shortage of builders with capacity. White and Partners carried out 2 tenders in order to find a suitable builder for the project that fulfilled criteria not only required by White and Partners but also the senior debt provider. The selected builder, Duffy Kennedy, is an experienced builder with over 20 years in the industry and is currently in final stages of completing two projects in Sydney.

The buoyant market has resulted in builders being stretched, and finding it increasingly difficult to take on new projects. This shortage is causing heightened construction costs which White and Partners estimates are at a 20%-30% premium compared to 2-3 years ago.

These two aspects have contributed to the already complex process of property development and will continue to evolve as demand for property continues to grow.

Since the joint venture acquisition of an older style industrial facility in Brisbane’s northern suburbs in December 2015, White & Partners and State Development Corporation (SDC) have worked hard to improve the property and perform much needed maintenance in order to attract tenants.

Ray White Commercial’s recent Between the Lines publication highlights a slowdown in supply additions across this market coupled with stable take up levels. This has translated into a steady vacancy environment which is expected to further improve over the next 12 months. The Manager has been proactive offering flexibility with both price and size in order to meet the market. This tactic has led to the letting up of 77% of the vacant area within the first 13 months. Interestingly, the majority of the space has been absorbed by small business committing to sub 500sqm at circa $110/sqm with minimal incentives.

The Property now generates sufficient holding income to sustain the Trust whilst it continues to pursue the investment strategy of rezoning the land for mixed use development. The Manager has met with Brisbane City Council and has been assigned a seat on the advisory panel that will provide feedback and advice to Council during its development of a new neighbourhood plan for the industrial precinct.

Close proximity to amenities such as established transport links, and retail outlets will continue to benefit the property regardless of its underlying use.

The recent sale of a State Development Corporation / White & Partners project at 611 Coronation Drive for $13.5m to a student housing operator further underlined the increasing significance of this sector of the market. The sale price was a significant premium to the value of the property as a traditional residential development site, and delivered a significant premium to the purchase price of $5.1m in October 2013.

Located in the bustling hub of Toowong, 4km south west of the Brisbane CBD, the strategy was to carry out a modest refurbishment of the office building and lease the property while pursuing a DA to redevelop the property into a mixed use development. Final development approval was achieved in February 2016 for 162 apartments and the property was subsequently revalued at $9.5 million, an 86% increase in capital value.

Just as the pre-sale marketing for the apartments was set to commence in May 2016, we were approached by a number of student housing operators (SHO) who were attracted to the property due to its location, amenity and close proximity to QLD University.

Education is Australia’s third largest export, with over 450,000 international students contributing $16.3 billion to the Australian economy annually.
The number of students showed year on year growth of 10.4% with the three largest student markets being Sydney (95,618 students), Melbourne (96,174 students) and Brisbane (60,032 students). According to data published by the National Census of Student accommodation (NCSA) there is a shortfall in student accommodation of 78% in Sydney, 76% in Melbourne and 61% in Brisbane.

After a number of bids, Scape Australia was the successful purchaser, and the sale price represented $8,132/sqm based on NLA or $83,333 per approved apartment. These metrics are far stronger than those for residential apartment developments, especially considering the risks associated with undertaking the development in an increasingly unpredictable Brisbane apartment market.