Centuria have launched the Centuria Government Income Property Fund, an unlisted property fund to raise $133m for the acquisition of 1 McNab Avenue, Footscray Victoria.
The Fund provides an opportunity for investors to to invest in a metropolitan office property secured by long-term government tenancies.
The Property is an A-grade metropolitan office building which provides 20,191 sqm of net lettable area (NLA) spread across 14 levels, with 9 commercial office floors, 4 levels of car parking, ground floor retail and end of trip facilities. The building is primarily leased to government and state-owned entities in Victoria with a 11.8 year weighted average lease expiry and contracted rent increases of 3.5% per annum on the Government leases which comprise 91.1% of the building. The property also holds a 5.5-star NABERS energy rating and 5 star Green Star rating.
Centuria are forecasting initial distributions of 5.25% p.a. in FY22 and 5.35% p.a. in FY23 with an average of 5.36% p.a. over the five years, with the first three years being 100% tax deferred.
Refer to our article on the acquisition below.
Fund Overview
| Trustee | Centuria Investment Management (Property) No.3 Pty Limited |
| Fund Manager | Centuria Property Funds No.2 Limited |
| Fund Raising Target | $133M |
| Fund Open | 1 July 2021 |
| Fund Raising Close | 28 July 2021 |
| Fund Term | 5 years |
| Target Return | 5.3% – 8.8% p.a. (midpoint 7.1% p.a.) |
| Liquidity | Illiquid |
| Investor Type | Wholesale & Retail |
| Target Assets | 1 McNab Avenue, Footscray VIC |
Investment Strategy
The Fund’s goal is to provide unitholders, with regular, consistent and considerably tax deferred income with potential capital growth. Centuria believes the Property meets the Fund’s objective through the quality leases to the Victorian Government and state owned entities, with no key leases expiring during the investment term and fixed rental increases
Centuria are also of the view that the significant government infrastructure and private investment currently underway in the proximity of the building can provide a material uplift to the office market of Footscray, transforming the precinct into a key metropolitan suburb with substantial retail amenity, and strong connectivity providing an efficient gateway to the Melbourne CBD.
In the short term, the Centuria will actively manage the short-term lease expiries and maintain the strong relationship with the current tenants.
Key Features
Core Property Group have independently reviewed the Fund and determined that based on a range of core assumptions, the Fund is forecast to deliver a 5-year Internal Rate of Return (IRR) in the range of 5.3% – 8.8% p.a. (7.1% p.a. midpoint). The calculation is based on the Manager’s forecasts and assumes a +/- 25bps movement in the terminal capitalisation rate of 4.63%. We note that a +/- 50bps movement in the terminal cap rate would results in a IRR range of 3.6% to 10.3% return.
Centuria have obtained a terms for a five-year debt facility of $113.2M with an initial draw down of $109.6M. The facility will be hedged for the first three years at an all-in cost of 1.70% p.a. The initial Loan to Valuation Ratio (LVR) is expected to be 49%, against an LVR covenant of 60.0%.
The Fund as illiquid in nature and the capital and profits from the investment will be realised upon the sale of the property toward the end of the investment term. The term is for an initial five-year period, however Centuria also extend the Fund for two years subject to an Ordinary Resolution of investors (50% of votes in favour) and thereafter by 2 year periods with unanimous resolutions (100% of votes cast in favour) or via a Withdrawal Price offer.
Fund Fees
Centuria will be entitled to Fees from the Fund including;
- an acquisition fee of 2.0% of the purchase price
- a disposal fee of 1.0% of the sale price
- a management fee of 0.6% of the Gross Asset Value
- a custodian fee of 0.015% of GAV or $15,000
- a performance fee of 20% of the outperformance above a IRR hurdle of 8.0%.
Core Property Group have assessed the fees estimates and notes that the Manager is entitled to 5.9% of the total cash flow which they note is low when compared to similar products, which are typically around 7% – 9% of total cash flow.
Recommendation
The Fund is recommended for further consideration by investors seeking an average distribution yield from long term Government back tenants. Capital growth from the assets in the fund are expected to be under pinned by increase rents which are secured under lease arrangements. An increase in interest rates could impact the net income from the asset and the potential valuation capitalisation rate at the time of sale and as such there is some risk to capital growth. Potential investors are advised to review the key risks in the product documentation and undertake a detailed assessment of the portfolio and investment cash flows.
Disclaimer: The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
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