Artifex To Raise Capital For Allara House Canberra18 November 2021
Artifex Property Group is seeking to raise $42.9m in capital to assist in the acquisition of Allara House, 48 Allara Street, Canberra.
The Property is a seven-level commercial office building, located in the Finlay Crisp Centre, a landmark building complex in the Canberra Civic Precinct.
Located on the fringe of the Canberra CBD, the property benefits from its proximity to major arterial roads and the CBD light rail which will shortly have a stop directly outside the Property.
The Property was previously owned by Dexus but acquired by Artifex together with SC Capital in 2019. Artifex have since completed $13M of upgrades to the building structure and introduced the ACT Government as a tenant to the property. The capex program involves upgrading the buildings core services, installing ESG materials and systems, upgrading end of trip facilities, new lifts, a redesigned ground floor plaza and extensive refurbishments across all floors.
The building is fully leased by the ACT Government on a 20-year lease with fixed annual rental increases of 2.5% p.a. and a five-year option to extend. As part of the lease, the tenant is completing the fitouts and refurbishment works for four government entities – the Human Rights Commission, the Restorative Justice Unit, the ACT Civil and Administrative Tribunal, and the Government Solicitors Office. The tenant will receive a rental incentive of $1.35M p.a., over the term of the lease with the vendor paying for the first 7-years of the incentive by way of a rental guarantee.
Artifex Property Group is a boutique Sydney based investment firm with a strong focus on asset management to deliver superior returns. The business was founded by the four current directors who has over 80 years’ combined experience in asset management across listed, wholesale and private equity property structures. Since 2017 the Manager has been involved in $1.7B of commercial property transactions.
The Fund is an unlisted managed investment scheme for wholesale investors.
The fund is closed ended single asset trust with quarterly distributions forecast to deliver a 5.25% yield in FY22 and an average of 5.68% over the 5 year term of the trust.
The Fund has secured a 5year term debt facility for the acquisition based on an LVR of 50%. The loan is estimated to have an all-in cost of 2.10% p.a. based on 50% of the loan being fixed.
|Responsible Manager||Artifex Property Group Pty Ltd|
|Fund Manager||Artifex Asset Management Services Pty Ltd|
|Fund Size Target||$42.9M|
|Closing Date||15 December 2021 unless extended|
|Fund Term||5 year – Close Ended|
|Distributions||Target 5.25% for FY21 based on current unit price|
|Target Return||5.5% – 7.5% p.a (pre fees, pre tax)*|
|Target Assets||Allara House,|
48 Allara Street,
Canberra Civic ACT
The Fund has a Core investment strategy to provide a secure income distribution stream for investors by investing in a government occupied office building in Canberra ACT.
The Trust’s investment strategy is to acquire the Property and provide a secure, quarterly income distribution stream for investors. The Manager will also look to further improve the ESG features of the Property in conjunction with the tenant, to maintain the long-term value of the Property within the Canberra Civic East Precinct.
48 Allara Street, Canberra ACT is one of three commercial office buildings that form part of the Finlay Crisp Centre, located in the Civic East Precinct of Canberra’s CBD. The Property is a seven-level A-grade commercial office building with 9,004 sqm of net lettable area (NLA), two basement levels for 81 cars, ground floor plaza and end of trip facilities.
The building was originally constructed in 1986 and a full refurbishment is being completed to lift the finish to a modern standard of accommodation. The building has a 4.5-star NABERS Energy rating and 4.5-star NABERS Water rating.
Due to the extensive works already undertaken the Manager has set aside $1.0M over the next five years to fund any maintenance that is required.
The Property is expected to be acquired by the Fund in January 2022, at which point it will have a Weighted Average Lease Expiry (WALE) of 19.8 years (by income).
The property has been valued by Colliers at $73.7m, in line with the purchase price and reflecting an initial passing yield of 4.68% and a cap rate of 4.0%.
Canberra Office Market
According to agents, Knight Frank, Canberra is the only CBD office market in Australia to not record an increase in its vacancy rate during 2020. Reflecting its resilience to the effects of the pandemic, the office vacancy rate has held stable at 10.1% in the six months to January.
More than 63,000sqm of new office space was completed in the second half of 2020. Government demand for office space, with specific sustainability targets and building amenities, as well as mandates to consolidate work groups into a single location has contributed to this wave of new supply and above-average absorption rates.
Generally average face rents are holding across most precincts and grades since the onset of the pandemic. While leasing evidence during the Covid-19 period generally suggests incentives have so far remain unchanged, they are expected to soften over the short to medium term, particularly in the secondary market as landlord’s seek to maximise occupancy.
Average A-grade yields in the Civic and Parliamentary Precinct markets stabilised at 5.87% and 5.88% respectively in January 2021. The market has sharpened further in 2021.
The subject property has been valued at a sharper cap rate than average A Grade assets, given the tenure of the lease with the ACT Government and the recently completed capital upgrades to the property.
The Fund is illiquid and investors will be required to await the sale of the asset by the Manager to achieve a return of capital.
Aritfex are entitled to receive fees in consideration for establishment and management of the Fund including;
- Acquisition Fee equal to of 1.5% of the Acquisition Price
- Management Fees based on 0.54% of the Gross Asset Value (GAV) of the Fund
- Trust Expenses equal to 0.07% of the Gross Asset Value (GAV) of the Fund
- Trustee Fee equal to $50,000per annum index to CPI each year
- Trustee Removal Fee of 1.0% of the Gross Asset Value (GAV) of the Fund
- Debt Establishment Fee of 0.15% of the total debt facility on establishment, renewal, extension, or variation of the debt facility
- A Disposal Fee equal to 1.5% of the sale proceeds (in place of an agents selling fee)
- A Performance Fee of 15% of the Fund’s performance above an 8% return increasing to 20% of the outperformance above an Equity IRR of 10% p.a
Core Property Group has reviewed the Fees and estimate that Artifex is entitled to 7.0% of the total cash flow. Core Property considers the fees paid to the Manager to be low in comparison to similar products, which are typically around 7% – 9%.
The Fund is recommended for further consideration by investors seeking an above average distribution yield from a AAA rated Government Tenant. The prospects of capital growth from cap rate compression are less certain in the current cycle.
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