In the first of a series of Q&As with the CEO’s of Australia’s leading property investment groups, we’ve put a series of questions to Centuria’s Jason Huljich.
Q: In the history of your company can you identify one defining moment that changed the future for the business?
Centuria Capital Group (ASX: CNI) has a 24-year track record for delivering significant investor returns. Prior to 2014, our business was predominantly focused on unlisted real estate, which remains core to our overall strategy. In December 2014, our business took the decision to expand its fund types and access to capital sources. We IPO’d our first A-REIT, which is today known as Centuria Office REIT (ASX: COF) and is now Australia’s largest ASX listed pure play office REIT.
January 2017 marked the beginning of our asset class diversification when we took control of the management rights for a large real estate platform that included a listed REIT, which is now known as Centuria Industrial REIT (ASX: CIP). Today it is an ASX-200 listed entity and the largest listed pure-play industrial REIT within Australia. CIP’s portfolio totalled approximately $900million but it needed a lot of work to reposition it as a pure-play industrial vehicle.
As part of Centuria’s growth since 2017, the Group has undertaken over $12 billion dollars of transformational initiatives covering select mergers and organic real estate acquisitions. Some of these included:
- Healthcare – 63% investment in Heathley Limited, now known as Centuria Healthcare
- Daily Needs and Large Format Retail as well as Agriculture – by merging with Primewest
- Real Estate Credit Funds – with a 50% investment in Bass Capital, now known as Centuria Bass Credit
- The New Zealand market – through our merger with Augusta Capital, now known as Centuria NZ
Q: What do you see as the key risks to Investment Returns over the next 3 years?
At any point in real estate cycles, a number of risks (economic, geopolitical, market, social etc.) need to be considered as part of real estate investment processes. One perceived risk that is gaining a lot of media attention is inflation and rising interest rates.
Historically, real estate investment has often been considered as a hedge against inflation for a number of reasons. A substantial number of our leases, across all asset classes, have fixed annual rental increases or CPI-linked rental increases. This means when CPI increases, so too does our rental revenue.
Additionally, we expect the supply of new buildings coming to market should moderate as construction costs rise, which means less supply and a better opportunity for rental growth across existing properties.
Where new supply does come to market, we believe rental levels are likely to increase to take into account the increased cost of building a new property. This is particularly relevant for metropolitan office markets where the rental levels are lower and more intrinsically linked to affordable rental values.
Australia’s 10-year bond has risen to just over two per cent, but continues to remain below historic longer-term averages. Similarly, capitalisation rates and yields continue to provide a relative spread to long term interest/bond rates.
Q: Better ESG outcomes have become a significant part of the investment decision process, how do you strike the balance between maximising investor returns vs maximising ESG outcomes?
Our ESG areas of focus are: ‘Valued Stakeholders’, ‘Responsible Business Principles’ and being ‘Conscious of Climate Change’.
We continue to build out our ESG initiatives. In recent periods:
- we established our Culture and ESG Committee, which I am a member of,
- hired a General Manager of Sustainability,
- produced our first sustainability report, provided initial disclosures aligned to the Task Force on Climate-Related Financial Disclosures (TCFD)
- provided disclosures aligned to Global Reporting Initiative (GRI) Sustainability Reporting Standards,
- delivered Centuria’s second Modern Slavery Statement.
- and installed over 4,600 solar panels across Centuria assets and we continue to assess further environmental opportunities across our portfolio.
In short, we take a pragmatic approach to ESG and through our Group’s defined sustainability framework, in close collaboration with our stakeholders and with the support of the Boards, Committees and management teams across the organisation.
Q: Technologies have and will continue to change the way we work, live, shop and interact with each other. At what point would technological change begin to negatively influence real estate returns?
There is a lot of discussion around proptech disruption but, at the heart of it, we believe technology is providing better and more efficient ways of developing and managing assets. At present, we are piloting a new tenant customer interface called T.E.N (acronym for Tenant Engagement Network). This tenant portal allows our occupiers to communicate with the facilities and property management teams as well as digitise a variety of value-add initiatives such as booking meeting rooms or shared workspaces, using digital lockers, viewing a building’s directory, accessing concierge services, registering visitors, utilising a local café directory and lodging maintenance/service queries.
At the beginning of the COVID lockdowns, there was considerable speculation that technology would replace the need for an office workspace but this hasn’t eventuated. What we are seeing today is that companies realise the importance of the office – a place to collaborate, build culture, create efficient workflows… just to name a few. In recent months, Australia has experienced a surge in employment, which has translated into stronger demand for office accommodation. Recent JLL research showed there was 185,000 sqm of positive net absorption across Australian office markets in the three months to 31 December 2021.
Additionally, the rise of e-retailing is benefitting the industrial real estate sector but it hasn’t replaced the need for convenience based retail.
Q: The significant weight of capital can be an opportunity to accelerate growth, how do you balance a desire to grow and maximise shareholder value vs a need to wait for the right opportunity to satisfy investor returns?
Centuria is a well-diversified business. We are diversified by:
- asset class (office, industrial, healthcare, daily needs retail (DNR), large format retail (LFR), agriculture and real estate finance);
- investor profiles (retail investors, wholesale investors, advisors, High net worth/ultra high net worths and global institutions)
- fund type (single and multi-asset unlisted, including fixed-term and open-ended, as well as ASX and NZX listed REITs)
- and geographical dispersion across Australia and New Zealand
Different investors have different risk appetites and return expectations. We try to match investment opportunities with a range of investor profiles. The benefit of our platform means that we have various fund types and asset classes that can be made available to a range of investors.
Importantly, our in-house management is very well-placed to procure and oversee the real estate investments. Our real estate capabilities are fully integrated across Australia and New Zealand and include funds management, capital transactions, asset management, development, property management and leasing to name a few.
Q: Risk is generally priced by a function of someone’s ability to manage it. Do you feel more inclined to avoid areas of high risk or develop capability to better manage those risks?
As I mentioned, Centuria has operated throughout the past 24 years meaning that we have waded through multiple property and economic cycles. As a group, we carefully consider risk, as well as the various risk profiles of our investor base. As I mentioned, our platform offers various fund opportunities that may suit a range of investor profiles. In general, though, the GFC highlighted the importance of reduced debt levels and this is something we have taken into account in our Fund structures and continually monitor. We also have a team of 300+ professionals who, at their core, manage our portfolio to identify and address foreseeable challenges.
Q: Do you expect it to be harder over time to compete with private capital where the cost of capital is lower?
Again, this comes back to diversification – of asset class, investor type and fund type. For example, an institutional mandate might have a low cost of capital and therefore may consider a different return profile to an investor with a higher cost of capital, for example. Being well diversified, as a fund manager, spreads the risk of these variables.
A key consideration is access to the right opportunities. Centuria benefits from an industry leading Capital Transactions team, who has developed strong relationships with agents and vendors alike. In fact, a high percentage of our acquisitions are secured either off-market or via select sales campaigns.
If you look back five or six years ago, the value of our entire AUM was less than what we now transact in a six-month period.
Q: The consolidation of Australian Super Funds will result in a smaller number of larger funds with most establishing direct real estate investment teams with fewer external managers. Your Unlisted Institutional Capital raising in 2021 of $1.8bn was similar to 2020 ($1.7bn), Do you expect Australian Super Funds to be increasingly less relevant to your unlisted business?
There is no doubt that the Australian Super Funds will continue to grow to be some of the largest investors in the world. Centuria’s unlisted institutional mandates and one-off joint ventures, collectively have assets under management worth $1.8billion. Historically, Centuria has developed strong relationships with offshore institutional investors and the demand from offshore across capital markets continues to increase. These capital sources have added to the wider distribution network of unlisted investors that I mentioned earlier. To date, our interaction with Australian superfunds has been limited, however we continue to assess opportunities that may be suited to a range of institutional investors.
Q: Do you expect Australian Super Funds to have equal access to unlisted investment opportunities to other investors who may pay higher fees?
Generally speaking, real estate continues to be a significant sector for many types of investors across Australia and New Zealand.
Q: Investment mandates have broadened in recent years to cover a range of emerging sectors, ie healthcare, datacentres, agribusiness, self-storage. Do you expect these assets to become mainstream alternatives to traditional core offerings of retail, office and industrial? Why?
We are already seeing sectors that were once considered alternative to now be mainstream and this largely comes down to investor appetite. Historically, yield differentials separated the alternatives from the mainstream but as investor interest grows across different asset classes, they have become more mainstream and the yields have normalised.
For example, since we diversified into healthcare three years ago, demand from investors continues to rise. Collectively across the group, we now manage $1.7billion of healthcare real estate and are progressing through a significant healthcare development pipeline. Looking at our unlisted open-ended healthcare fund as an example – we launched this fund a little over one year ago.
From a standing start, this fund has now grown to in excess of half a billion of assets under management and continues to see strong investor demand. We also see significant demand for agriculture assets and believe this sector will attract increasing investor interest.
In fact, if you look at the underlying asset classes in the USA’s Top 10 REITs the majority are what we still consider as alternatives in Australia.
Q: Maintaining a certain culture in an organisation is difficult as people naturally come and go. Is culture important to you and how do you go about protecting or enhancing a culture over time?
John McBain and I have built this company from five personnel to more than 300 over the past 24 years. The team is very important to us and maintaining a relatively flat structure is vital to ensuring we remain nimble and able to compete in the market, especially when it comes to transactions and actively managing our assets.
Company culture is a significant priority, which is why John or I personally interview every potential employee to ensure they are the right fit for Centuria. We believe this is why we have extremely high retention rates. As the company has grown, we’ve introduced a more formal wellbeing programme and also have regular company-wide townhalls and arrange team building exercises. In recent years, we’ve introduced a leadership programme to ensure we can continue to support the growth of our team. Also, communication has always been key, and we ensure the team is regularly updated on the Group and its strategy.
John and I have always been at the helm of the business and forming, shaping and developing our company culture is something we take very seriously.
Q: The 2021 Results were impressive; 16% increase in FUM and a Total Shareholder Return of 38%. Do you expect to continue to grow at this rate?
Thank you. We are proud of our HY22 results, which are a combination of our scale across the Australasian platform and strong contributions across all of our real estate verticals. In recent years, this growth was accelerated through select mergers and ongoing organic growth, enabling us to diversify into industrial, healthcare, DNR, LFR, agriculture and real estate finance.
Whilst we cannot guarantee future performance, we believe the Centuria platform has reached critical scale and should be able to continue its impressive growth by continuing to build across the seven sectors where we invest.
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