October 20, 2023

September 2023 quarter ASX A-REIT market update

Stuart Cartledge, Managing Director, Phoenix Portfolios

Market Commentary

The S&P/ASX 300 A-REIT Accumulation Index moved lower in the September quarter, losing 3.0%. Property stocks underperformed broader equities in the quarter, with the S&P/ASX 300 Accumulation Index giving up a lessor 0.8%. This underperformance is unsurprising considering the 10 Year Australian Government Bond yield increased meaningfully over the quarter, finishing at approximately 4.5%.

Despite the property index underperforming over the period, the headline result masks the weak performance of most property stocks. Only 8 out of 32 index constituents outperformed the index. This result was mostly driven by the outperformance of the index’s largest stock, Goodman Group (GMG), which rose 6.9%, despite the weakness seen elsewhere. Many investors became excited about the opportunity in data centre investment that GMG referenced in their result. For more on GMG, see the performance commentary section of this report.

During the quarter, most property stocks reported their full year financial results to 30 June 2023. A key feature of results was increased interest costs and the impact they are having to short term profitability and distributions. Phoenix normalises for mid-cycle interest rates when considering the valuation of a stock, so the impact was minimal to our valuations, however, was seen as very significant by those focussed on short term distribution outcomes.

Stocks with exposure to office property were particularly weak during the quarter. Incentives to secure office tenants remain elevated and vacancy is beginning to creep into office portfolios as existing long-term leases come to their end. Growthpoint Properties Australia (GOZ) lost 20.8%, whilst Cromwell Property Group (CMW) gave up 29.3% and Centuria Office REIT (COF) dropped by 14.6%. Large capitalisation office owner Dexus (DXS) also lost ground, off 6.4%. Charter Hall Group (CHC), whilst a diversified manager of property funds, has a meaningful exposure to office property and was also weak, giving up 11.4%.

Owners of large regional shopping centres broadly reported solid results in August’s reporting season. Specialty sales were strong, supported by elevated inflation and resilient consumer spending. All-important specialty re-leasing spreads were positive for both Scentre Group (SCG) and Vicinity Centres (VCX). There is some concern that cyclical factors such as weakened consumer sentiment will weigh on future results despite the recent strong performance. SCG and VCX marginally underperformed the index, losing 4.1% and 4.7% respectively. Owners of smaller neighbourhood shopping centres were weaker during the period as their rental outcomes are not as directly tied to inflation, but their costs are rising sharply. Region Group (RGN) gave up 11.0% and Charter Hall Retail REIT (CQR) finished the quarter 13.0% lower.

Developers of residential property showed resilience during the period as the undersupply of housing in Australia came into focus. All else equal, a sharp increase in interest rates should have a cooling effect on residential house prices and sales, however the impact of interest rates is offset by an acute shortage of both rental and stock for sale. Peet Limited (PPC) outperformed, up 1.2%, AV Jennings Limited lost only 1.9% and large capitalisation developer Stockland (SGP) dropped 2.7%.

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Market outlook

The listed property sector is in good shape and provides investors with the opportunity to gain exposure to high quality commercial real estate at a meaningful discount to independently assessed values. While share market volatility may be uncomfortable at times, the offset is liquidity, enabling investors to rebalance portfolios without the risk of being trapped in illiquid vehicles.

Rising interest rates have been a headwind for many asset classes, with property, both listed and unlisted, a particularly interest rate sensitive sector. The August reporting season saw a number of listed stocks come under pressure as short term interest rates hedges are beginning to roll off and higher interest costs are impacting earnings growth and distributions. Long term valuations are driven by “normalised” interest costs, meaning the impact of short term hedges maturing is mostly immaterial.

The industrial sub-sector continues to be the most sought after, given the tailwinds of e-commerce growth, the potential onshoring of key manufacturing categories and the decision by many corporates to build some redundancy into supply chains to cope with current disruptions. All of these factors are contributing to ongoing demand for industrial space, which is evident by rapidly accelerating market rents and vacancy rates at historic lows of around 1% in many markets.

We remain cognisant of the structural changes occurring in the retail sector with the growing penetration of online sales and the greater importance of experiential offering inside malls. Recent performance of shopping centre owners has however been strong, with consumers showing resilience. It is interesting to note the juxtaposition of very high retail sales figures despite very low levels of consumer confidence, no doubt impacted by rising costs of living. Importantly, we are also now seeing positive re-leasing spreads in shopping centres, indicating strengthening demand from retail tenants.

The jury is still out on exactly how tenants will use office space moving forward, but demand for good quality well located space remains. Leasing activity is beginning to pick up, and there has also been some transactional activity, albeit at prices typically at discounts to book values. Incentives on new leases do remain elevated and some vacancy in the market is becoming apparent.

We expect to see further downside to asset values in office markets, but elsewhere expect market rent growth to largely offset cap rate expansion, particularly in industrial assets. Listed pricing provides a meaningful buffer to such movements.

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About Stuart Cartledge

Stuart is the Managing Director of Phoenix Portfolios and the portfolio manager for each of the company’s property portfolios. Prior to establishing the business in 2006, Stuart built a strong track record in the listed property security asset class and has been actively managing securities portfolios since 1993. Stuart holds a master’s degree in engineering and management from the University of Birmingham and is a Chartered Financial Analyst.

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October 20, 2023

Australia’s housing battle: Interest rates versus supply and demand

Stuart Cartledge, Managing Director, Phoenix Portfolios

Residential property occupies much of Australia’s news coverage and much of the brain space of Australians in general. Everyone seems to have an opinion on house prices and housing policy and not all of it seems to be based on fact. This article will try to provide an analysis of the current factors inﬂuencing residential property and in dealing with those facts, provide some examples of how Phoenix is making investments that are supported by the current environment.

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Interest rates

It seems all of us have heard comments like “house prices always go up”. Anyone with a basic understanding of maths and economics have told those people they cannot be correct. With that, let’s look at the median house price in Sydney since 2002:

Looking at the chart above it almost does seem like house prices always go up. But wait: what happens when interest rates go up, surely house prices will crash? Let’s zoom into the chart above and look at the eﬀect of recent interest rate rises on the value of homes in Sydney:

Despite interest rates on new home loans more than doubling oﬀ their lows, it is clear that house prices have been stunningly resilient, growing once more after marginally decreasing when rates began to increase.

Those concerned about the sustainability of current house prices will correctly point to just how much it costs to own a home. Approximately 75% of home purchases are supported by the use of a mortgage. Obviously, those making the purchase can only do so if they can service the payment on that mortgage. To show this, the chart below looks at the monthly cost of servicing a new mortgage (Loan to Value = 90%) on the median home in Sydney and how it has changed over the same period.

The cost of servicing a mortgage has clearly risen dramatically. A mortgage obtained on the median home in Sydney now costs more than $7,400 per month to service. This has increased by more than 50% since December 2021, less than two years ago. Common sense suggests that this must have a limit. Surely at some point people can’t aﬀord to service their mortgage anymore and surely even the ~25% of people who buy a home with cash won’t have enough cash to buy the home they want. That all has to be true, but house prices prove that at this stage we have not reached that breaking point.

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How can we aﬀord this?

Basic economics states that in a market economy, the price of a good or service is a function of its supply and demand. Housing is no diﬀerent. The demand for housing should be simple to understand. All Australians have demand for a place to live. To support “elevated” house prices and increased mortgage servicing, there has to be a capacity to pay monthly costs. This capacity is most commonly tied to a person’s income. When entering into a 30-year mortgage, someone’s view of their job security is also front of mind. In this context, a chart of long-term and more recent unemployment rates in Australia is presented below:

As can be seen, unemployment rates are at multi-generational lows, serving to add to demand for housing at ever-increasing prices.

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Housing demand

In the most basic sense, the quantum of dwellings needed in Australia is related to the amount of people in each dwelling and the population of the country. The Australian Bureau of Statistics (ABS) and Reserve Bank of Australia (RBA) have compiled the nation’s historic average household size and recent trends as shown below:

While perhaps a controversial ﬁgure, former RBA Governor Phillip Lowe summed up recent changes astutely, saying:

“During the pandemic, the average number of people living in each household declined. People wanted more space. They were working from home. Rents actually declined for a while. People said, ‘Rather than have a ﬂatmate I will just have an oﬃce at home,’ so the average number of people living in each dwelling declined and that increased the demand as a result for the total number of dwellings”.

So, we have less people living in each dwelling and the other component of household requirements, populaion, is also increasing strongly. Again, the RBA and ABS help by showing both the impact of population growth (in light blue) and change in household size (dark blue) over time in the chart below:

Again, Phillip Lowe sums up the situation:

“The other thing that is now happening is a big increase in population. The population is increasing by two per cent this year. Are there two per cent more houses? No. The rate of addition to the housing stock is very low. We have a lot of people coming into the country.”

This comment touches on the other key element to home prices in Australia. Namely, the supply of new property.

The other thing that is now happening is a big increase in population. The population is increasing by two per cent this year. Are there two per cent more houses? No. The rate of addition to the housing stock is very low. We have a lot of people coming into the country.

Phillip Lowe

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Housing supply

So there clearly is a need to build new houses. Given the voracious demand for residential properties at elevated prices, one would think that residential developers would address this demand and supply the properties the population clearly want. Two major factors are holding back the supply that would otherwise naturally occur.

Firstly, the cost of building new homes is a major factor. A residential property developer will require approximately a 20% proﬁt margin on top of their costs to put new housing supply into the market. The costs of developing that property comprise:

the cost of the land on which it is built,
the hard costs of the materials used,
ﬁnance costs,
architectural and planning costs and
the cost of labour to physically build the property.

In recent times, all of these costs have been increasing. Materials costs increased signiﬁcantly with supply chain disruptions during the COVID-aﬀected period and only now is the “rate of growth” slowing. Labour costs are also ever increasing, as even the availability of workers is a signiﬁcant challenge in many cases (see unemployment rates). Each of these increased costs place downward pressure on the supply of new properties.

The real issue

Arguably the biggest factor limiting new supply however is simply being allowed to build new properties. New building requires a myriad of approvals, principally development approvals, from local councils or state governments. Local constituents tend to be against development in their area, often known as NIMBYs (Not In My Backyard). Local councils and members of parliament are voted in by existing residents of a geographic area and hence are incentivised to block the building of new houses.

To provide one such blatant example, one member of parliament (MP) made the comment: “Housing in Australia is in crisis,” describing the cost of housing forcing “families [to sleep] in their cars”. This same MP has vehemently opposed the development of more than 800 dwellings on an unused site in their electorate. Going further, in an attempt to justify the position, he argued that such development activity “drives up the cost of rent and house prices.” This is demonstrably false and fails to pass even the most basic test of common sense. We are not referencing it to call out an individual, but rather providing an example of just how diﬃcult it is to obtain approval to address the housing supply shortage, even from those aware of the need. To see how dire this supply issue has become, see the chart below, provided by the ABS, showing the trend in approvals for dwelling units despite the obvious need for housing.

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What are we doing about it?

Amending the long-held planning practices, incentives of government and ﬁxing global supply chains is above our pay grade. What we can do is observe and acknowledge the situation and make investments that beneﬁt from the realities of housing undersupply. This can be done by investing in companies that either have development approved housing projects, or a history of working with planning authorities to obtain approval, despite all the complexities inherent in residential development.

One such investment in the portfolio is Mirvac Group (MGR). Most of MGR’s development takes place in urban inﬁll locations. These projects often increase density and at times have included iconic projects across Australia. MGR is currently developing the old Channel 9 headquarters in Willoughby in Sydney’s North, which will deliver 417 lots, with a total development value of $800 million. Existing iconic projects completed by MGR include The Melbournian, and The Eastbourne in Melbourne. MGR has also been a pioneer in the embryonic “build to rent” property sector. This involves building large apartment buildings, with all lots held for rent on an ongoing basis as opposed to being sold on completion. Those in Melbourne can inspect LIV Munro, adjacent to Queen Victoria Markets, which was recently completed and has 490 apartments available for rent. In the midst of record low rental vacancy, this business both addresses a need and provides low risk returns to investors.

Another investment in the portfolio is Peet Limited (PPC), which specialises in master planned communities across the country. These tend to be extremely large plots of land on the urban fringe of major cities and will eﬀectively be new suburbs and in some cases almost new cities. PPC’s largest project is Flagstone, located between Brisbane and the Gold Coast in Southeast Queensland. It will take a generation to complete, however once built will house 120,000 people and become Australia’s 20th largest city, a similar scale to Cairns. It will include a 100-hectare town centre, with a regional shopping centre similar in size to Chatswood Chase and will have a bigger town centre than the Brisbane CBD. This project has all relevant approvals. It is projects such as this that will go a small way to addressing Australia’s housing undersupply.

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A closing note

The current balance in Australian housing is a bit like an unstoppable force meeting an immovable object. Interest rates are having a meaningful impact on the aﬀordability of housing and clearly are putting downward pressure on housing prices. Fighting against this, ever increasing demand and insuﬃcient supply are supporting home values. Over time, these factors should ﬁnd an equilibrium. Investing in those who are helping to address this undersupply is prudent both from an investment perspective and for the beneﬁt of the nation.

Flagstone-Citys-Future-Town-Centre
Peet Limited’s Artist Impression of Flagstone City’s Future Town Centre

About Cromwell Phoenix Property Securities Fund

Read more about Cromwell Phoenix Property Securities Fund, including where to locate the product disclosure statement (PDS) and target market determination (TMD). Investors should consider the PDS and TMD in deciding whether to acquire, or to continue to hold units in the Fund.

Find out more

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October 19, 2023

September 2023 direct property market update

Peta Tilse, Head of Retail Funds Management

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Economy

pf_quarterly_oct2023_cpi The quarter started off on positive footing, with inflation across advanced economies edging down to 4.4% YoY in July¹. Central Banks’ continued focus on inflation outcomes saw data moderate, helping to ease pressure on rates. However toward the quarter’s end, it was rising energy prices (in part driven by a supply halt by OPEC+) which posed some risk to the inflation outlook and therefore increasing interest rate expectations once again

In Australia, the pace of annual inflation slowed in July from 5.4% to 4.9%, before picking up in August to 5.2%². While services inflation does remain sticky, the August increase is unlikely to be seen as cause for concern by the RBA, namely because it was driven by volatile items such as automotive fuel (up from -7.6% to 13.9%) and holiday travel (5.3% to 6.6%).

Australian bond yields were dragged higher over the quarter by the US, as markets grappled with comments from the Federal Reserve’s Chairman Powell suggesting the Fed’s job is not done, and higher-than-expected Treasury debt issuance.

While the cash rate in Australia did not change over the quarter, market pricing in early October suggested a 34%³chance of a hike. The October meeting of the RBA Board saw a new Governor (Michele Bullock) in charge. The Board elected to leave interest rates on hold (at 4.1%) which was welcomed by the market. Market pricing (as at 9^th October) has all but removed the prospect of another move, only ascribing a 5% chance of another 25bps, and signalling that the central bank is almost at the end of the cycle.

While expectations of further cash rate hikes have diminished, longer term interest rates (proxied by 10-year bond yields) remain ~40bps higher than a year ago⁴. This is continuing to put pressure on debt costs and is the main macro driver challenging property valuations, despite resilience across demand drivers.

The labour market remains tight, with unemployment staying unchanged at 3.7% in August⁵ and the number of employed people increasing by 50k over the first two months of the quarter (September data still to come). However, the “quality” of jobs growth was poor, with the number of full-time jobs decreasing by -15.9k over the same period. Leading indicators such as job vacancies and applicants per job advertisement point to slowing jobs growth ahead. Population growth is running at a far stronger pace which should cause unemployment to move beyond 4% before the end of the year, providing support to the view that the RBA hiking cycle may be complete.

On the consumer front, the impact of higher mortgage rates continues to be the primary concern. The RBA recently released its biannual Financial Stability Review which provides an updated assessment of household resilience and loan serviceability. The fixed-rate “cliff” is generally being managed well, with 45% of fixed loans originated during the pandemic having already rolled off onto higher rates and 90 days arrears rates remaining below historical averages. While risks are clearly most elevated for borrowers with high loan-to-value ratios (>80%), around two-thirds of fixed-rate mortgage holders have liquid savings equivalent to at least 12 months of scheduled mortgage payments⁶.

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Office

dpf_quarterly_chart_netAbsorption There continues to be mixed demand readings between the major CBDs, largely aligned to the different industry compositions of the markets. According to JLL Research, national CBD net absorption totalled around 1.5k square metres (sqm) across the quarter. The resource-based markets of Brisbane and Perth both continued their run of positive demand, which has now extended to over a year for each. Adelaide recorded the strongest CBD result with positive net absorption of 37.5k sqm, underpinned by the completion of a 40k sqm Prime office building at 60 King William St anchored by Services Australia. Sydney CBD recorded the weakest result on a quarterly and annual basis, with all precincts except the Core contracting over 3Q23. Prime net absorption was stronger than Secondary net absorption for the tenth consecutive quarter, with Sydney and Canberra the only CBD markets recording weaker net absorption across Prime stock.

The national CBD vacancy rate decreased slightly from 14.4% to 14.2% over the quarter, with the result following the same pattern as net absorption. Brisbane CBD (-1.1% pts) and Perth CBD (-1.2% pts) both recorded lower vacancy rates, particularly across A Grade stock. Sydney CBD and Melbourne CBD were largely unchanged, with Sydney in particular benefitting from minimal large occupier space handbacks and exits which have impacted previous quarters. Premium stock continues to have the highest vacancy rate compared to the long-term historical average, although much of this vacancy is concentrated in a handful of buildings outside occupiers’ preferred precincts.

dpf_quarterly_oct2023_chart_totalVacancy

Elevated vacancy and soft demand have caught up to Sydney and Melbourne, with the major CBDs recording weak Prime rental growth outcomes for the quarter. While net face rents continued to grow modestly, incentives increased to record highs (Sydney 35%, Melbourne 41%), dragging net effective rents backwards. The strong demand conditions which have persisted across Brisbane and Perth for some time pushed rents higher again, with Brisbane CBD in particular recording both higher face rents and lower incentives. They are the only CBD markets where net effective rents today are higher than pre-pandemic levels.

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dpf_quarterly_oct2023_chart_rentalGrowth

Transaction volume ($1.2b nationally) increased significantly from the very weak previous quarter ($0.6b) but remains well down on typical levels. This lack of transaction evidence resulted in average CBD Prime yields expanding by only 9bps, however industry feedback regarding bid-ask spreads for assets currently on market point to further softening ahead. A more substantial expansion of yields is expected in the December quarter when a greater proportion of assets are revalued.

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Retail

dpf_quarterly_oct2023_chart_retailTrade The impact of higher interest rates is being felt by consumers, with retail sales rising by a modest 0.7% over July and August combined. This was despite positive effects from warmer than normal weather and the Women’s World Cup boosting clothing and dining spending. Annual growth has slowed to 1.5% and with population growth running above 2%, real growth per capita is firmly in negative territory. On an annual basis, dining continues to record the strongest growth, followed by groceries. Tasmania is the worst performing market with nominal sales heading backwards year-on-year, while the ACT has been the top performer with annual sales growth of 5.5%.

Positively for retail real estate, income growth continues to recover from COVID impacts. Retail sales are still 16% above the level implied by the pre-COVID trend, and leasing activity reflects the outperformance which accrued to tenants over the pandemic period. Retail has not been immune from yield expansion. However, a higher starting yield means the movement is less impactful to valuations on a percentage basis.

While income recovery is strongest across discretionary-focused assets, investors continue to prefer centres underpinned by a strong convenience offering. Assets with a high proportion of income derived from supermarkets or dominant national chains (e.g. Bunnings) are proving attractive.

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Industrial

Industrial continues to generate face and effective rental growth, albeit at a slowing pace. All markets except Perth recorded growth for the quarter, led by Melbourne (+6.9%)⁷. Prime incentives increased slightly by 1%, and now average 10%. Space take-up continues to be hampered by a lack of available space, but higher pre-lease activity in Sydney and Melbourne lifted demand to slightly below the 5-year quarterly average. From an industry perspective, Transport and Warehousing, Retail Trade, and Manufacturing continue to drive demand, with Transport and Warehousing accounting for 51% of gross take-up over the quarter.

Supply is expected to reach a record level in 2023, with a new record expected to be set in 2024. However, it’s important to note these records reflect delayed completions from previous quarters due to planning, construction, weather, materials, and labour issues. Delivery delays are most likely in Sydney, which together with Melbourne comprised 74% of completions for the latest quarter. There is currently around 900k sqm of stock under construction due for completion in 4Q23, but some of these projects may be pushed into 2024.

Investors continue to pursue allocation to the sector, but transaction activity is being constrained by higher cost of capital and a lack of available stock. There is a clear preference for the more established East Coast markets, which accounted for all income-producing asset transactions greater than $10 million over 3Q23.

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Outlook

The Australian economy remains in a solid position despite global headwinds. Inflation is slowing, employment is solid and population growth will provide support to demand over the course of the year. The rate hiking cycle appears to be nearing its end, financial stability has been maintained, and distress remains contained.

These factors put the Australian commercial property market in good stead from a demand perspective. Businesses continue to adjust size requirements for occupancy as they live with hybrid working, although in certain markets this is now largely known. Experiential workplaces with clever refurbishments and amenity continue to attract and retain quality tenants; something we continue to see within our assets. Location has emerged as the biggest driver of occupier demand and asset performance.

Powerful megatrends such as the need for more sustainable, energy efficient real estate, demographic shifts, and rising demand for segments serving the modern economy such as urban logistics, healthcare and highly amenitised offices will create income growth opportunities.

With the Israel-Hamas conflict adding further uncertainty to geopolitical risks and a soft Australian dollar, capital continues to view Australia as a favourable investment destination. This is because of its attractive demographic profile, growth prospects, and relative social and political stability. However, elevated interest rates, wide bid/offer spreads, and limited transactional evidence have all put pressure on valuations.

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How did Cromwell Funds Management fare this quarter?

Reflecting the good leasing activity in Brisbane, it was a busy quarter for 100 Creek Street, Brisbane with the leasing of speculative suites helping to fit the asset’s occupancy to 88.4%. The Fund’s current WALE (on a look-through basis) is 4.3 years, and occupancy sits at 94.4%.

There were no valuations updates in the quarter for the Fund given the entire portfolio was independently revalued last quarter. With higher interest rates and softer valuations weighing on the Fund, and understanding regular income is important to all unitholders, the Cromwell Funds Management Board made some financially prudent changes in September. These included ceasing to offer redemptions for a period of 6 months, and reducing distributions to 5.75cpu p.a; bringing it in line with expected profit from operations. Other important changes included the addition of a 5% discount to the Distribution Reinvestment Plan. Further details are listed here.

Performance (%) p.a as at 30 September 2023

Year	Cash (AU)	Bonds (AU)	Shares (AU)	Cromwell Direct Property Fund
1	3.56%	1.61%	10.9%	-11.0%
3	1.36%	-3.92%	8.55%	2.31%
5	1.28%	0.34%	5.08%	3.48%

_{Past performance is not a reliable indicator of future performance.}_{Source: Lonsec and Cromwell Funds Management}

_{1. The Forward View – Global, NAB (Sep-23)

2. Monthly Consumer Price Index Indicator, ABS (Sep-23)

3. RBA Rate Tracker, ASX (Oct-23)

4. Capital Market Yields – Government Bonds, RBA (Oct-23)

5. Labour Force, ABS (Sep-23)

6. Financial Stability Review, RBA (Oct-23)

7. Australia Industrial and Logistics Figures Q3 2023, CBRE (Oct-23)}

About Cromwell Direct Property Fund

Read more about Cromwell Direct Property Fund, including where to locate the product disclosure statement (PDS) and target market determination (TMD). Investors should consider the PDS and TMD in deciding whether to acquire, or to continue to hold units in the Fund.

Learn more

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September 14, 2023

Industrial: Still delivering the goods

Colin Mackay, Research & Investment Strategy Manager, Cromwell Property Group

Industrial has been Australian real estate’s star performer for a decade, notching up an annualised 10-year return of 14.2%¹. While the rate of new supply has increased, the availability of space has been unable to match pace with surging demand. Australia has become the lowest vacancy industrial market in the world², contributing to record rental growth of almost 25% in the year to March 2023³. The sector’s strong momentum continues, and the outlook is bright, as several long-term tailwinds drive demand.

E-commerce

The shift in retail activity from physical stores to digital channels drives demand for industrial space in several ways:

warehouse space is needed to store inventory which would have otherwise sat in a store;
e-commerce tends to offer a wider range of products, rather than the curated selection that a specific retail store might be limited to, necessitating more storage space; and
goods purchased online have higher rates of return, and space is needed to handle the reverse logistics.

Increased storage and space needs mean pure-play e-commerce requires three times the distribution space of traditional retail⁴. Customer preferences are primarily driving the shift to online, particularly as demographic change sees ‘digital natives’ become the dominant consumer segment. As scale and investment lead to greater efficiencies and profitability, the shift may gain another momentum boost.

E-commerce in Australia is following a similar trajectory to Great Britain – it is on track to hit a market share of 20% of all retail sales by 2030 despite growth slowing from pandemic peaks. With 70,000sqm of logistics space needed for every incremental $1 billion of online sales⁵, e-commerce alone could generate industrial space demand of almost 600,000sqm p.a. over the next seven years⁶.

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Supply chain resilience

As explained in last year’s Supply Chain Adaptation paper, one of the most immediate and lasting impacts of the pandemic has been supply chain disruption, with erratic swings in demand exacerbated by congested ports and border restrictions. The pendulum is now swinging from the prevailing ‘Just-In-Time’ supply chain philosophy, where goods are shipped on demand and arrive just before they are needed, back towards a ‘Just-In-Case’ approach. Under this approach, higher volumes of inventory and production are stored and undertaken locally, where it can be better guaranteed.

Supply chain experts estimate the majority of Australian occupiers are currently holding approximately 30% more inventory compared to pre-pandemic levels⁷. While this degree of buffer will likely decrease as supply chain disruptions ease, a full return to previous inventory levels is unlikely, meaning more warehouse space will be needed on an ongoing basis for storage.

Infrastructure

Infrastructure development is a key priority in Australia as we contend with ongoing urbanisation and densification, along with surging population growth. Across the 2022-23 Budgets, $255 billion in government expenditure was allocated to infrastructure for the four years to 2025-26, an increase of $7 billion or 2.7% compared to 2021-22⁹. In dollar terms, NSW has the highest allocation to infrastructure ($88 billion), while QLD saw the largest increase on the previous year ($5.7 billion). The three East Coast states of NSW, Victoria, and QLD account for 83% of the committed infrastructure funding.

Budget-infrastructure

Infrastructure investment stimulates demand for industrial real estate in a couple of ways. As new infrastructure is built, congestion and connectivity improve, lowering transport and operating costs and allowing more efficient movement of people and goods. This helps businesses to grow and increases the supportable population base. More activity and more people, mean more demand for industrial space to power the ‘engine room’ of a bigger economy. The more direct source of infrastructure-related industrial demand occurs during a project’s construction phase, as space is needed to manufacture, assemble, and store materials and components.

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Customer proximity

The time it takes to reach the customer is of critical importance in modern supply chains. Customers increasingly expect products to arrive faster, more flexibly, at the time promised, and with lower delivery costs. While not a driver of aggregate space demand, the focus on customer proximity does contribute to stronger rental growth for well-located properties.

Transport accounts for 45-70% of logistics operator costs compared to 3-6% for rent¹⁰. This low proportion of cost means well-located industrial assets with good transport access and proximity to customers have long runways for rental growth, as occupiers prioritise lower (cheaper) transport times – an up to 8% increase in rent can be justified if a location reduces transport costs by just 1%.

But what about supply risk?

While the demand drivers for industrial are clear, the supply-side response is just as important in determining asset performance. In previous cycles, downturns have arisen from excess speculative development creating too much stock and dampening rental growth. But there are several reasons why the sector is insulated from a supply bubble this time around. Firstly, labour and materials shortages are making it challenging to physically build new assets, even though development is commercially attractive. Secondly, there is a lack of appropriately zoned, serviced land available for development. While land is becoming available farther out from metropolitan centres (e.g. Western Sydney Aerotropolis), this land is not appropriate for many occupiers or uses which require closer proximity to customers. It will also take time for this land to become development-ready, due to planning, infrastructure (e.g. road widening), and utility servicing (e.g. water connection) delays. Finally, the sector has matured and become more ‘institutional’ over the current cycle, with a shift in ownership from private capital to large, sophisticated owners and managers. Institutional owners take a more cautious approach to development, contingent on higher levels of tenant pre-commitment, reducing the risk of a speculative supply bubble. These factors will make it difficult for supply to keep pace with – let alone surpass – demand.

Demand story remains intact

Industrial has been the “hot” sector in recent years, and it’s reasonable to question whether it’s been squeezed of all its juice. The pandemic provided a boost to many of industrial’s demand drivers (e.g. e-commerce) and introduced new ones (e.g. supply chain resilience). While these tailwinds have abated somewhat from their pandemic highs, they continue to contribute to a positive demand outlook. Arguably more importantly, the supply response remains constrained by shortages (e.g. labour/materials/land) and delays (e.g. planning), and it will take several years for the sector to return to a more normal supply-demand balance. As a result, Cromwell expects healthy rental growth to be a key driver of industrial returns, and for the sector to remain attractive despite expansionary pressure on cap rates.

‘

_Footnotes

^{1. The Property Council-MSCI Australian All Property Digest, June 2023 (MSCI)

2. Australia’s Industrial and Logistics Vacancy 2H22, December 2022 (CBRE Research)

3. Logistics & Industrial Market Overview – Q1 2023, May 2023 (JLL Research)

4. What Do Recent E-commerce Trends Mean for Industrial Real Estate?, Mar-22 (Cushman & Wakefield Research)

5. Australia’s E-Commerce Trend and Trajectory, September 2022 (CBRE Research)

6. Projection based on historical 15-year retail sales growth of 4.0% p.a. (Cromwell, Jun-23)

7. Is ‘Just-in-Time’ a relic of a time gone by in Australia?, March 2023 (JLL)

8. Global Reshoring & Footprint Strategy, February 2022 (BCI Global)

9. Australian Infrastructure Budget Monitor 2022-23, November 2022 (Infrastructure Partnerships Australia)

10. 2022 Global Seaport Review, December 2022 (CBRE Supply Chain Consulting)}

About our managed commercial property funds

Our suite of funds offers access to unlisted property trusts, ASX-listed Real Estate Investment Trusts and internationally listed small cap securities, providing different methods of investing in commercial property and diversifying your portfolio.

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September 14, 2023

An office space evolution

George-street-final

We know the office space landscape is changing. It’s up to Cromwell, as a real estate investor and fund manager, to a listen to the modern requirements of tenants and invest in upgrading our assets to meet these needs while also adding value for investors.

In Edition #42 of Insight, Cromwell’s Research Investment Strategy Manager, Colin Mackay, examined how the office is increasingly becoming a place for collaboration and social connection, rather than focus work, meaning a greater need for meeting, gathering, and collaboration spaces. There is also a need to lower density and make workplaces more comfortable from an employee wellbeing and retention perspective.

Earlier this year, Insight examined ‘The physical office in a hybrid world’ – how white-collar employees divide their working week between home and office, and how the role of the office space has changed forever, largely due to work from home requirements during the COVID-19 pandemic.

The conclusion reached was that, as demand continues to concentrate on the minority of space suitable for modern occupation, the supply-demand mismatch will widen. It was proposed that investors who own or can acquire or create the space occupiers want, where they want it, are well positioned for future rental growth – and, importantly, are more likely to retain and attract tenants.

So, what do tenants want?

Spaces occupiers want

Understandably, tenant requirements can be as diverse as the building occupiers themselves. However, there are a number of reoccurring modern office space requirements that require attention.

A May 2023 research paper by global real estate services firm JLL revealed that incentives being offered by landlords to either encourage tenants to stay, or entice them to new premises, remain at historically high levels across many markets¹.

According to the research, upgrades to the base building, including end-of-trip facilities, improved ground entry and reception areas, improved lifts and amenities, event spaces, health and wellbeing facilities, business lounges, and cafes are high on the agenda for landlords seeking to keep their occupancy levels stable.

Sustainability is also increasingly a consideration for tenants, including requirements to source all power from renewable sources, or undertake capital upgrade works to the building infrastructure.

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In addition, research from Swinburne University of Technology and Third-Place.org in January announced that “working from cafes and pubs will be a 2023-defining trend”². These kinds of work environments have been termed ‘third spaces’ – or ‘third places’.

That is, if ‘home’ is categorised as a ‘first space’, and the traditional office workplace is categorised as a ‘second space’, ‘third spaces’ can be best described as communal, multi-purpose areas that people can utilise as they desire – including for work. The desire for third spaces has increased significantly since the end of the COVID-19 pandemic, as office building owners and employers look for ways to encourage more workers to return to the office.

The Swinburne-Third-Place research found that almost half of remote workers now spend time each week working from cafes or other third places. The trend continues to be particularly popular with Gen Z workers (loosely defined as people born between 1995 and 2010), ten percent of whom say third places are now their preferred place to work.

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The researchers found that, on average, people who work in third places will typically do so between two and three times each week. These workers will stay anywhere between 15 minutes and four hours – most of the time, they’ll go to a third place on their own.

The top three benefits to working in a third place were reported to be mental reset, community and social connection, and great food and coffee. When asked to what extent working from a third place positively contributes to their overall wellbeing, the average response was 86%. By extension, 98% of respondents said they’d continue to use a third place for work in the future.

‘

Meeting market desires

Cromwell has a strong track record of adapting office spaces to meet tenants’ requirements. Our exceptional in-house property development, project management, and technical capabilities allow us to identify and deliver value for our tenants, our investors, and capital partners through innovative development and construction projects, whole- of-building refurbishments, and adaptive re-use and asset transformations, all of which incorporate market leading sustainability initiatives.

In response to our tenants’ changing needs – highlighted in the 2022 Tenant Engagement Survey – Cromwell rolled out the successful design and delivery of a new purpose- built wellbeing and third space at our 400 George Street building in Brisbane.

Brisbane-based architectural firm nettletontribe was engaged to design a space that would meet the needs of our current and future tenants; and experienced national Indigenous accredited fitout and refurbishment company Rork Projects was tasked with delivering the vision.

The result is a superbly integrated indoor-outdoor shared meeting area; a training room and larger boardroom; a multi-faith/wellness room; and a 200 sqm breakout or function space.

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High ceilings and earthy floor tiles are complemented by polished timber entranceways and olive-green feature walls. Concertina (bifold) doors allow much of the area to be opened to the bustling city below.

The space is already being utilised by tenants as a break- out area; a space for meetings, yoga classes, and wellbeing classes. In this instance, Cromwell was able to repurpose a vacant and difficult floor space to provide an outcome that benefitted tenants, enhanced the building amenity, and increased marketability of the asset. Cromwell will apply the lessons learned through this process to upgrade works at our other assets.

Our experienced property managers continue to liaise with tenants regarding every workplace requirement, including lease disposal, lease negotiation, space planning, workplace design, change management, cost of construction, technology solutions or transitioning to net zero.

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The office market latest

Vacancy rates in Australia’s capital cities have increased modestly over the last six months, driven by an uptick in new office supply, according to fresh data from the Property Council of Australia (PCA).

The July 2023 edition of the ‘Office Market Report’, which is released twice a year, showed overall CBD vacancy increased from 12.6 to 12.8% nationally³. Non-CBD areas saw an increase from 15.2 to 17.3%.

PCA projects that the supply of office space in CBD markets is expected to remain close to the historical average throughout 2023, with an anticipated increase above the average in the second half of 2024.

Encouragingly, the office market in Brisbane – where Cromwell owns a number of assets – is particularly robust, with tenant demand outpacing available supply, decreasing the vacancy rate from 12.9% to 11.6%.

“Notably, the results show Premium and A Grade stock remains in high demand, reinforcing businesses’ desire to provide attractive and enjoyable workplaces for their people,” Property Council Chief Executive Mike Zorbas said as part of the July Office Market Report launch.

“These organisations recognise that maintaining a physical office presence in our cities is vital for conducting business effectively. We know that face-to-face teamwork supports deeper team relationships and brings about positive outcomes for organisations, the economy, and society
at large.”

Continuing to improve our spaces

Attracting Government and blue-chip tenants on long-term leases continues to be a key focus for Cromwell. As with our George Street property, works have been undertaken at several other assets to retain existing building occupiers – and attract new tenants.

Cromwell has actively completed a number of property upgrades of this kind already in 2023, including the recent completion of several speculative fitouts.

Speculative fitouts are new office fitouts built by the landlord or building owner, designed to accommodate a broad range of new tenants. If building owners can show potential tenants a functional, modern space that requires no further work, it makes the property a much more attractive prospect.

Recent completed works include:

207 Kent Street, Sydney
Cromwell’s Projects Team has successfully concluded construction activities on levels 18, 19, and 20. These enhancements are in preparation for the upcoming occupancy of new tenants in the forthcoming months.

The tenancy areas have undergone upgrades, featuring environmentally conscious carbon-neutral flooring and energy-efficient LED troffer lighting. Additionally, significant improvements have been made to lift lobbies and amenities across various floors. Both cold shell and warm shell office spaces have been prepared for future fitouts.

These recent endeavours build upon the substantial base build refurbishment that was previously undertaken in 2022. This refurbishment included a lobby refresh inspired by a First Nations Indigenous design, with the addition of end-of-trip facilities. These facilities encompass a spacious bike storage area, expanded shower amenities, and the installation of numerous new storage lockers.

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95 Grenfell Street, Adelaide
Cromwell Direct Property Fund’s Chesser House property, located in the heart of Adelaide, has recently seen the completion of speculative fitouts in two tenancies.

The suites boast neutral colour palettes, highlighted by gentle blues and calming green tones, contributing to a serene ambience. The layout of the 360sqm and 200sqm spaces has been strategically planned to maximise functionality. This includes dedicated areas for meeting rooms, quiet spaces, and collaborative zones.

475 Victoria Avenue, Chatswood
Cromwell’s Projects Team has successfully managed the realisation of six speculative fitout tenancies spread across three levels. The sizes of these tenancy floors span from 100sqm to 520sqm, with each suite thoughtfully adorned with a distinct colour palette, instilling a sense of individuality to every area.

Space planning was thoroughly conducted in collaboration with both internal and external leasing teams. This strategic approach responds to the growing demand for collaborative spaces while underlining the importance of design flexibility to facilitate enhanced reusability.

Furthermore, sustainability remains a paramount focus. A notable achievement in this regard is the recycling of 52% of construction waste, which includes repurposing existing furniture items.

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100 Creek Street, Brisbane
Three speculative fitouts, completed in December 2022, were well received by the market; prompting the building of a further four speculative fitouts, across two floors, this year.

The design of these suites focused on breakout areas and collaboration zones to address market requirements in addition to providing quiet rooms to those wishing to concentrate on tasks or avoid distraction.

To enhance the value of the space, carbon-neutral flooring inspired by First Nations Indigenous culture was carefully selected and incorporated.

Continuing to improve our strategy

In response to market dynamics, Cromwell is reshaping our speculative fitout approach. Our primary goal is optimising financial efficiency, particularly during periods when tenants are yet to be secured.

As part of this process, we’re introducing a fresh concept: pre-lease design concepts – that is, potential tenants can influence final touches after pre-commitment. By addressing tenant preferences, we enhance experiences and minimise post-move changes. This strategy balances financial prudence, tenant engagement, and functional design, exceeding expectations consistently.

Our designs offer lasting allure, catering to diverse needs. Easily upgradable components reduce major modifications. Further, ESG considerations remain paramount to our business decisions – we integrate eco-friendly practices and repurpose elements to cut waste.

In essence, our approach emphasises sustainability, functionality, and tenant satisfaction. Adaptable designs create appealing, eco-conscious spaces.

In conclusion

As the office market continues to evolve, Cromwell is committed to ensuring that our assets adequately meet current and future tenant requirements – we will adapt office spaces to meet tenants’ needs, improving our vacancy rates in a highly competitive market.

By developing our approach to improve the occupancy of our assets, we will deliver favourable outcomes for investors now and in the future.

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_Footnotes

^{1 Choosing the best fit for your organisation, May 2023 (JLL Research)

2 Third Places – A health alternative to working from home?, January 2023 (Swinburne University of Technology and Third-Place.org)

3 Office Market Report, July 2023, (Property Council of Australia)}

About Cromwell Direct Property Fund

Read more about Cromwell Direct Property Fund, including where to locate the product disclosure statement (PDS) and target market determination (TMD). Investors should consider the PDS in deciding whether to acquire, or to continue to hold units in the Fund.

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September 14, 2023

In conversation with… Rob Percy

A native Glaswegian, Rob Percy has lived in Australia for almost 20 years. He’s an avid swimmer and AFL convert – and has adapted to the life of a Sydney Swans supporter in his adopted hometown.

Skilled in asset management, mergers and acquisitions, financial structuring, financial services, and valuation, Rob has been with Cromwell for just under 12 years – serving as the Group’s Chief Investment Officer since mid-2018.

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1. You’ve been the Chief Investment Officer at Cromwell for the past five years, Rob – what does the role involve? What are some of the key responsibilities you take on daily?

The role has changed somewhat since I was first appointed, but the current role is responsible for Group Strategy, our Australian Funds Management business, Investor Relations, and Research. I also represent Cromwell on the Boards of our joint venture companies (Phoenix and Oyster) and, in the case of Oyster, I chair the Investment Committee.

On a day-to-day basis, I’m focused on thinking through what’s next for Cromwell Property Group and our suite of Funds Management products, while ensuring our existing balance sheet and retail products are appropriately and effectively managed.

2. You hold a Master of Science, focused on chemical physics, from The University of Glasgow – how did you transition from that field to the finance industry? Are there any transferable skills
between the two vocations?

I always enjoyed studying the sciences through school so, when it came to choosing what degree to do, I decided to choose something that clicked with me; something I enjoyed learning about. I had a great time at university, but never intended on becoming a professional scientist. In the summer before my final year, I spent two months in London with a large investment bank, working in their derivatives team – and I was hooked.

I applied to a number of investment banks to join their graduate programmes, and ultimately accepted an offer to join NM Rothschild & Sons for their 1998 intake.

I joined the bank around September that year, along with my fellow graduate programme members – which included geographers, linguists, and historians, among others. We embarked on a four-month on-the-job training programme, where I was taught financial analysis, presentation skills, basic legal skills, project management skills, and spent time on secondment across the various parts of the business. From then on, I spent eight years in investment banking in London and Australia before moving into property funds management.

There are a huge number of transferrable skills between science and finance. At Uni, I was taught how to independently think and motivate myself – the days of being chased and reminded by a teacher to complete an assignment were over. No-one else was going push me, I had to do that myself.

A science-based education teaches you strong analytical and problem-solving skills that can be used across any number of careers. I was taught how to observe, research, and think critically, all kills which can be used when approaching any task, be it in a laboratory, at an office desk, or in a boardroom.

3. There’s been considerable media attention given to the current state of the commercial property market over the past six months – how do you see the market in August 2023?

There is no denying that times are challenging and uncertain. The current volatility in interest rates and valuations is making investment decisions hard for investors, which is flowing through to low transaction volumes worldwide.

Recent data is looking more promising for Australia, but I think we still have some way to go until markets can settle down, interest rates become more stable, and investors have more confidence in deploying capital that is not just looking for opportunistic returns.

The other key focus is on leasing and maintaining our buildings to ensure we are keeping our occupancy high and that our buildings are attractive and relevant to existing and new tenants.

4. Given the environment, how does Cromwell navigate the uncertain market conditions to keep generating income for our investors?

A key focus for us in this environment is to protect our balance sheet. We have undergone a programme of noncore asset sales, the proceeds of which have been applied to reduce our outstanding debt balance and reduce gearing. These sales continue, particularly in Europe, where we are looking to return capital to Australia for investment locally.

The other key focus is on leasing and maintaining our buildings to ensure we are keeping our occupancy high and that our buildings are attractive and relevant to existing and new tenants.

5. In your opinion, what opportunities exist for Cromwell over the next twelve months?

With uncertain and volatile markets also comes opportunity. A key strategic goal for us in the short-to-medium-term is to expand and grow our Australian Funds Management business. We are looking to create a number of new products in the short-term to take advantage of some thematic trends we are seeing domestically.

We will be looking to expand our sector horizons outside of office and take advantage of our repositioning skills to look for opportunities where we can add value and additional life to existing assets.

We also see great opportunity to boost our funds under management and skill base through platform and portfolio acquisitions, much like our recently announced transaction between Cromwell’s Direct Property Fund and the Australian Unity Diversified Property Fund.

We have a great platform, loyal investors, and a broad skill set within Cromwell, which I think places us well to take the business to the next stage of its strategic plan.

6. The merger of Cromwell’s Direct Property Fund with Australian Unity’s Diversified Property Fund was seen as a bright point for the business in 2023 – can you expand on the work that was put into the deal?

It’s a big deal for both funds, and one that took a lot of people to get to this point.

We’ve been working on the transaction for close to 12 months, working with multiple advisors across all disciplines. It has already involved every team within Cromwell and will continue to as we move towards the unitholder meeting and hopefully completion and integration into our platform.

It’s a great illustration of what can be achieved together, working alongside our colleagues, and being aligned to a common goal.

7. What are some changes or shifting attitudes/trends/practices that you currently see playing out in the commercial property market?

As businesses adjust to the post-COVID-19 environment and work practices, we are seeing tenant attitudes to office shifting. We are seeing larger occupiers, which traditionally fill Premium buildings with large floorplates, contract – while smaller tenants are expanding.

This is changing the adage of “flight to quality”. Historically, “quality” would have been synonymous with Premium – top grade, large floorplate office buildings with high rents, but this ignores the needs of most office occupiers, particularly those that are growing.

The majority Australian businesses (and employment) are small and medium-sized enterprises. These SMEs are in the market for a new ‘Toyota’, not a ‘Rolls-Royce’. They want the highest quality office, in the best location, within their price bracket. So “high quality office” is really the space that meets the needs and preferences of its target audience.

We are also seeing a shift to “experiences”, with tenants now increasingly focused on the whole package of location, local amenity, on floor experience and fit-out, natural light, third spaces and wellness, and proximity to transport. We are seeing this play out particularly in the city fringe areas where rents are growing strongly, given the lack of availability.

8. What do you enjoy most about your role?

I think it’s the variety of the role and being central to the growth of the business, helping to set and drive the strategy, creating new products, and building new relationships.

When I was in investment banking, we would move from one transaction to the next, but at Cromwell I can follow through on ideas and new opportunities, helping to build out the business and develop the culture.

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September 14, 2023

Initial ‘green’ loan secured under new Sustainable Finance Framework

In a milestone for the business, Cromwell Property Group transitioned to our first ever green loan in July, as part of the rollout of our new Sustainable Finance Framework. Developed in consultation with the Commonwealth Bank of Australia and French-based multinational financial services company Societe Generale, this framework will see Cromwell apply best practices in energy efficient real estate and sustainability to our portfolio – and support the transition to a more sustainable economy more broadly.

What is a ‘green’ loan?

According to the Climate Bonds Initiative, an international organisation working to mobilise global capital for climate action, green loans are defined as any type of loan instrument used to finance or re-finance projects, assets, and activities with environmental benefits.

Green loans are based on ‘use of proceeds’, with borrowing proceeds transparently earmarked for eligible ‘green’ assets1. It is global best practice for green loans to be arranged in line with the Green Loan Principles, the Climate Bonds Standard (to the extent of available criteria), as well as several country specific guidelines.

The Climate Bonds Initiative anticipates that green loan markets are poised for growth in the coming decade, as lenders and borrowers cooperate and leverage market development to support local economies to transition to become net zero and climate resilient.

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It’s better being green

The inaugural transaction under Cromwell’s new Sustainable Finance Framework involved transitioning the existing $130 million bilateral loan on the Cromwell Riverpark Trust – with Commonwealth Bank of Australia – to a green loan certified by the Climate Bonds Initiative. The debt facility for the Cromwell Riverpark Trust was extended for a further two years, with all other terms remaining the same.

Obtaining this type of loan requires issuers, like Cromwell, to embed transformative steps, not incremental improvements, for rapid decarbonisation across all three scopes of their footprint.

Lara Young – Group Head of ESG, Cromwell Property Group

Cromwell’s Group Head of ESG, Lara Young, said a huge team effort, and considerable work, went into securing this type of loan for the Cromwell Riverpark Trust, which is underpinned by Energex House in Brisbane.

“The Climate Bonds Low Carbon Buildings Criteria was designed with an ambition of a zero-carbon future in 2050. Obtaining this type of loan requires issuers, like Cromwell, to embed transformative steps, not incremental improvements, for rapid decarbonisation. Only the top 15% most emissions-efficient buildings in a city can qualify for green loans certified by the Climate Bonds Initiative⁽¹⁾” said Ms. Young.

“Energex House is an industry leading Green Star 6 star, and 6-star NABERS Energy rated, building. By extending the term of the facility for a further two years under a green loan, we will continue to improve its sustainability performance.”

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Framework to safeguard the future

Cromwell has developed its Sustainable Finance Framework to support, and provide transparency to, our commitment to fund low-carbon, sustainable, efficient, and resilient buildings that meet our ESG ambitions, as well as those ambitions of our people, our tenants, and our suppliers.

Moving forward, the framework will further optimise the Group’s borrowing practices through the use of sustainable debt instruments, including green bonds and loans – like those outlined above – as well as sustainability linked bonds and loans. A copy of the document is available on the Cromwell Property Group website.

Lara Young explained that Cromwell would continue to refine its Sustainable Finance Framework over the next few years, in line with the evolving sustainable finance market and the latest legislation, standards and best practices.

“By leveraging green or sustainability linked debt, Cromwell Property Group can move significantly closer to meeting our current and future ESG responsibilities, including a Cromwell portfolio Net Zero Scope 1 and 2 target for 2035, and Net Zero across all 3 scopes by 2045.”

Initial-green-article-1

The new framework was developed following in-depth consultation with issuers and financial institutions to ensure that a best practice methodology could be deployed. The Commonwealth Bank of Australia and Societe Generale acted as sustainability coordinators throughout the development process.

Commonwealth Bank of Australia General Manager Corporate Finance and ESG, Jane Thomson, said sustainable finance was a rapidly growing market.

“We have partnered with many high-profile clients through their first sustainable finance transactions, and we’re thrilled to support Cromwell to develop a framework that reflects their business objectives and sustainability strategy,” Ms. Thomson said,

“One of our priorities is to play a leading role in supporting Australia’s transition to a modern, resilient, and sustainable economy, and key to that is supporting high quality green buildings in the commercial property sector.

There are enormous benefits for an organisation in accessing the vibrant sustainable finance markets and we are pleased to have supported Cromwell’s inaugural green loan under the new framework for the Energex House asset.”

Tessa Dann, Head of Sustainable Finance for Australia & New Zealand at Societe Generale, said: “as a global bank with strong focus on supporting the transition to a more sustainable economy, we are pleased to have worked as a sustainability coordinator for Cromwell Property Group to develop a Sustainable Finance Framework with a global perspective that reflects Cromwell’s presence across 14 countries.”

“The Sustainable Finance Framework adds another dimension to Cromwell’s sustainability strategy by enabling all Cromwell funds and related entities to utilise the Framework by aligning debt funding needs with sustainability outcomes.”

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Benefitting our investors

As outlined in the ‘ESG and Investment Strategy’ white paper by Cromwell’s Research Team, ESG and financial performance are inherently interlinked. The report demonstrated that investments which maximise positive ESG outcomes also maximise long-term performance given their contribution towards ensuring stable, well-functioning and well-governed social, environmental, and economic systems.

There is no trade-off between ESG and financial return, the report found – they go hand-in-hand. That is why it is prudent that investors seeking to protect, create, and grow long-term performance ensure that ESG is central to investment strategy decisions.

Strong ESG credentials attract high calibre tenants, helping to safeguard stability of income.

Strong ESG credentials attract high calibre tenants, helping to safeguard stability of income. For example, the Australian Government has minimum energy performance standards for all government office buildings. Australian Government tenants are only allowed to occupy office building spaces that have a 4.5 stars NABERS Energy, or equivalent, level of energy efficiency.

State governments around Australia similarly have strict energy requirements for the spaces they occupy. For Cromwell, given the large volume of government tenants we cater for, ensuring that we nvest in ESG is critical to ensuring ongoing long- term government leases.

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Accountability: delivering on what we promise

Cromwell formalised an overarching ESG Strategy in early 2023, the process for developing which was one of consultation and collaboration, and we have sought to achieve a globally harmonised approach.

The new ESG Strategy includes targets that are crucial to our future, including decarbonising our business toward net zero and setting new baselines for areas such as energy consumption, waste management, and carbon in each of our operating regions. We have also developed region-specific targets to ensure we are addressing local concerns, such as the development and registration of an Australian Reconciliation Action Plan, with further progress and meaningful reflection occurring constantly.

As a capital light fund manager that focuses on the acquisition and uplift of existing buildings, we have a lower carbon footprint compared to organisations focused on new developments as our embodied carbon is largely limited to maintenance and refurbishment. That said, even Cromwell still strives to ensure embodied emissions are addressed. During our buildings’ lifecycles, we aim to act as responsible stewards – we generally acquire existing buildings, identify and implement the most relevant opportunities to improve their environmental efficiency and ensure they are performing well, before divestment.

In FY23, we developed a comprehensive Scope 1-3 emissions baseline and Marginal Abatement Cost Curves across all regions to understand where our major emissions sources lie in our value chain, and determine and prioritise locally appropriate and cost-effective emissions reduction activities.

We have now developed an ambitious Net Zero Strategy that encompasses our Scope 3 emissions, including our tenants’ emissions and embodied carbon, and we are excited to share updates on our progress.

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_Footnotes

^{1. Green Loans Australia & New Zealand, 2020 (Climate Bonds Initiative)}

Explore our Sustainable Finance Framework

Read the full Sustainable Finance Framework and find out more.

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August 15, 2023

After tax returns and the value of franking credits

Stuart Cartledge

Part of the advantage of the Cromwell Phoenix Property Securities Fund (Fund) over other REIT investment options, is that it is managed to maximise after-tax returns. This is the real measure that matters to investors. Unfortunately, the funds management industry doesn’t typically report this way, instead showing investment returns on a pre-tax basis; and it is this nuance that can lead to the under-pricing of franking credits.

While REITs have historically been trust structures, the more common structure among many large capitalisation REITs today is a combined trust and company structure. This is important, because companies pay tax on their earnings before distributing dividends and it is in this context that franking credits become important. Franking credits were introduced in Australia to stop the double taxation of company profits subsequently distributed to investors via dividends. These franking credits, representing company tax already paid, can be used by investors to reduce their tax bill. On average, over the last 10 financial years, the Fund has delivered franking credits that have “topped up” investors’ income by 0.49% per annum. Given the Fund’s positioning in Sunland, discussed below, the top up delivered in the 2023 financial year was 1.56%.

This article takes a closer look at the somewhat dry subject of franking credits and how they can help to maximise your after-tax returns.

The theory

Some of the stocks held in the portfolio are traditional corporates, subject to Australian tax, and are therefore likely to generate franking credits under the Australian dividend imputation scheme. These are valuable to investors and should influence how the portfolio is managed.

The table set out below shows the impact, with each column representing a different investor category. For example, the second column, labelled ‘Accumulation’ shows how a super fund investor in accumulation phase gets $85 of after-tax value from a $70 fully franked dividend. The performance figures for the Fund only capture the $70 of cash dividend. The uplift goes unreported but is clearly valuable.

In practice: Goodman Group versus Charter Hall Group

Goodman Group (ASX:GMG) (Goodman) and Charter Hall Group (ASX:CHC) (Charter Hall) are both Australian listed property securities that derive earnings from a combination of rental income, development and funds management activities. Goodman is focused on industrial property and diversified geographically with operations in the US, Europe and Asia in addition to Australia and New Zealand. Charter Hall is diversified across multiple property sub-sectors, but the business is focused geographically on Australia.

There are of course many other differences between these two securities, but Charter Hall’s domestic focus results in its corporate earnings being subject to Australian tax, and as a result, Charter Hall pays out franking credits. Goodman’s global business, on the other hand, will likely pay at least some tax in foreign jurisdictions, and these tax payments won’t come with franking credits. All else equal, an Australian investor should prefer the domestic business, because their after-tax returns will be higher.Sometimes it gets even better.

The Cromwell Phoenix Property Securities Fund holds a position in property development company Sunland Group (ASX:SDG) (Sunland). Sunland has been a profitable business for many years and has retained some of its profits to grow the business. As a result, it has built up a significant franking credit balance.

Following a strategic review, Sunland has elected to wind up its business and return all capital to shareholders. Phoenix has held a position in Sunland for many years – we like the business and management team and believe the company has been an excellent steward of shareholders’ capital.

A wind-up of the business may seem like a drastic step, but the share market has never really valued Sunland appropriately, with the stock price trading at a material discount to the book value of the company’s assets for most of its listed life, thereby ascribing negative value to the goodwill of the business. Furthermore, a sizeable franking credit balance has also been ignored by investors. For a tax-aware investor like Phoenix, we find this appealing.

At the risk of over-simplifying the transaction, as Sunland goes through the process of completing projects and selling inventory, it will pay out all cash proceeds as a combination of fully franked dividends and a return of capital. Table 2 shows some key metrics immediately prior to the announcement of the Sunland Group Strategic Plan, and the share price reaction to the announcement on 20 October 2020.

Table 2: Key metrics

Despite the strong share price reaction to the announcement, Phoenix lifted its exposure to the stock given the increased certainty of the recognition of value.

Over the subsequent 18 months, Sunland have made significant progress towards the strategic goal and has recognised further profits from the sale or completion of several development projects, such that the eventual outcome is likely to be even better than the original estimates.

For Australian taxpayers on low tax rates, such as super funds or foundations, the value of such a transaction is ‘super-charged’. Pun intended. Portfolio construction needs to consider a myriad of factors. Most of them require estimates of the future. At least with tax, the framework for analysis is reasonably steady, and a tax-aware strategy can deliver with certainty in a somewhat uncertain world.

Read more on the history of franking credits

In the lead up to the 2019 Federal Election, Cromwell provided a brief overview and history of franking credits.

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August 3, 2023

June 2023 direct property market update

Peta Tilse

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Economy

chart_austcpi

At the risk of sounding like a broken record, the outlook for inflation and interest rates was again the key focus for markets over the June quarter. It does appear that central banks are winning the fight against inflation, with CPI prints in the US and Australia coming in below market expectations and Canadian inflation dropping below 3%.

Australia’s June quarter data showed goods inflation continues to slow, with services inflation stickier (as expected). Annual inflation is now sitting at 6.0%, down from 7.0% in the previous quarter. Surging insurance premiums (14.2%), elevated food prices, and the highest annual rent inflation since 2009 were the key drivers.

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The softer-than-expected inflation print provided the RBA with breathing room, with markets now expecting a pause at the August meeting. At this late stage of the cycle, it’s prudent that rates are only hiked when compelled by the data, and most indicators such as hiring plans, consumption, and confidence point to slowing ahead.

The strong labour market will potentially force another rate hike in coming months if it remains tight, but it’s important to remember that unemployment is a lagging indicator. The RBA is conscious of our highly indebted household sector; the high proportion of fixed rate mortgages which will be rolling onto higher variable rates; the 400bps of tightening which is still yet to fully hit the economy; and rising rents putting pressure on household budgets.

The challenge of rising rents is in part due to a mammoth increase in population, driven by estimated net overseas migration of 400,000 people for the year to June¹. While the very strong population growth will expand the demand base of the economy, it does place extra strain on a housing sector which was already behind the pace in supplying adequate dwellings. There isn’t a quick fix, so residential rents will likely continue rising at a solid pace for some time. There is a limit to how much rental growth households can stomach, and relief will likely be seen via an increase in the average household size. After decreasing to record lows over the year, a reversion of household size to the pre-COVID average (~2.52 people) would “free up” around 100,000 dwellings, while an increase to 2.55 would account for all estimated population growth in the year to June.

chart_overseashousehold

Office

It was a mixed bag for office data over the latest quarter, as rental growth proved resilient despite early signs of softening across space fundamentals and yields. According to JLL Research, national CBD net absorption totalled over 13,000 sqm, with four of six markets recording positive demand. The resource-based markets of Brisbane and Perth comfortably saw the strongest levels of demand, with expansion from the public sector, mining and professional services driving their positive results.

Sydney CBD recorded the weakest result, as large occupiers across financial services and technology contracted their footprint and/or offered excess space for sublease. Prime stock continued to record stronger net absorption than Secondary stock on a national basis.

chart_netabsorption

The national CBD vacancy rate increased negligibly to 14.4%. Reflecting the large occupier trends noted above, Sydney and Melbourne both saw an increase in the vacancy rate. The other CBD markets recorded a lower vacancy rate compared to the first quarter of the year, with Brisbane and Perth seeing the most tightening consistent with their stronger net absorption outcomes. Despite elevated vacancy, rental growth was broadly positive. Prime net face rents grew across every CBD market for the quarter, led by Brisbane. Prime incentives were largely stable, leading to positive net effective rental growth across half the markets and the strongest growth in four quarters on a national basis.

chart_totalvacancyrates

chart_primenetgrowth

The impact of higher interest rates was reflected in a softening of Prime yields over the quarter, resulting in lower valuations across the sector despite supportive income growth. Transaction volume remains very low, with 44 Market St, Sydney the only notable Prime asset which traded over the quarter.

Retail

The impact of higher interest rates is starting to be felt by consumers, with retail sales declining -0.8% in June. This was the fifth consecutive month of sub-1% growth, bringing annual growth down to 2.3%. Growth was weakest across the discretionary categories of Department Stores and Clothing, as their very strong run through the pandemic starts to lose steam. Groceries was the top performing category over the month with its more resilient inflation drivers, while eating out held up relatively well considering the headwinds facing consumers.

Positively for retail real estate, income growth continues to recover from COVID impacts. Retail sales are still 16% above the level implied by the pre-COVID trend, and leasing activity reflects the outperformance which accrued to tenants over the period. Retail has not been immune from the expansion of yields seen across real estate in the June quarter. However, retail’s higher starting yield means the movement is less impactful to valuations on a percentage basis.

While income recovery is strongest across discretionary-focused assets, investors continue to prefer centres underpinned by a strong convenience offering. A 50% stake in Westfield Tea Tree Plaza came to market this month and will provide pricing evidence for large shopping centres.

Industrial

Industrial continues to generate significant face and effective rental growth, albeit at a slowing pace. The strength of the sector is due to its favourable demand-supply balance, with national vacancy remaining below 1%² . Space take-up continues to be led by Transport & Warehousing, Retail Trade, and Manufacturing occupiers. Pre-leased space, particularly in Brisbane, continues to be the main driver of take-up, however this is skewed by the lack of lettable space – Sydney vacancy is near zero and impacting the ability of occupiers to move or expand.

Supply is expected to reach record levels in 2023, with high levels of completions also expected in 2024. Vacancy is still expected to remain well below long-run averages despite elevated development, with most of the pipeline for 2023 already pre-committed. There is also a risk that some of this supply is delayed in coming to market, particularly in Sydney, due to labour shortages and planning delays.

Outlook

The Australian economy remains in a solid position despite global headwinds. Inflation is slowing, employment is solid and population growth will provide support to demand over the course of the year. The rate hiking cycle is nearing its end, financial stability has been maintained, and distress remains contained.

These factors put the Australian commercial property market in good stead from a demand perspective. Businesses continue to adjust size requirements for occupancy as they live with hybrid working, although in certain markets this is now largely known. Experiential workplaces with clever refurbishments and amenity continue to attract and retain quality tenants; something we continue to see within our assets. Capital continues to view Australia as a favourable investment destination given its attractive demographic profile, growth prospects, and relative social and political stability.

How did Cromwell Funds Management fare this quarter?

The Cromwell Direct Property Fund (CDPF) was fully revalued this quarter by external valuers with 54% of the portfolio completed as at 30 April 2023, and the remainder as at 30 June 2023. The portfolio of assets as at 30 June reflects best available information. Despite good leasing outcomes, valuations were impacted by some recent sales which saw a further widening in cap rates of between 0.125% to 0.75% (depending on the individual asset fundamentals).

After the quarter’s end (7 July), Cromwell Funds Management Limited (CFM), as the responsible entity of the CDPF, entered into a Merger Implementation Deed (MID) with Australian Unity Property Limited (AUPL). If successful, the trust scheme under the MID will see the Australian Unity Diversified Property Fund merge with CDPF creating a 15 asset portfolio across the Industrial, Retail Convenience, and Office sectors, and increasing location diversification with three assets located in Western Australia.

View further information about the proposed merger here: Cromwell Direct Property Fund Proposed Merger – Cromwell Funds Management

The Fund continues to distribute 6.75 cents per unit p.a., or 6% p.a³ (payable monthly), and has generated annualised total returns since inception of 7.2% p.a. The Cromwell Direct Property Fund continues to demonstrate excellent risk adjusted returns for investor portfolios.

Performance (%) p.a as at 30 June 2023

Year	Cash (AU)	Bonds (AU)	Shares (AU)	Cromwell Direct Property Fund
1	2.89%	1.24%	14.4%	-11.0%
3	1.01%	-3.51%	11.07%	2.70%
5	1.17%	0.51%	7.12%	3.60%

_{Past performance is not a reliable indicator of future performance.}_{Source: Lonsec and Cromwell Funds Management}

_{1. 2023-24 Federal Budget estimate

2. CBRE Research, Australia Industrial and Logistics Figures Q2 2023

3. Based on current distributions of 6.75 cents per unit p.a. and a current unit price of $1.1156 as at 30 June 2023.}

About Cromwell Direct Property Fund

Read more about Cromwell Direct Property Fund, including where to locate the product disclosure statement (PDS) and target market determination (TMD). Investors should consider the PDS in deciding whether to acquire, or to continue to hold units in the Fund.

Learn more

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July 18, 2023

Room service: exploring investment opportunities in the hotel sector

Stuart Cartledge

The Cromwell Phoenix Global Opportunities Fund assesses potential investments in a bottom-up manner, selecting the best opportunities, rather than following broad thematics.

Despite this, investment opportunities may have similar drivers – or operate in similar industries – from time-to-time. This is currently the case for the Fund’s exposure to hotel properties – these opportunities all exist for different reasons and have unique risk/reward propositions; however, the true value of each is predominantly derived from the ownership of hotels.

Before examining specific examples, it is worth touching on how to think of the value of a hotel.

Like other types of property, one way to think about valuing hotels is to apply a capitalisation rate to the earnings the asset generates. Unlike some types of property (but much more similar than some realise), hotels need to be refurbished frequently to stay up-to-date and attract customers. Any income should be adjusted lower for a normalised capital expenditure amount.

Those who buy and sell hotels also often think of valuing hotels on a “per key” basis – this describes the hotel’s value relative to the number of rooms available. A well-located, extremely high-end hotel may trade for well above $1 million per key, while a motel in the middle of nowhere would likely trade for less than $100,000 per key.

The per key valuation of a hotel can be used to compare hotel valuations to replacement cost, which is the amount required to replace the hotel from the ground up (inclusive of land). This is important because, if hotels are trading for below replacement cost, it is less likely that new hotels will be supplied in that market. Hotels are extremely sensitive to demand and supply, as anyone who has travelled in peak periods can attest to. As an example, a high-end hotel on the Las Vegas Strip is commonly available for AUD$200 per night. Booking even a basic room in that same hotel during the Las Vegas Formula One event would set you back more than AUD$3,500.

Recognition of the value of hotel properties by listed markets is held back by two components. Firstly, financial results have been negatively impacted by COVID restrictions, meaning that those looking solely at the recent income generated by many properties are underestimating the true earning power. Applying a capitalisation rate to this smaller income number is understating the property’s true value. Secondly, unlike some other forms of property, hotels are held on a company’s balance sheet at the lesser of its depreciated cost or net realisable value. If a hotel was built long ago, this may significantly understate its true value and make it difficult to identify for investors screening for discounts to book value.

With this background detail out of the way, let’s look at some examples in which the Fund invests.

Park Hotels & Resorts Inc. (NYSE:PK)

Historically, the world’s leading hotel operators used to own hotel properties and manage their operations. In more recent times, these companies realised they could split the businesses, with one company managing the hotels – requiring very little capital (and, therefore, generating high returns on equity) – and one owning the more capital-intensive properties. Recognising this, Hilton Hotels spun-out its physical real estate in 2016, creating Park Hotels. At the time of the spin, Park comprised Hilton assets from all over the world. Today it is an entirely US-based portfolio of predominantly Hilton-run hotels.

A well-located, extremely highend hotel may trade for well above $1 million per key

Park owns some of the world’s most iconic hotels, including the 1,921-room Hilton San Francisco Union Square and the 1,878-room New York Hilton Midtown, which both dominate prime blocks in their respective cities. Perhaps more importantly, it owns two exceptional hotels in Hawaii – the Hilton Hawaiian Village Waikiki Beach Resort and the Hilton Waikoloa Village. We previously discussed the importance of replacement cost; however, these two sites are genuinely irreplaceable.

Despite the challenge in assessing the replacement cost of these hotels, a reasonable estimate for Park’s hotels is USD$735,000 per key. At the current share price, Park is trading for less than USD$250,000 per key. Using capitalisation rates from comparable property transactions ascribes a net asset value of $28.50 per share, compared with Park’s period end closing share price of $12.36. With a solid management team in place and a world class array of assets, Park Hotels appears very attractively priced.

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Sotherly Hotels Inc. (NASDAQ-CM:SOHO)

While Sotherly Hotels is another US-based hotel owner, it is in a very different situation to Park. As its name suggests, the organisation’s hotels are based in the South of the US, predominantly in states like Florida, Georgia, and North Carolina. These hotels are smaller and more downmarket than Park’s hotels, with many branded as Doubletree by Hilton, the company’s lower upscale brand.

The investment opportunity for Sotherly Hotels is largely tied into its capital structure. Most recently, Sotherly took on too much debt and preferred equity instruments to grow assets. This proved to be ill-advised when COVID hit, and their business was effectively shut down. They stopped paying dividends on their preferred equity, which began to accrue, and the company took on emergency debt.

As things began to improve, they have been able to repay their most costly debt that was taken on in their darkest days. They have also been able to retire some of their preferred equity and have resumed paying dividends on these instruments, reducing arrears. Dividends to regular shareholders can be paid again once the arrears are repaid. At a market capitalisation of just US$37 million, the implied value per key is approximately USD$175,000. This is a long way below replacement cost. As some property investors like to say, you couldn’t build those hotels out of playdough for that price!

Sotherley’s high debt load is a risk, however, which could be destructive should the macroeconomic environment turn more negative as a meaningful reduction in cash flow could make the interest burden extremely difficult. The Fund’s position sizing of approximately 2% of assets acknowledges this risk.

sagon-hotel

Stamford Land Corporation (SGX:H07)

Stamford Land is a Singaporean-based owner of the Stamford hotel portfolio in Australia, and it is run by eccentric Chairman CK Ow. In 2021, Mr. Ow put the entire portfolio on the market for sale. The portfolio attracted bids at multiples of the share price, but the offers did not hit Mr Ow’s target, so he u-turned and decided to raise capital at a massive discount.

Stamford has perpetually traded at a discount to the value of its properties, in part due to governance concerns, but also due to the aforementioned accounting treatment of hotels. Some of these hotels were purchased in the 1990’s and therefore their book value significantly understates their true value. Despite initially raising capital and saying he was no longer selling the hotels, Mr Ow has begun selling some assets. This includes the Stamford Circular Quay, sold as a development site, at a price of more than $2 million per key and the Stamford Plaza Auckland, sold at a price of more than $550,000 per key. Stamford has not yet reported its financial accounts since these transactions closed. When it does, the book value will reflect the sale prices of these properties highlighting some of the company’s latent value.

What the Ow family will choose to do with the money received from these sales, or whether they will sell more properties in the future remains a mystery. However, trading at a big discount to the value of the properties, with a near term revelation of value, we maintain a holding in the company.

Keck Seng Investments Limited (SEHK:184)

Keck Seng is controlled by Ho Kian Guan, one of Singapore’s 50 richest people. Keck Seng predominantly owns upscale hotels across North America and Asia – its major assets include the W Hotel San Francisco, the Sofitel New York, and the Sheraton Saigon Hotel. It also owns residential property in Macau. It has approximately zero net debt, with almost all gross debt held in the form of non-recourse mortgages tied to the US hotels.

Current earnings for these properties understate their true value due to the impact of COVID restrictions. The Sofitel New York was closed for most of 2021 and occupancy through 2022 was meaningfully below current levels. Restrictions in Macau and Vietnam have only recently been lifted and travel is still recovering to pre-covid levels. Keck Seng’s hotels are held on the balance sheet at depreciated cost. These hotels were purchased more recently than those owned by Stamford; however, book value still almost certainly understated their true value. At book value, the hotels are held at less than $175,000 a key, despite being predominantly 5-star properties. Even before considering how much this undervalues the property, Keck Seng’s book value is HKD$8.63 per share. This compares to a share price at period end of HKD$2.85.
Keck Seng’s governance is reasonable, with dividends regularly paid to shareholders and the share count remaining stable over time. Related parties are paid fair salaries and transactions seem sensible. Despite this, there is no reason why this discount is likely to close in the near term.

The stock is illiquid and, while it trades at one of the largest discounts in its history, it has always traded at somewhat of a discount to its fair value. Given the size of the discount and the quality of the underlying properties, Keck Seng appears to be a very attractive investment idea.

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Checking Out

Hopefully, the above provides examples of the different ways the Fund is investing in hotel properties. Despite the similarities in the underlying assets held by each, they are all somewhat unique from an investment perspective. Collectively at quarter end, these four investments constituted approximately 10% of fund assets.

For the period, they added a small amount of value relative to global indices, however as described above, they still appear to be attractive investment propositions.

Cromwell Phoenix Global Opportunities Fund

Read more about the Cromwell Phoenix Global Opportunities Fund (Fund), including where to locate the product disclosure statement (PDS) and target market determination (TMD). Investors should consider the PDS in deciding whether to acquire, or to continue to hold units in the Fund.

Find out more

Learn

September 2023 quarter ASX A-REIT market update

Market Commentary

Market outlook

About Stuart Cartledge

Performance commentary

Learn

Australia’s housing battle: Interest rates versus supply and demand

Interest rates

How can we aﬀord this?

Housing demand

Housing supply

The real issue

What are we doing about it?

A closing note

Learn

September 2023 direct property market update

Economy

Office

Retail

Industrial

Outlook

How did Cromwell Funds Management fare this quarter?

Learn

Industrial: Still delivering the goods

E-commerce

Supply chain resilience

Infrastructure

Customer proximity

But what about supply risk?

Demand story remains intact

Footnotes

Learn

An office space evolution

Spaces occupiers want

Meeting market desires

The office market latest

Continuing to improve our spaces

Continuing to improve our strategy

In conclusion

Footnotes

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In conversation with… Rob Percy

A native Glaswegian, Rob Percy has lived in Australia for almost 20 years. He’s an avid swimmer and AFL convert – and has adapted to the life of a Sydney Swans supporter in his adopted hometown.

1. You’ve been the Chief Investment Officer at Cromwell for the past five years, Rob – what does the role involve? What are some of the key responsibilities you take on daily?

2. You hold a Master of Science, focused on chemical physics, from The University of Glasgow – how did you transition from that field to the finance industry? Are there any transferable skills between the two vocations?

3. There’s been considerable media attention given to the current state of the commercial property market over the past six months – how do you see the market in August 2023?

4. Given the environment, how does Cromwell navigate the uncertain market conditions to keep generating income for our investors?

5. In your opinion, what opportunities exist for Cromwell over the next twelve months?

6. The merger of Cromwell’s Direct Property Fund with Australian Unity’s Diversified Property Fund was seen as a bright point for the business in 2023 – can you expand on the work that was put into the deal?

7. What are some changes or shifting attitudes/trends/practices that you currently see playing out in the commercial property market?

8. What do you enjoy most about your role?

Learn

Initial ‘green’ loan secured under new Sustainable Finance Framework

What is a ‘green’ loan?

It’s better being green

Framework to safeguard the future

Benefitting our investors

Accountability: delivering on what we promise

Footnotes

Explore our Sustainable Finance Framework

Learn

After tax returns and the value of franking credits

The theory

In practice: Goodman Group versus Charter Hall Group

Learn

June 2023 direct property market update

Economy

Office

Retail

Industrial

Outlook

How did Cromwell Funds Management fare this quarter?

Learn

Room service: exploring investment opportunities in the hotel sector

Park Hotels & Resorts Inc. (NYSE:PK)

Sotherly Hotels Inc. (NASDAQ-CM:SOHO)

Stamford Land Corporation (SGX:H07)

Keck Seng Investments Limited (SEHK:184)

Checking Out

_Footnotes

_Footnotes

2. You hold a Master of Science, focused on chemical physics, from The University of Glasgow – how did you transition from that field to the finance industry? Are there any transferable skills
between the two vocations?

_Footnotes