|
|
Direct Property
Direct Property Fund, Direct Real Estate Fund Update
September Quarter 2008
This update is for the BlackRock Direct Property Fund (Aust) (formerly known as the Merrill Lynch Direct Property Fund) and the BlackRock Direct Real Estate Fund (Aust).
The performance shown in the Fund Update is the gross performance of the fund. To view the net performance of the fund or of the different unit classes of the fund download the Fund Performance Report or visit Fund Performance.
Gross performance returns and benchmark performance shown do not include expenses, fees or tax. Net performance returns are prepared on an exit-to-exit fee basis which includes all ongoing fees and expenses.
Reduced availability and higher cost of debt
- The upheaval in credit markets that began in the second half of 2007 has continued into 2008. Credit spreads have continued to widen with borrowers continually facing even greater difficulty in accessing capital.
- The Reserve Bank of Australia at its meeting on 7 October lowered the cash rate by 100 basis points, citing volatile conditions across international financial markets and a serious dislocation in interbank markets.
- The RBA expects CPI to show an increase of 5.0% over the four quarters to September however it is cognisant of slowing consumer demand in Australia and slowing global economic growth.
Cost of equity
- Issues have not only been confined to debt markets.
- Global equity markets have seen declines in prices, driven by major global financial institutions writing down credit exposures, almost unprecedented lows in market sentiment, corporate collapse, negativity surrounding the outlook for the financial sector, the increased cost of securing debt (if available at all), and concerns about the economic outlook globally and in the US.
Bond rates
- The spread between 10 year bond rates and internal rates of return on property assets has decreased in recent years due to increased institutional ownership and development of property, as well as superannuation funds seeking exposure to investment grade property.
- In the future, increased risk is likely to see the required spread between the risk free rate (10 year commonwealth government bond rate) and the required return (internal rate of return) widen.
What does this mean for property values?
- Financial markets are undergoing a period of repricing of debt and equity which is having a significant effect on investors in commercial property. As the ability of investors to access both debt and equity becomes increasingly difficult and costly, there are reduced numbers of buyers of property able to participate in the market.
- Property assets with higher risk will be more exposed to any downturn, while higher quality assets will have greater protection. Vendors’ expectations are likely to be divergent from the capacity of buyers.
Valuations
While there has been an absence of transactional evidence in most markets, valuers have opted to reflect weaker market sentiment through the easing of capitalisation rates and/or discount rates when conducting valuations. However, there appears to be agreement amongst valuers that notwithstanding this change in mood, property market fundamentals remain solid in many of the major markets. This will be a positive should demand for office, industrial, or retail space weaken in a slowing economy. These strong fundamentals have been reflected in the valuation process through increases in market rent assumptions, as well as continuation of positive views on rent growth.
Despite the recent uncertainty across the markets, the BRPT’s unit price decreased by 2.26% once all properties in the Trust were revalued at 30 September 2008. Given the prevailing macroeconomic conditions, we view this as a solid result, particularly in light of returns in other asset classes.
The BRPT is very well placed with 97% occupancy and only 4.6% of the portfolio’s income (excluding 369 Ann Street) expiring in 2008.
Positive Influences on Performance
Property
|
Previous Valuation
|
Current Valuation
|
% Change
|
60 Holbeche Road, Arndell Park, Sydney
|
$20,500,000
|
$21,700,000
|
5.9%
|
Rosemeadow Marketplace, Sydney
|
$15,800,000
|
$16,000,000
|
1.3%
|
34–42 Sheppard Street, Hume, Canberra
|
$13,900,000
|
$14,000,000
|
0.7%
|
Negative Influences on Performance
Property
|
Previous Valuation
|
Current Valuation
|
% Change
|
310 Barrack Street, Sydney
|
$77,300,000
|
$72,600,000
|
(6.1%)
|
883 Whitehorse Road, Box Hill, Melbourne
|
$26,500,000
|
$24,500,000
|
(7.5%)
|
31–33 Maddox Street, Alexandria
|
$61,000,000
|
$58,750,000
|
(3.7%)
|
Unlisted Investments - The BRPT currently has six investments in unlisted property funds. These investments are made to enhance the diversification of the Trust, complement our direct exposure, and capitalise on pricing arbitrages.
- While five of the six investments continue to perform in line with, or exceed, our expectations, the Centro Direct Property Fund (Centro DPF) remains closed to applications and redemptions.
Recent Sales - The settlement of 34 Corporate Drive, Cannon Hill, for $13.2m, occurred on 30 September, 2008. The sale is a pleasing result given current market conditions and the distinct lack of buyers. With an original purchase price of $10.4m plus costs, the result is highly satisfactory.
Trust Activity
- Our leasing team continues to witness solid rental growth across most markets.
- Terms were agreed on a large number of leasing transactions during the quarter, with several tenants now in the process of executing final lease documentation.
- We have agreed terms with a multinational logistics company to lease the entire property at 60 Holbeche Road, Arndell Park, Sydney immediately after the expiry of the current lease thus resulting in zero vacancy between tenants.
- We have concluded our first lease transaction at 369 Ann Street, Brisbane with the ground floor having been leased to Drake Recruitment. We have agreed terms on a further two floors and are in negotiations with another two tenants for a total of a further three floors.
- Terms have been agreed with a serviced office provider to occupy level 3 of 26 Rodborough Road, Frenchs Forest, Sydney, on a 10 year term.
- McKesson Asia Pacific has agreed terms to renew their lease over part of level 2 of 166 Epping Road, Lane Cove, Sydney. Strong rental growth has been achieved in relation to this transaction, with a minimal leasing incentive required to conclude the transaction.
- Next Step Recruitment has exercised their further 4 year option for level 3 at 107 Pitt Street, Sydney and strong growth is expected.
- Barristers Chambers Limited, who has been a long term tenant at this property, has signed a new 10 year lease over levels 8 and 9 at 555 Lonsdale Street, Melbourne.
- Allied Pickfords have also renewed their lease over building 1 at 34–42 Sheppard Street, Hume, Canberra.
The following performance is of the BlackRock Property Trust.
|
|
Gross
|
Benchmark#
|
Out-performance*
|
3 Month
|
-1.60%
|
-0.03%
|
-1.57%
|
6 Month
|
-1.75%
|
1.74%
|
-3.49%
|
1 Year
|
2.57%
|
10.29%
|
-7.72%
|
2 Year (pa)
|
10.56%
|
14.66%
|
-4.10%
|
3 Year (pa)
|
11.42%
|
15.85%
|
-4.43%
|
5 Year (pa)
|
12.62%
|
14.57%
|
-1.95%
|
^ Inception date 30/6/1993
Past performance is no indication of future performance.
* Shows the difference between Gross return and Benchmark return.
# Mercer Direct Property Index
Long term performance returns show the potential volatility of returns over time. Gross performance figures quoted are calculated with no allowance for management fees, operating expenses or tax on income.
Trust strategy
- The Trust has come through the valuation exercise with solid performance in light of current macroeconomic events and returns in other asset classes, illustrating the benefits of geographic and sector diversification within property.
- We believe the Trust is well placed to capture the rent growth being experienced across a number of the Australian office markets.
- The Trust is further strengthened by its excellent occupancy rate of 97%, good quality lease covenants, limited short term lease expiries and a portfolio weighted average lease expiry of over 4 years.
- Other than existing commitments, the Trust has no additional acquisition plans. We will continue to monitor markets closely and focus on reducing debt and maximising returns through active portfolio management in this uncertain economic environment.
Investment objective
The primary aim of the Fund is to provide investors with exposure to a diversified portfolio of direct property investments by selectively acquiring quality investment properties which provide a blend of income and capital growth.
Fund strategy
The investment style of the Fund is to offer investors exposure to a property fund that is diversified sectorally and geographically. We have a track record of managing direct property for more than ten years. Value has been created by identifying asset management turnaround opportunities, identifying emerging locations, acquiring assets well below replacement cost where valuation upside is apparent, and managing the development of assets which may be secured by pre-commitments. We have engaged external property managers to provide specialist property management services to the Fund.
Designed for investors who…
- Want a fund that provides income and capital growth from a portfolio of direct property investments.
- Have a long-term investment horizon.
Portfolio structure
The portfolio currently comprises 25 properties, together with unlisted investments in 6 unlisted property funds.
      -->
|
