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January 2, 2025

Cromwell: where our future lies post-European exit

On 15 May 2024, Cromwell announced the sale of the Cromwell Polish Retail Fund for €285 million ($465 million) to Star Capital Finance, a diverse real estate investor based in Prague.

Later that month, Cromwell informed the market that we had entered into a binding agreement for the sale of our European fund management platform and interests – including the Cromwell Italy Urban Logistics Fund and Cromwell European REIT – for a total consideration of €280 million ($457 million) to a Geneva-headquartered, multi-strategy real estate investment manager, Stoneweg SA Group.

Speaking on the European platform sale agreement at the time, Cromwell Chair Dr Gary Weiss said, “this is a turning point for Cromwell to focus on leveraging the exceptional team we have in Australia; to drive value from our local asset and funds management business.”

“In the current operating environment, numerous options were considered to simplify and de-risk the business, and we believe that this transaction will provide the debt reduction and working capital needed to move forward in a focused and value-accretive way.”

Now, with the sale of the European fund management platform sale finalised, Cromwell is completing the simplification of the business, and entering the next exciting phase of our strategy.

We are continuing to refocus on traditional property sectors primarily in Australia – a market in which we have a proven record of active asset management, driving value through enhanced leasing activities, asset upgrades, and ESG repositioning.

In this article, we will examine some of the property sectors that have been identified for future investment, following the settlement of the European platform. Our investment approach is guided by both top-down and bottom-up analysis, with consideration given to a number of cyclical, structural, and secular drivers of performance – such as behavioural shifts, demographic demands, economic factors, market fundamentals, and investor requirements.

This is a turning point for Cromwell to focus on leveraging the exceptional team we have in Australia; to drive value from our local asset and funds management business.
Dr Gary Weiss – Chair, Cromwell Property Group

Office building investment

In Australia, Cromwell manages an investment portfolio of $2.2 billion and funds management platform of $1.5 billion. Central to our business success has been, and will remain, office buildings in large metropolitan centres. We view several segments of the sector as favourable for investment, including Core/Core+ Value Add, Creative Fringe, and ESG Rejuvenation.

Core/Core+ Value Add

The ‘core’ category of office property investments includes a focus on high-quality, stable properties located in prime markets – particularly capital city CBDs. The hallmark of core investments is their ability to generate consistent, long-term income through different cycles and market conditions. These properties form the foundation of Cromwell’s current Australian investment portfolio.

While the office sector continues to face challenges due to global market pressures, there are nuances across and within markets regarding vacancy rates and rental growth outlooks. In Brisbane, for example, the CBD vacancy rate is at the lowest level since 2012, and occupied space has increased since the onset of the pandemic, contributing to higher rents1. Similarly, the majority of Australian CBD buildings remain well-occupied, with real estate investment research company CBRE estimating more than half of all office buildings have vacancy of less than 5%2. This disconnect between sentiment and actual market conditions presents opportunities for investors to acquire quality office assets at attractive prices.

At this point in the cycle, we also see substantial opportunity to generate additional value for investors by leveraging the skills and expertise of our in-house property and project management teams. Delivering carefully considered capital improvements, space fit-outs, and a targeted leasing strategy, can reposition an asset’s appeal to potential occupiers. This process has been successfully repeated by Cromwell across our assets in recent years.

207 Kent Street third space – CoLab at Kent

In early 2025, Cromwell will open our newest third space – CoLab at Kent – at our 207 Kent Street property in Sydney. Construction began mid-year after Australian interdisciplinary design practice Hot Black was engaged to design a space that would meet the diverse needs of our current and future tenants. The new third space will encompass a 365sqm area on Level 6 of the building. Features will include:

  • A refreshment area
  • A kitchen/breakout area
  • A business lounge
  • 25-person training/multi-purpose room
  • A 70-person training/multi-purpose room
  • Quiet and focus areas
  • Furniture/equipment storage space

 

 

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Creative Fringe

Fringe markets are adjacent to major CBDs and provide a number of the same agglomeration and accessibility benefits as CBD precincts, while offering proximity to diverse amenity and a unique cultural feel. In particular, non-traditional and difficult-to-replicate office assets within fringe markets, such as converted warehouses or heritage buildings, often strongly appeal to growing technology and creative industries and support the cultural and brand identity of a firm. This is increasingly important as providing an engaging and dynamic workplace and employee experience becomes more of a central focus.

A key advantage of targeted opportunities in the ‘Creative Fringe’ is the ability to better cater to smaller occupiers. These tenants have been exhibiting a stronger propensity for in-office, face-to-face work, and have been growing most strongly over the last five years in terms of both headcount and office space3. This trend is contributing to the performance of fringe markets, which have ranked first, second, and third for net space demand since the onset of the pandemic4. Given their location, they can also be a more affordable option for tenants, reducing the risk of financially induced downsizing and providing a runway for rental growth if demand conditions remain conducive.

 

ESG Rejuvenation

To ensure that Cromwell maintains optimal returns for investors over the longest possible duration – that the assets we manage generate the returns expected – we need to ensure that Environmental, Social, and Governance (ESG) practices are genuinely integrated and brought to life across all the activities we undertake, across all our investments.

Given the current delays in commercial building construction across Australia, refurbishing existing assets to meet ESG requirements has the potential to be a more , time-efficient – and simultaneously the “greener” option – as opposed to constructing new buildings for tenants. Indeed, preserving original buildings as much as possible will be critical to achieving our net zero targets.

We have the opportunity to identify buildings that are lagging in ESG specifications and apply our collective knowledge to implement strategies and initiatives to enhance ESG ratings and performance. Such improvements can expand the pool of potential tenants, increase net income (via higher rents or lower operational expenses), and support a stronger asset valuation.

Cromwell has already made progress in this space over the past two years, including the McKell building electrification project in Sydney; completion of our solar programme installation; and replacement of HVAC facilities at other locations.

By identifying and modifying existing properties to align more effectively with the long-term sustainability goals of our tenants; our investors’ expectations; and changing market demands, we can create assets that provide long-term, ‘future proof’ returns for investors.

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Medical offices and community support services

The healthcare and social assistance sector remains an essential and growing industry, accounting for 8% of the Australian economy5 and 16% of employment6. Healthcare property encompasses a range of asset types, from hospitals to medical centres, life science facilities and specialist disability accommodation. While some sub-sectors – such as private hospitals – are facing well publicised issues, we believe medical centres/offices are resilient to these challenges and well placed to benefit from several demand tailwinds. These assets are essential to communities across the country, providing a range of primary and secondary care such as GP, specialist, and allied health services.

Why target for investment?

Supply of healthcare services across the country is currently being outpaced by demand, which is being driven by long-term demographic trends, such as population growth, the ageing population, and longer life expectancy. Additionally, lifestyle factors such as poor diets and lack of exercise, coupled with improved detection and diagnostics, are seeing the rate of disease incidence increase on an age-standardised basis. This environment is resulting in health service pressures and longer wait times – necessitating a greater focus on more efficient models of care.

We believe shifting towards primary and preventive care is critical to achieving a more sustainable healthcare system, and that medical centres are an important component in that shift. Providing care in a non-hospital environment, such as a medical centre, can:

  • be cheaper due to lower overheads;
  • reduce the risk of infection and deliver better health outcomes;
  • enhance patient comfort and satisfaction; and
  • improve convenience, due to the proximity to local communities.

The shift from hospital to non-hospital care is already underway, as evidenced by spending and policy prioritisation. Latest available data shows growth in primary healthcare expenditure outpaced growth in spending on hospitals from 2011-12 to 2012-227. Additionally, a number of policies have been announced that put greater emphasis on primary and preventive care, including a $99 million Federal Government initiative to connect frequent hospital users with a GP to reduce the likelihood of hospital re-admission; $79 million to support the use of allied health services for multidisciplinary care in underserviced communities; and $3.5 billion to triple GP bulk billing incentives.

Medical centres are an increasingly important part of the essential and growing healthcare industry, representing efficient and fit-for-purpose facilities that can help alleviate the capacity constraints of hospitals and improve the sustainability of the health system. Tenants are typically stable, long-term occupiers, which have higher rates of lease renewal compared to traditional office space8.

We believe medical centres’ alignment with demand trends and Government healthcare spending priorities, together with attractive investment characteristics, such as CPI-linked income and defensive land holdings, puts them in a favourable position compared to other healthcare property investments.

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Large format retail (LFR) property

Large format retail currently accounts for approximately 24% of all retail sales in Australia9– or an estimated $102.3 billion – according to June 2024 data from the industry’s peak body, the Large Format Retail Association. Large format retail now makes up more than 35% of all retail floor space in Australia10.

The sector emerged in the 1970s with the development of stand-alone retail stores that sold homemaker products, including furniture, floor coverings, homewares, or whitegoods – a consumer need that had been previously met by traditional department stores.

Why target for investment?

As an investment, large format retail property can offer a more attractive yield and lower capex requirements compared to other sectors, given the simplicity of the property type’s physical structure and associated infrastructure.

In addition, large format retail has faced competition from industrial uses for new sites, constraining supply and contributing to one of the lowest vacancy rates on record11.

Like healthcare property, increases in demand for large format retail shopping centres are closely linked to strong population growth, particularly within the ‘household formation’ lifestyle stage – the period of time that couples or families are establishing a place to live. By extension, high migrant-driven population growth at present is increasing demand for these resources, as these people find and fit-out their new homes.

Urbanisation and smaller households provide another source of demand. The number of occupied dwellings is growing faster than the overall population12, meaning there is a need for more rooms to be furnished and greater demand for the shopping centres that primarily cater to home-oriented retail categories.

Importantly, the sector has proven to be relatively resilient to online shopping – with consumers preferring to ‘touch and trial’ homewares in easy-to-navigate shopping centres with substantial convenient parking.

 

Small lot industrial property

Industrial property has been the top-performing real estate sector over the past decade13, propelled by strong rental growth as demand for space outpaced development of new supply.

‘Small lot’ industrial refers to industrial assets that are typically smaller than 8,000sqm; support a variety of occupier uses; can be multi-tenanted; and are often located in urban ‘infill’ areas. These assets differ from ‘big box’ assets, which are larger; often logistics-oriented; usually single-tenanted; and situated further from the heart of metropolitan areas, given their size.

Why target for investment?

In 2024, customer demand, scarcity of supply, along with a diverse tenant base, are key drivers for rental growth in this sector. Small lot industrial properties’ proximity to customers is a significant benefit for tenants – occupiers are able to provide customers with products faster, and more flexibly, at the time promised and with lower delivery costs. Being in proximity to customers has the potential to provide stronger rental growth – given that transport is the biggest cost for logistics operators, a location that reduces transport costs is worth paying more in rent for.

The small lot industrial sector caters to an array of industries and uses, from warehousing through to manufacturing. As different industries have different demand drivers and can thrive at different points of the property cycle, having a diverse tenant pool provides leasing optionality.

Often overlooked by institutional capital due to a lack of scale, and by passive private investors due to escalating active management requirements, small lot industrial offers compelling total return opportunities for those with the expertise and capability to identify and improve underappreciated assets.

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Convenience retail property

Convenience retail property assets are generally smaller, standalone shopping centres – often anchored by supermarkets – that service the surrounding suburbs by providing convenient access to essential goods and services.

Why target for investment?

Convenience retail centres have consistently been the top-performing centre types over the past 30 years14. These centres have been shown to provide resilient, inflation-adjusted cashflow that is less exposed to the cyclicality of discretionary spending – cashflow which is largely underpinned by blue chip, national tenants.

In 2024, convenience retail is an in-demand sector with less long-term uncertainty than discretionary shopping centres. This is partially due to their alignment to long-term shifts in consumer preferences – from goods (big screen TVs, home theatres, etc.) to groceries, services, and experiences. A major driver for these shifting preferences is the cultural and lifestyle changes consumers are making, which has implications for which retail categories can sustain growing rents.

Convenience retail is also less exposed to the competition impacts of e-commerce – people like to pick their own apples, and haircuts are yet to be made available online! While the rise of online shopping may have some impact on incremental space demand, much of the once-off impact has been incorporated into rents and valuations.

 

Conclusion

Cromwell has a strong record in traditional property sectors locally, driven by our exceptional team who deliver enhanced returns through active asset management.

By repositioning and developing assets, an area in which we have consistently excelled, we aim to generate meaningful securityholder value.

We will continue to drive value from assets in Cromwell’s investment portfolio and the assets in our retail funds through active asset management initiatives – this will support asset valuations and unitholder value through the next part of the property cycle.

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Footnotes

  1. Cromwell analysis of JLL data (Sep-24)
  2. Source CBRE, Australian CBD Office Occupancy Brief (Sep-23)
  3. Cromwell analysis of JLL (Sep-24) and ABS (Jun-23) data
  4. Cromwell analysis of JLL data (Sep-24)
  5. National Accounts, ABS (Dec-23)
  6. Labour Force, ABS (Feb-24)
  7. Constant prices. Cromwell analysis of AIHW data (last updated October 2023)
  8. Exploring Australian healthcare opportunities, JLL (Jun-22)
  9. Large Format Retail Association
  10. Large Format Retail Association
  11. Cromwell analysis of JLL data (Jun-24)
  12. Cromwell analysis of ABS data
  13. The Property Council of Australia/MSCI All Property Digest, Jun-24
  14. Cromwell analysis of The Property Council of Australia/MSCI All Property Digest, Jun-24
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November 12, 2024

Tenants praise Cromwell’s approach as FY24 ESG results released

Cromwell’s latest ESG report was released in late October – the document outlines the significant progress the business has made towards our long-term ESG targets in FY24, including sizeable reductions in Australian scope 1, 2, and 3 emissions. Encouragingly, the results have been praised by tenants throughout our Australian office and fund portfolios.

Cromwell Head of Property Operations, Tessa Morrison, said ongoing delivery of ESG initiatives was consistently being undertaken in close partnership with building users to deliver tangible positive impacts.

“We’ve seen a massive shift towards an ESG focus by tenants in the past 18 months – it’s always been strategically important to us as a business, but it is increasingly becoming a key consideration for occupiers in their decision making as well,” said Ms. Morrison.

“A large part of Cromwell’s ESG approach is centred on ‘future proofing’ our assets – making sure we can meet the current and future needs of occupiers. By installing solar energy infrastructure and making the shift to GreenPower in our buildings, for instance, we’re taking steps to secure the long-term future of our assets and simultaneously aligning our approach with our occupiers’ ESG needs.

“Larger tenants, in particular, are telling us that they need to have their net zero strategy in place; they’ve got their own targets and, because of their footprint, they need to carefully consider the office space they occupy.

“This means that if we can’t support tenants’ needs, they can’t meet their ESG objectives, but by meeting tenant ESG demands – through the implementation of environmental, social, and governance policies to produce tangible results – we’re working to maximise rental yield, reduce waste, and retain tenants at the same time.”

Through the implementation of environmental, social, and governance policies to produce tangible results – we’re working to maximise rental yield, reduce waste, and retain tenants at the same time.
Tessa Morrison – Head of Property Operations, Cromwell Property Group

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Global software corporation occupies a full floor at Cromwell Direct Property Fund’s 100 Creek Street building in Brisbane’s CBD. Gustavo Pilger, 3DS’s R&D Strategy & Management Director, said, “ESG, and sustainability in general, is at the core of our purpose and ambition as a company. It remains critical that we do business with organisations that place importance on ESG also, so to see Cromwell make strides towards their own ESG ambitions has been hugely encouraging.”

Similarly, business advisory firm ImpactInstitute, which occupies space in Tower 1 of Cromwell’s 475 Victoria Avenue complex in Chatswood, has also expressed admiration for Cromwell’s ESG development.

Company CEO [name] said, “as an organisation dedicated to implementing actionable strategies that help positively shape the future of Australia – and the world – we’ve felt that Cromwell’s ESG strategy really aligns with our own values.”

“It’s refreshing to be headquartered in a building where the owner has made tangible changes to better the community in which we work and live – and has committed to doing so going forward.”

Earlier in 2024, global infrastructure consulting firm AECOM signed a seven-year lease extension – for 6,622 sqm of floorspace over two-and-a half levels – at the HQ North building in Fortitude Valley, citing Cromwell’s ESG sustainable upgrades and excellent facilities at the building as a determining factor in remaining at the location.

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ESG Report

Cromwell’s FY24 ESG Report highlights the business’s ESG progress made during FY24. This includes:

  • Scope 1 emissions in Australia decreased by 24%, primarily due to electrification projects and continual improvement of building management practices.
  • Scope 2 emissions decreased by 58% through the purchase of GreenPower, a government-accredited renewable energy product, along with energy efficiency measures and the installation of additional on-site solar panels.
  • Scope 3 emissions in the Australian value chain decreased by 14% which represents all upstream and downstream activities. A portion of this decrease is linked to downstream leased assets as tenants benefitted from the shift to GreenPower.

Cromwell has also highlighted a focus on efficient resource utilisation and exploring opportunities in the transition to a low-carbon economy going forward. This approach aims to drive sustainable value creation and build resilience against climate risks for the business.

View the ESG Report

The full report can be found at www.cromwellpropertygroup.com/esg.

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November 12, 2024

The Essential Guide to Investing in Unlisted Property: parts 3 and 4

Cromwell continually strives to help securityholders and potential investors better understand the nature of the market – and our business – so that they can make more informed investment choices.

In Insight 47, we explored key excerpts from parts 1 and 2 of Cromwell’s The Essential Guide to Investing in Unlisted Property – a comprehensive series of papers that has been compiled to be a valuable resource for anyone seeking to diversify their portfolio and explore alternative avenues for growth through unlisted property funds and trusts.

In that article, we defined the different property asset classes, and investigated various ways to invest in commercial property. Now, in the second part of this series, we will explore the excerpts from the final two parts of the Guide.

Get the full, unabridged guide for free

Cromwell’s The Essential Guide to Investing in Unlisted Property is comprised of four parts:

Part 1 – The different property asset classes
Part 1 explores the differences between the residential and commercial property and provides an overview of the sub-classes of commercial property – retail, office, industrial, and specialist properties.

Part 2 – Various ways to invest in commercial property
In part 2 we examine different investment methods, ranging from direct property ownership to professionally managed property trusts.

Part 3 – How does an unlisted property trust work?
Part 3 provides insight into the structure of unlisted property trusts; the issuance of units; borrowing arrangements; property management; costs and fees, distributions; tax-deferred income; and the process of exiting your investment.

Part 4 – Reviewing an unlisted property trust
Before investing in an unlisted property trust, it is important to understand and review the provided Product Disclosure Statement (PDS) and Target Market Determination (TMD), particularly the ‘risks’ section, to fully comprehend the nuances of the trust and its assets. In part 4 we provide a summary of what to look out for.

Get the full guide
‘
Excerpt from The Essential Guide to Investing in Unlisted Property: Part 3
‘

How does an unlisted property trust work?

 

Unlisted property trusts can only be offered by licensed managers, who are called the ‘responsible entity’ of the trust. ASIC issues the manager an Australian Financial Services (AFS) licence – and the manager has a fiduciary duty to act in the best interests of investors, including prioritising the interests of unitholders over their own interests.

This section of the Guide explains two key documents that managers must provide to investors:

  1. the Product disclosure statement (PDS); and
  2. the Target Market Determination (TMD) – a newer document introduced as a result of new Design and Distribution Obligations (DDO) introduced by ASIC in October 2021.

A PDS and TMD must be provided for any type of trust you consider investing in, these being:

Fixed-term trusts

A fixed number of units are issued (usually at $1.00 each). The capital raising is completed when the full cost of the property, plus fees and costs less any borrowing, has been raised.

Open-ended funds

An open-ended fund continues to raise funds indefinitely so long as it can keep purchasing properties. Units will be issued based on a unit price, with the unit price based on the value of the fund’s properties and other assets. Unit pricing policies and frequency of issue will depend on the manager and fund.

 

Property management

A significant benefit of investing in an unlisted property trust is gaining access to the multi-faceted expertise of the manager. The best property fund managers have an internal property management division, which looks after the buildings in the trusts it manages. Having this function in-house ensures an alignment of interests between not only the manager and investors, but also tenants who are ultimately responsible for providing unitholders with real income.

Property management includes leasing, ongoing maintenance of buildings, building concierge services, fire safety, and other compliance requirements and – most importantly for you as an investor – making sure rent is collected!

 

Distributions

The trust will receive rental payments from tenants and this is passed on, less any expenses, to unitholders as distributions on a regular basis. Depending on the trust, distributions may be paid monthly, quarterly, six-monthly, or annually.

Tax-deferred distributions

Tax-deferred distributions can be an attractive feature of many property investments and have the potential to increase the after-tax return of an investment. The benefits of tax deferral can be significant, especially for those with high incomes. For many investors, an investment that offers 100% or even 50% tax-deferred distributions can significantly enhance the after-tax returns from that investment.

Cromwell’s The Essential Guide to Investing in Unlisted Property is available to download for free. 

Download your copy
‘
Excerpt from The Essential Guide to Investing in Unlisted Property: Part 4
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Reviewing an unlisted property trust

The manager is critical when choosing a property trust. These are the people and organisations you are relying on – and paying – to carry out appropriate due diligence on the property asset, to build and manage the trust, and usually to physically manage its assets. In reviewing the manager, you should consider their experience and past performance, as well as whether they are financially secure; have good compliance process in place; are forthcoming with information; and more.

Among other elements, it is critical to consider the trust structure; distribution yield; and the property asset/s.

 

Trust structure

It is important to understand the trust structure to ensure the investment is suitable for your needs and anticipated outcomes. The product disclosure statement can be used to help you determine a) whether the trust fixed term or open-ended; b) what happens at maturity of the trust; c) how liquidity is provided (for open-ended trusts); d) how units are priced; e) how are properties valued; and more.

 

Distribution yield

The distribution yield is the income you can expect to receive for every $1 of investment (e.g. a dividend yield of 6% per annum means you can expect to receive 6 cents per year for every $1 invested).

 

The property asset

When reviewing the building(s) in a trust, there are a number of factors to consider and questions to ensure you have answers to before an investment is made. These factors include:

  • Location – is the property in an ideal location; on a major road; has access to public transport?
  • Building quality – what kind of capex is required to bring the building up to the required standard?
  • Capital growth – is there opportunity for capital growth? Is the building in a growth area?
  • Lease team – Ideally, for a fixed-term trust, the lease term will be longer than the term of the trust, as this ensures security of income stream throughout the term of the trust.
  • Lease – Is the rental rate market or is it ‘over-rented’?
  • Tenants – are the tenant blue-chip corporate or government tenants?
  • Weighted Average Lease Expiry – what is the vacancy risk associated with the property?
  • Green credentials – what is the NABERS rating for the property?

Understanding unlisted property trusts

For the full, unabridged version of parts 1 to 4 of the Essential guide to investing in unlisted property, please visit https://www.cromwell.com.au/real-expertise/investing-in-unlisted-property-trusts/

Understanding unlisted property trusts

Read the full, unabridged version of parts 1 and 2 of The Essential Guide to Investing in Unlisted Property, as well as parts 3 and 4 in the series – ‘How Does an Unlisted Property Trust Work?’ and ‘Reviewing an Unlisted Property Trust’. Parts 3 and 4 of the guide explain unlisted property trusts in easy-to-understand detail. Download your copy for free today.

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November 11, 2024

September 2024 quarter ASX A-REIT market update

Stuart Cartledge, Managing Director, Phoenix Portfolios

 

Market Commentary

The S&P/ASX 300 A-REIT Accumulation Index rocketed higher during the September quarter, gaining 14.3%. Property stocks outperformed broader equities in the period, with the S&P/ASX 300 Accumulation Index adding 7.8%. During the quarter most companies in the property sector released their full year financial results to 30 June 2024. The solid results and upbeat outlook statements aided performance. The other (related) factor was the reduction in interest rates over the period. At the end of June, the 10 Year Australian Government Bond yield was 4.4%, however it ended September below 4.0%.

Traditional property fund managers were some of the strongest performers in the September quarter. The earnings of these companies are particularly sensitive to movements in interest rates. At current levels, property funds management product is once again in demand, with yield and expected internal rates of return (IRRs) which are appealing relative to fixed income products. Charter Hall Group (CHC) led the way, gaining 42.8%, as its earnings guidance for the next financial year surpassed the expectations of market participants. Centuria Capital Group (CNI) was also a meaningful outperformer, adding 26.7%, as it was carried by the same positive sentiment that drove CHC higher. Alternatively, Goodman Group (GMG) returned a respectable 6.4%, but underperformed the index as lofty expectations of future earnings growth were not met by the guidance provided at its annual financial result.

Shopping centre owners were also outperformers, as they produced solid results and presented earnings guidance that demonstrated resilience. Operating metrics, such as specialty sales and leasing spreads did diminish across the year, but some believe that a lower interest rate environment over the medium term and tax cuts in the short term are likely to lead to strong consumer spending and income growth for retail property owners. Vicinity Centres (VCX) was the major outperformer, moving 22.6% higher in the quarter. Scentre Group (SCG) also rose sharply, up 19.7%. The owners of smaller neighbourhood shopping centres saw more muted, but still strong performance, with Charter Hall Retail REIT (CQR) returning 14.9% and Region Group (RGN) lifting 9.0%.

Large capitalisation diversified property owners were also beneficiaries of the renewed enthusiasm from property securities. Stockland (SGP) rose 25.7%, aided by solid operational progress and the prospect of an improving market for the sale of new residential homes and land. GPT Group (GPT) also performed well, up 24.5%, with new CEO Russell Prout outlining his vision for a more capital efficient and higher return on equity (ROE) future for the business. Despite dropping on an underwhelming financial result, Mirvac Group (MGR) more than recouped its losses, finishing the quarter 15.0% higher.

Larger land lease retirement property owners were the major underperformers during the quarter. Lifestyle Communities (LIC) lost 31.8% as it was the subject of an ABC investigation, which suggested it was taking financial advantage of its customers. It has also been the subject of a short report, questioning its business model. Beyond this, it solely operates in Victoria, which is currently the weakest state in terms of house price growth and new home sales. This combination of factors forced the company to withdraw its sales guidance for the coming years. Ingenia Communities Group (INA) produced a solid financial result, albeit the quality of its earnings has been questioned. It underperformed the index but still lifted 6.5% in the period.

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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 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. More recently, interest rates have reduced and strong returns have been seen in property securities. The August reporting season saw stocks providing solid updates, with meaningfully more optimistic outlooks, based on the assumption that interest rates may have peaked and begun to come down. Long term valuations are driven by “normalised” interest costs, meaning the impact of short term hedges maturing is mostly immaterial. Should the forecast decline in interest rates eventuate, recent momentum may continue.

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 2% in many markets. Strong rental growth has offset capitalisation rate expansion in recent periods resulting in flat valuations and capitalisation rate spreads to government bonds more in line with long-term norms.

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 and share prices moving sharply higher. 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 remain elevated.

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 buffer to such movements.

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The content above is taken from the Cromwell Phoenix Property Securities Fund quarterly report. Sign up here to be the first to access the latest report and to gain a deeper insight into the Fund’s performance.

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August 1, 2024

In conversation with… Kerry Tickle

Fund Manager, Cromwell Property Group

Cromwell Fund Manager Kerry Tickle is an experienced financial and property professional with almost two decades of experience within the organisation.

Skilled in financial modelling and analysis; asset and funds management; and investment strategy, Kerry is one of the key figures driving Cromwell’s funds forward. She holds a Bachelor of International Business (Economics), an Associate Diploma of Management Accounting from CIMA.

Kerry is the Fund Manager for Cromwell Direct Property Fund; Cromwell Riverpark Trust and Cromwell Property Trust 12.

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1. Kerry, what interested you about a career in the commercial property sector?

As an economics graduate who knew nothing about property – and who was obviously still very ‘green’ – I very quickly found the commercial property sector a really exciting industry to work in.

I’ve always loved working on something where the real, tangible results of my work can be seen. I’m a very analytical person by nature, so I was quickly drawn in by, and found my footing with, the quantitative aspects of the job – I really enjoyed being involved with all the mathematics and metrics behind the decision-making processes.

I’ve also loved the variety that my roles have given me – working directly with not just a wide range of tenants, but property and facilities managers, external agencies, lawyers, and lenders. There’s a huge number of people Cromwell works with, and we’re working on behalf of the most important people of all – our investors – whether they be the mum and dad investors, or the larger wholesale and institutional investors.

 

2. You’ve been at Cromwell Property Group for almost 20 years, can you share the reasons for your long tenure?

I came to Cromwell after having spent six years based in London, working for an international fund manager, mostly in asset and funds management across central and eastern Europe.

I was interviewed for the role while I was still living in the UK and was excited to come back to work for a Queensland-based fund manager. I think it has been the diversity of my roles within Cromwell, and the opportunity for career advancement, that has kept me here. Yes, I’ve been here nearly 20 years, but I’ve held multiple roles – ranging from transactions, where I ran the financial due diligence process; property and fund analytics; through to treasury and now funds management.

I’ve had the opportunity to get involved in some big projects – the first of which was the merger and stapling back in 2006 – capital raisings, JV partnerships, new funds, software implementations, modelling projects, and large senior debt restructures and refinancings.

I think it has been the diversity of my roles within Cromwell, and the opportunity for career advancement, that has kept me here.
Kerry Tickle – Fund Manager, Cromwell Property Group

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3.  As a fund manager, what are some of the key responsibilities that you take on daily?

I’m lucky that, in my role, I get to work with most people across the broader Cromwell business.

In a typical day, I’ll generally work with asset managers who look after the properties within our funds – this could be on decisions related to leasing or capex; I liaise with Cromwell’s transactions team on potential acquisitions and disposals; and I’ll speak to members of our treasury team regarding debt capital, such as refinancing or hedging, and to our finance team on reporting.

I collaborate with members of the funds management operations team to efficiently address queries from advisers, investors, or research houses and with our risk team on regulatory compliance. I also work closely with our fund analyst on financial modelling and reporting for our funds.

 

4. The property market has been particularly challenging over the past 18 months, how has Cromwell been managing Funds to minimise the impact?

I recognised that coming into the role of Fund Manager in December 2022 would be a huge challenge. Thanks to a whole host of external market factors, including inflation and historic rate rises by the RBA, we’ve seen some real pressure on valuations and liquidity. The funds management team has been carefully managing the balance sheets and liquidity of our funds from the ground up – this has been, and remains, a real team effort. These decisions could range from the timing of capital spend on the portfolio, structuring of lease deals (particularly how incentives are paid), debt structuring, and setting distribution rates.

I work very closely with our asset managers on optimising the performance of the properties within our funds, which includes our valuation cycle, and work with the treasury team on how to best manage the relationships with our lenders.

Distributions and unit prices are, understandably, at the front of investors’ minds, so we work with Cromwell’s research and marketing teams to accurately report correct, timely, and relevant information to investors. In relation to our open-ended Cromwell Direct Property Fund, we also need to factor in maintaining or bettering our rating, as this will influence our inflows.

We work with Cromwell’s research and marketing teams to accurately report correct, timely, and relevant information to investors

View latest quarter reports
‘

5. What is a property cycle and how can it impact commercial property investments?

Simply put, the property cycle is stages of market activity and value over time, driven by supply and demand. Unfortunately, this process is largely a result of, and at the mercy of, macroeconomic and geopolitical forces outside of our control – for example, the COVID-19 pandemic and resulting structural shift in how businesses work.

Let’s face it, flexible (hybrid) working wasn’t a core consideration for businesses five years ago. The Russia/Ukraine conflict escalation was unexpected, as was the steepest hiking of interest rates in living memory. High inflation with cost-of-living pressures – and sharp increases in construction costs – all factor into dictating how the property cycle plays out, but it’s Cromwell’s responsibility to manage our unitholders’ investments through these cycles and get the best possible outcomes for them.

We’ve seen high interest rates and inflation, alongside low transactional volumes, massively impact commercial property valuations, and create a huge gap in the pricing expectations of sellers and buyers. Deals are being struck at opportunistic pricing levels, and then that sales evidence is contributing to pressure on valuations and the funds’ liquidity and cashflows.

However, I’m hopeful that we’re currently heading into a recovery phase – which will see our interest rates stabilise, and hopefully start falling, and increased demand from both domestic and off-shore capital driving prices back up.

 

‘

6. What advantages do investors gain from Cromwell managing the properties within its unlisted funds in-house?

Cromwell’s fully integrated model is a huge strength for our business and is something that differentiates us from a lot of our competitors in the market. There is an incredible depth of knowledge and expertise within all of our departments – including property, facilities, project and development management, and leasing.

For tenants, having everything in-house means that we can offer a boutique, hands-on service model, but still have the experience and service delivery of a large-scale landlord. Tenants know that, if they need to pick up the phone to rectify an issue or make a request, they’re immediately able talk directly to a Cromwell representative.

Similarly, if an investor picks up the phone to make an enquiry, they’ll be able to speak directly to a Cromwell representative working inside our Brisbane-based head office.

In this way, Cromwell is able to create operational efficiencies and cost savings by streamlining our systems and procedures and keep control where it belongs – with us – on all management decisions. This model ensures that all of our properties are managed and maintained to the highest standards, which leads to greater tenant retention – and, in turn, better investor outcomes.

Having this kind of operational control allows Cromwell to have greater flexibility in quickly responding to market changes, tenant demands, and operational changes. Again, this translates to better outcomes for investors in terms of both income and capital returns, through a well-run and profitable portfolio.

 

7. What do you enjoy most about your role at Cromwell?

That’s an easy question to answer – I enjoy working with the people here. I genuinely feel privileged to work with the people I do – they’re incredibly talented and hardworking. I really love not only being part of the funds management team at Cromwell but working with everyone across every department in our Brisbane and Sydney offices.

Want to learn more about investing in property?

Information on commercial property investing, plus the latest industry research and insights, are available on our learn page to help you start planning your investment journey.

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July 30, 2024

A deep dive: Meet the Board of Cromwell Funds Management

Cromwell Funds Management Limited (CFM) is a multi-award-winning Australian real estate fund manager that seeks to create and manage attractive commercial property investment opportunities for its investors.

Since its inception, the strategic aim of CFM has been to build investor wealth through the careful selection, acquisition, and management of secure income-producing commercial properties and portfolios.

Real expertise has always been, and remains, critical to the success of the business; it is that expertise and leadership on which CFM relies.

In this edition, Insight magazine is profiling the experts at the very top of the Cromwell Funds Management organisation; the people responsible for steering our success – the Board of Directors.

 

Cromwell Funds Management Board of Directors

In 2022, Cromwell refreshed the CFM Board, which oversees the Cromwell Direct Property Fund, as well as Cromwell’s property syndicates and listed security funds.

“It was Cromwell’s intention to identify a small number of financial and property experts, who had worked through a number of economic cycles and who, consequently, had experience managing property investments through long-term property cycles,” explained Tanya Cox, Chair of the Board of Cromwell Funds Management.

As such, the directors of CFM were carefully selected from the property, finance, investment banking, and capital markets sectors to help steer Cromwell’s funds through both the peaks and troughs of future property cycles.

The Cromwell Funds Management Board is today comprised of four industry professionals with more than a century of combined property, finance, and funds management experience.

Our collective expertise enables the Board to provide informed advice to the experienced Cromwell team
Tanya Cox, Non-executive Chair

‘

Each Board member brings a unique set of perspectives and skills to the position, which, in turn, complement the experiences of their fellow members. These collective knowledge bases create a solid foundation for sound investment management, strategic thinking, and best-practice governance methodologies.

“Our collective expertise enables the Board to provide informed advice to the experienced Cromwell team – and together we make decisions regarding the investments, cashflow, and operational management of the retail funds management business,” said Ms Cox.

‘

Effectively managing property investments through property cycles

Investment in property can provide stable income returns and capital appreciation over time; however, property markets are cyclical, which can pose both opportunities and challenges through the various phases. For example, when property values are depressed – reflecting a lack of buyers in the market – property investments can become relatively illiquid until the cycle improves. Knowing how to navigate such issues in property cycles, as well as understanding the underlying forces that influence property market outcomes, is pivotal in ensuring positive investment outcomes.

Cromwell Funds Management Directors, Graeme Ross and Jane Lloyd, explained how their knowledge and experience informs CFM’s navigation of property cycles.

 

Decisions based on in-depth experience and real-time knowledge

“To successfully navigate real estate cycles, it’s important to closely observe underlying change in market conditions on a regular basis and take prudent steps to anticipate risks and identify emerging opportunities,” said Graeme Ross.

Cromwell’s integrated property platform undertakes a broad cross-section of management functions in the property markets – from buying and selling; capital raising; leasing; and property management – allowing access to unique insights into market conditions in real-time. It is this data-backed approach that allows the business to pivot, when necessary, to achieve optimum outcomes.

“Our research team provides data on broader macro themes, such as shifts in consumer and geographic trends and technological change,” said Mr Ross.

“All this information is provided to the Cromwell Funds Management team and Board, who assess and weigh these insights to arrive at informed and prudent decisions that are in the best interests of investors – and allow sustained risk adjusted returns for our funds.”

Fellow CFM Director, Jane Lloyd, added that taking a tactical, considered approach to decision-making is critical, particularly when markets are down in the cycle.

“I tend to be conservative – it’s important not to react without a plan. Property is a long-term asset class, so being patient is a big part of risk management. This accords with the CFM approach, where investors are top of mind,” said Ms Lloyd.

To successfully navigate real estate cycles, it’s important to closely observe underlying change in market conditions on a regular basis and take prudent steps to anticipate risks and identify emerging opportunities.
Graeme Ross, Non-executive Director

Discover the Board
‘
Building on past experience

According to Mr Ross, experience of past cycles is a critical input – while current cycles may be different in terms of cause or nature, past experience gives insights about how certain forces may translate to property market outcomes.

For instance, the forces that drove property market cycles in commercial real estate markets during the Global Financial Crisis are quite different to the forces impacting these markets today, arising from a rapid rise in interest rates and other underlying social trends.

Nevertheless, the behaviour of market participants in those cycles can give insight into behaviour in current market conditions and hence allow suitable strategies to be adopted to manage risk and take advantage of opportunities.

“I joined the workforce in arguably the worst downturn in property in the last fifty years. Those experiences stay with you, inform you how to make decisions and provide insight as to what to look for in falling and rising markets,” said Ms Lloyd, reflecting on her experience through a number of property cycles while working across different asset classes and locations.

“My whole career has been in property and includes early experience working on building sites through to asset development and funds management, both in Australia and overseas. I have been in both the detail and at the strategic level. That depth of knowledge allows me to think about the issues we face on a range of levels and question both the strategic thinking for the portfolio and the “traps for young players”. I ask a lot of questions and I appreciate teasing out a problem, so the team has thought through an issue to the end. A long career helps you think about the implications of early decisions in a process.”

 

Focusing on the fundamentals

“While it’s important to seek opportunities in volatile markets, it’s always top of mind to ensure that, to the extent possible, capital is preserved, assets are managed well, and income is maximised,” said Ms Lloyd.

Cromwell’s integrated property management model ensures that assets are managed in accordance with the interests of our investors and to the expectations of our tenants.

Many competitors outsource responsibility for the day-to-day management of their properties, whereas Cromwell actively manages all Australian property assets in-house, creating a link between investors, the assets, and our tenants. This integrated property management model is one of Cromwell’s key competitive advantages.

Our asset management team oversees the strategy for each property, aiming to ensure that tenants are content, space is leased, buildings are operating efficiently, and projects are delivered on time and on budget. We are also experts in value-add projects, such as end-of-trip facilities and “third spaces” (communal, multi-purpose areas that people can utilise as they desire – including for work) that improve value for both our tenants and our investors.

‘

While it’s important to seek opportunities in volatile markets, it’s always top of mind to ensure that, to the extent possible, capital is preserved, the assets are managed well, and the income is maximised
Jane Lloyd, Non-executive Director

‘

Changes to the investment landscape, why commercial property

Cromwell strives to understand the diverse needs of its investors and provide them with access to a range of quality, income-producing property investment options. CFM Director, Jane Crombie, heavily contributes to this objective – bringing the perspective of advisers and investors to the CFM Board, and focusing on ensuring decisions are made in unitholders’ best interests.

“The advice industry has become increasingly regulated in recent years, with some advisers moving clients to investment products that are less tailored to individual circumstances, in order to reduce costs,” said Ms Crombie, reflecting on the current market.

“While these products have their place, I believe that each investor has unique objectives that are specific to their life stage and situation.”

“Cromwell aims to develop a suite of products that gives advisers and their clients flexibility to choose investments that align closely to their needs, whether that be for regular income, capital growth, or diversified exposure across asset classes. Exposure to ‘real’ assets, such as Cromwell’s property funds can help maintain spending power over the long term, particularly in inflationary environments,” said Ms Crombie.

The Board has a strong conviction as to an allocation to property as part of a diverse investment portfolio.

“The best thing about property is you can touch, feel, and see what you have created and it’s satisfying to be a part of creating assets where people can live, work, shop, and play. There will always be a place for good quality commercial assets as part of a balanced investment approach,” said. Ms Lloyd.

“Well managed and maintained properties over the long term have always been a sound investment. Australia is one of the most sophisticated, transparent, highly institutionalised markets in the world and it is a place where overseas capital is comfortable alongside domestic investment.”

Cromwell aims to develop a suite of products that gives advisers and their clients flexibility to choose investments that align closely to their needs
Jane Crombie, Non-executive Director

‘

Why should ESG be of concern to investors?

Cromwell is often asked why investors should care about prioritising ESG.

As background, Australia was one of more than 170 parties to sign the Paris Agreement on climate change in April 2016. Under the Agreement, countries pledged to reduce greenhouse gas emissions, with the aim to limit global warming to below 2 °C.

Implementation is progressed and monitored through Nationally Determined Contributions (NDCs), which are the successive commitments of each country to achieve the long-term goals of the Agreement.

Australia’s most recent Nationally Determined Contribution, submitted in 2022, committed Australia to reducing its emissions to “43% below 2005 levels” by 2030.

One of the ways the Australian government intends to achieve this commitment is to require all commercial property owners to similarly reduce their greenhouse gas emissions.

“Australia’s major tenants now require their landlords to disclose their pathways to reduce emissions. That’s important for Cromwell as more than 80% of our tenants are either government or major tenants,” said Tanya Cox.

“In response to significant ESG movement in the sector, Cromwell has been developing and progressively implementing energy efficiency initiatives to reduce the energy consumption of its investment properties.”

Ms Cox has extensive experience in the ESG space and is well placed to lead CFM to deliver competitive financial returns, while maintaining a commitment to reducing the environmental impacts of our business.

“As Chair of the Australian Sustainable Built Environment Council, and past Chair of the World Green Building Council and Green Building Council of Australia, I have a deep understanding of Cromwell’s ESG responsibilities, as well as very hands-on experience regarding how we might best satisfy those responsibilities,” said Ms. Cox.

 

Board of Directors

Find out more about each member of our Board.

Find out more

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June 12, 2024

An opportunity underpinned by location: why the Cromwell Healthcare Property Fund

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

 

As a property segment, medical centres have all the right ingredients to provide a compelling investment opportunity – industry-wide structural tailwinds, strong fundamentals resilient to economic cycles, alignment to government funding, and attractive investment characteristics. But like any real estate investment, location matters. In this short article, we’ll outline some of the factors that make the Cromwell Healthcare Property Fund (Fund) stand out, with its proposed acquisition of 16 Playford Boulevard, Elizabeth, South Australia (the Property).

Catchment characteristics

Demand for healthcare is closely linked to population growth, particularly amongst those aged over 65. The Property is located in the fastest growing region in South Australia (Outer North), with total population growth of 2.8% p.a. projected from 2021-31, and growth in the 65+ segment projected to be even more significant (4.3% p.a.). At a more granular level, the Local Government Area (LGA) in which the Property is located (Playford), is projected to see the third strongest population growth over the period, at 2.9% p.a.1 

 

 

Low socioeconomic status is linked to higher incidence of disease and greater need for care. Due to cost, those with more socioeconomic disadvantage have lower rates of private health coverage2. They are also less likely to see a health practitioner but more likely to visit an emergency department2, resulting in a greater number of avoidable hospital presentations which unnecessarily take up valuable resources. The Property is located in the fourth most disadvantaged LGA in South Australia (out of 71) and the lowest socioeconomic LGA within metropolitan South Australia3, which Cromwell believes indicates significant demand within the catchment for affordable, public-aligned healthcare services, such as those provided at the Property.

 

 

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Important node in the Local Health Network

The Property is leased entirely to a South Australian government healthcare operator, which provides a number of important healthcare services for the Northern Adelaide Local Health Network (NALHN), including outpatient services. The main hospital servicing the NALHN, the Lyell McEwin, is the third busiest hospital in South Australia and has the highest number of non-urgent presentations4. The percentage of emergency department patients commencing treatment within the recommended time is the second lowest across South Australia5. The Property operating as a GP Plus Health Care Centre aims to help to reduce the number of unnecessary hospitalisations and better respond to the health needs of local communities6.

The Property is well placed to meet the needs of the catchment, forming part of an essential services precinct adjacent to the major shopping centre of the region. The location provides significant car parking and convenient road access, and is in close proximity to rail and bus public transport. With a substantial site area of nearly 12,000 square metres, the Property also has the potential to expand in line with growing demand for services within the region, providing continuity of care for patients.

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A unique proposition

As detailed in the Product Disclosure Statement, the Fund presents a unique investment opportunity, underpinned by a property with an attractive location and catchment characteristics. The Property is located in a fast-growing region with significant need for healthcare services. The Property is well placed to meet the needs of the catchment, providing a broad range of affordable, public-aligned healthcare services. The precinct benefits of the location, adjacent to a major shopping centre and with convenient access to public transport and car parking, further enhances its long-term appeal.

 

Footnotes
  1. Medium series population projections, Jun-23 (Government of SA; Cromwell)
  2. Patient Experiences 2022-23 (ABS)
  3. Socio-Economic Indexes for Australia, 2021 (ABS)
  4. Emergency department care activity 2022-23 (AIHW)
  5. Emergency department care access 2022-23 (AIHW)
  6. GP Plus Health Care Services and Centres, SA Health.
Disclaimer

This correspondence has been prepared for information purposes and is not a product disclosure document or any form or offer to invest in the Cromwell Healthcare Property Fund (Fund) under the Corporations Act 2001 (Cth) (Corporations Act). This document does not constitute personal financial product or investment advice (nor tax, accounting or legal advice) nor is it a recommendation to subscribe for or acquire securities or other financial products and it does not and will not form any part of any contract for the subscription or acquisition of securities or other financial products.

Cromwell Funds Management Limited ABN 63 114 782 777 AFSL 333 214 (CFM) is the responsible entity of and issuer of the Cromwell Healthcare Property Fund ARSN 676 931 838 (Fund). In making an investment decision in relation to the Fund, it is important that you read the Product Disclosure Statement dated 27 May 2024 (PDS) and the Target Market Determination (TMD). The PDS and TMD are issued by CFM and are available from www.cromwell.com.au/chpf, by calling Cromwell’s Investor Services Team on 1300 268 078 or emailing invest@cromwell.com.au.

This communication has been prepared without taking account of your objectives, financial situation and needs. All investments involve risk and before making an investment decision, you should consider the PDS and TMD and assess with or without your financial or tax adviser whether the Fund is appropriate for you having regard to your objectives, financial situation and needs.

Any ‘forward-looking statements’ are not guarantees of future performance but are predictive in nature and are subject to known and unknown risks, uncertainties and other factors which may be beyond the control of CFM. CFM does not represent or warrant that such ‘forward-looking statements’ will be achieved or will prove to be correct, and actual variations from the projections or estimates may be material. You are cautioned not to place undue reliance on any forward-looking statements.

Cromwell Healthcare Property Fund

Healthcare property investment opportunity | Open for investment

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May 1, 2024

ESG improvements key to Cromwell Direct Property Fund longevity

Cromwell Property Group is continuously looking at ways to increase the value of our properties – and generate long-term income – while progressing our own environmental, sustainability, and governance (ESG) ambitions and meeting the ESG expectations of investors, tenants, and regulatory bodies.

Efforts to conduct decarbonisation assessments for assets in the Cromwell Direct Property Fund (DPF) portfolio are currently underway ­– and, when complete, will help to establish  strategy for each building to optimise energy efficiency, with any remaining emissions offset to achieve net zero. It is expected that this round of assessments are due to be completed by late 2024.

Six buildings in the DPF portfolio have had their base building electricity requirements powered by 100% renewable electricity – via the Australian Government’s certified GreenPower program – since January 2024. These are:

  • 100 Creek Street, Brisbane
  • 420 Flinders Street, Townsville
  • 433 Boundary Street, Brisbane
  • Altitude Corporate Centre, Mascot
  • Energex House, Newstead*
  • 19 George Street, Dandenong *

Cromwell Group Head of ESG Lara Young said that the progress being made on ESG targets within the Cromwell Direct Property Fund portfolio – and the business more broadly – was a sign that Cromwell is finding ways to generate long-term, sustainable growth.

“To ensure that we maintain optimal returns over the longest possible duration – that the assets we provide generate the returns expected – we need to ensure that ESG is genuinely integrated and brought to life across all the activities we undertake, across all our investments,” said Ms. Young.

“We want to continue to be able to have best-in-class assets and attract the types of blue-chip tenants that we’ve made a name for ourselves doing.”

“By undertaking these types of activities, we’re creating a way to deliver financial returns, while reducing environmental impacts.”

By undertaking these types of activities, we’re creating a way to deliver financial returns, while reducing environmental impacts.
Lara Young, Group Head of ESG

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Stage 2 solar installation completed

Cromwell has completed Stage 2 of our programme of works to install solar panels on buildings at locations across the country, as part of the business’s commitment to meet our long-term ESG targets.

The months-long project stage saw approximately 930 individual solar panels installed across the roofs of six different assets, including four buildings in the Cromwell Direct Property Fund:

  • Energex House, Newstead – 100Kw system
  • 163 O’Riordan Street, Mascot – 100Kw system
  • 19 George Street, Dandenong – 100Kw system
  • 420 Flinders Street, Townsville – 39.9Kw system

Cromwell Project Manager Tarek Ayoubi said each installation process presented different challenges, though the initial approach remained largely the same.

“We followed a similar methodology at most locations, then made allowances for different spaces and installation requirements,” said Mr. Ayoubi.

“This involved the head contractor working with other local contractors to develop a roll-out plan; establishing the position of the panels for the best sun exposure, while maintaining safe access to the roof; and engaging a structural engineer to advise on the proposed installation method and location.”

“It was important to manage power connections, while maintaining minimum impact on tenants – and then coordinate with the local grid supplier for approval, before commissioning and energising the system.”

“All works were completed in coordination with Cromwell’s facility managers, to ensure the projects were delivered to a high standard and with no interruption to tenants.”

“The Flinders Street building in Townsville was arguably the most challenging installation, due to unpredictable weather and structural conditions, which meant we had less flexibility than at other sites; however, we were able to make the most of the space available to us.”

The Stage 2 solar installation is part of Cromwell’s broader commitment to transition to a Portfolio Net Zero target for operational control buildings by 2035.

Cromwell’s solar programme had generated 737 megawatt-hours for FY23 and was accounting for $165,000 in estimated savings per annum (with an average ROI of three years). This is the equivalent of reducing 538 tonnes of carbon dioxide equivalent – or approximately the emissions generated by 95 average households.

 

*The Fund holds an indirect interest in the property via an investment in the underlying managed investment scheme, of which CFM is the responsible entity. The underlying scheme is closed to investment.

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April 30, 2024

Getting the right healthcare property exposure: why medical centres

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

 

Healthcare property encompasses a range of asset types such as hospitals, medical centres, and aged care facilities. As outlined in the previous article of this series, the healthcare industry is benefitting from several demand tailwinds. However, it’s not all smooth sailing, as evidenced by recent news of private hospital closures1. In this article, we’ll explain why we believe medical centres is the specific property segment investors should prioritise.

 

A necessary care model

As the population ages, the supply of health services is struggling to keep up with demand, resulting in higher costs and longer wait times. Inadequate financial and labour resources are available to improve care standards or wait times under the status quo – a more efficient and cost-effective system is required.

public hospital elective surgery wait times

Part of the required shift includes moving treatment out of hospitals and towards GPs and other primary or secondary care facilities. Focusing on primary healthcare and out-of-hospital care can result in better health outcomes2, reduced risk of infection and improved patient comfort, convenience, and satisfaction3,4. From a funding perspective, out-of-hospital care can be cheaper due to lower overheads compared to when a hospital bed is occupied4.

Avoidable emergency department presentations are clogging the hospital system, with an estimated 1.9 million preventable patient days per annum from those aged 65+ alone5. It would be more appropriate to provide this care in an efficient, fit-for-purpose medical centre environment, saving costs and freeing up hospital resources for actual emergency care and complex cases.

The shift from hospital to non-hospital care is already underway and evidenced by growth in primary healthcare spending outpacing spending on hospitals, as well as government policies putting greater emphasis on primary care and preventive health. For example, the Federal Government has announced a $99m initiative to connect frequent hospital users with a GP to reduce the likelihood of hospital re-admission, and $79m in funding to support the use of allied health services for multidisciplinary care in underserviced communities6.

GROWTH IN PRIMARY HEALTHCARE SPENDING IS OUTPACING SPENDING ON HOSPITALS

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Attractive investment characteristics

In addition to demand and funding tailwinds, medical centres offer several attractive investment characteristics:

High quality cashflow
derived from a reliable tenant base
A hedge against inflation
via CPI-linked or fixed rental escalations
Long leases (typically 5-15 years)
sometimes on a triple net basis
Higher rates of lease renewal
compared to traditional office7
‘

Compared to private hospitals, medical centres may be preferred due to deriving income from a typical commercial lease structure, rather than a percentage of operator EBITDAR. Land also typically comprises a greater proportion of asset value, which can provide downside protection and aid long-term development or change of use potential.

 
Private Hospitals
Medical Centres
Lease term 20-30 years 5-15 years
Basis of income Percentage of operator EBITDAR, quoted on per bed basis Typical commercial lease structure, quoted per sqm
Tenant profile Single operator One or several tenants
Capital intensity Very high Moderate to high

Summarised from Exploring Australian healthcare opportunities, JLL (Jun-23)

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An increasingly important part of the healthcare landscape

Medical centres are an increasingly important part of the healthcare landscape, representing efficient and fit-for-purpose facilities that can help alleviate the capacity constraints of hospitals and improve the sustainability of the health system.

We believe medical centres’ alignment with demand trends and Government healthcare spending priorities, together with attractive investment characteristics such as CPI-linked income and defensive land holdings, puts them in a favourable position compared to other healthcare property investments.

 

Footnotes
  1. Ramsay Health Care warns of hospital closures as costs blow out, AFR (Feb 29th, 2024)
  2. How much of Australia’s health expenditure is allocated to general practice and primary healthcare?, M. Wright; R. Versteeg; K Gool (Sep-21)
  3. Out-of-hospital models of care in the private health system, Australian Medical Association (Oct-23)
  4. There’s no place like home: reforming out-of-hospital care, Private Healthcare Australia (May-23)
  5. Health is the best investment: shifting from a sickcare system to a healthcare system, Australian Medical Association (Jun-23)
  6. Federal Budget 2023-24, Treasury (2023)
  7. Exploring Australian healthcare opportunities, JLL (Jun-22)
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April 22, 2024

March 2024 direct property market update

Economy

The disinflation cycle is in the ‘last mile’, where monetary policy is being finely calibrated and market expectations can move month-to-month with each new data release. This was reflected in the RBA’s stance at the March Board meeting, where Australia’s central bank arguably kept a foot in both the tightening and neutral camps. However, much of the market’s speculation is focused on when rate cuts will occur, rather than the genuine possibility of further hikes. As at the end of March, financial markets and the major banks were forecasting the first cut to occur in the final quarter of 2024.

Annual inflation was stable at 3.4% in February (data released March), with rent and insurance inflation remaining stubbornly high, and goods inflation continuing to be moderate. However it is the tightness of the labour market (services inflation) which will likely be the key determinant of the CPI path moving forward. On this front, the unemployment rate fell from 4.1% in January to 3.7% in February1. The magnitude of the decrease is surprising at first glance, but less unexpected when you look at the detailed data which shows a shift in the seasonality of the labour market. It is now becoming the ‘new norm’ for workers to end a job in December and not start a new one until February. Labour data has also shown more volatility month-to-month since the pandemic. Looking at the recent trend rather than the latest monthly print in isolation shows the labour market is gradually softening, with underemployment (people wanting more hours) at its highest level since December 2021 and leading indicators such as job vacancies falling (albeit from high levels).

 

Retail sales provide another indication of a slowing economy. While Taylor Swift’s recent tour boosted February spending on clothing, department stores and dining in New South Wales and Victoria (the locations of the concerts), annual nominal growth of only 1.6% was recorded2. Considering inflation is running above 3% and population growth of circa 2.5%, underlying consumption is very weak, showing that the cost of living is clearly biting. However, consensus expectations are that there should be some relief towards the end of the year as stage 3 tax cuts flow through, inflation continues to moderate, and interest rates potentially ease.

A part of the economy bucking the slowdown trend is housing; reflecting robust demand and constrained supply. CoreLogic’s national Home Value Index recorded its 14th consecutive month of growth in March, rising to new record highs each month since November 20233. There is a risk sustained house price growth may influence the RBA’s view of the appropriate rate path, however as previously stated, the health of the labour market will likely be a much greater focus.

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Office

The office market recorded a positive result in the March quarter. According to JLL Research, national CBD net absorption totalled just over +33,000 square metres (sqm), the strongest result since March 2023. Sydney was the top-performing market after three weak quarters prior, while Perth was the only major CBD market which saw demand decline as a result of softening in the non-Premium grades. On an annual basis, net demand is still strongest in the smaller markets of Adelaide, Brisbane, and Perth.

 

The national CBD vacancy rate was flat at 14.7%, with every CBD market except Perth and Canberra recording an improvement in supply-demand conditions. While the softening in Perth was due to both new supply and weaker demand, the increase in Canberra vacancy was entirely driven by the addition of new stock (completion of a refurbishment). Nationally, Premium assets saw the greatest improvement in vacancy rate.

Prime net face rent growth (+1.4%) accelerated further compared to the prior quarter (+0.9%), with the Brisbane CBD and Adelaide CBD the top performers. Prime incentives were largely flat (+0.1%), with half of the markets recording minor increases (Sydney, Melbourne, Perth), offset by the other half recording minor improvements. This meant on a net effective basis, Adelaide and Brisbane recorded the strongest growth, with Melbourne the only market to head backwards.

 

Reflecting the continued softness in conditions, transaction volume for the March quarter ($1.0 billion nationally) was roughly in line with the quarterly average over the prior 12 months but 64% lower than the Q1 average of the previous five years. Having said that, it was the highest number of sales seen since December 2022, highlighting that the smaller end of the market remains more active than larger lot sizes. The lack of transaction activity reflects the sharp increase in cost of capital seen over the past 24 months. This has resulted in national CBD prime average yields softening a further 29bps over the quarter. The national movement in yields may not be directly reflective of individual portfolios or assets, given differences in the timing of valuation processes.

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Retail

While annual rental growth remains soft, it is consistent and broad-based. According to JLL Research, across large discretionary shopping centres (Regionals) gross rental growth averaged +0.1% for the quarter and +0.5% for the year, with every market recording a similar result. Growth across Sub-Regionals was slightly stronger at +0.2% and +0.8%, representing nine consecutive quarters of rental increases. Neighbourhood centres also recorded growth of +0.2% for the quarter, taking annual growth to +0.6%. Sydney and South-East Queensland, which have the highest Neighbourhood rents per sqm, recorded slightly weaker growth than the other markets.

It was a very slow quarter for retail property transactions, with volume totalling just over $500 million. No Regional assets changed hands for the first time since September 2022, dragging the dollar value of activity lower. It was quiet across the other centre types as well, with Sub-Regionals the most active relative to the five-year average. While yields did expand further over the quarter, it was to a lesser extent than office and industrial reflecting the higher starting point of retail yields prior to the hiking cycle.

While yields did expand further over the quarter, it was to a lesser extent than office and industrial reflecting the higher starting point of retail yields prior to the hiking cycle.

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Industrial

Gross occupier take-up softened materially over the quarter as inventory levels contracted and the broader economy slowed. Transport and Warehousing continues to comprise the greatest share of demand from an industry perspective, with Manufacturing take-up also remaining at a solid level. The big driver of the slowdown was Retail and Wholesale Trade, which saw demand fall by around 90% compared to the five-year average. This may reflect cautiousness from occupiers in the face of weak retail sales and declining global trade volumes, together with a ‘pause’ to expansion after substantial take-up during the pandemic. From a market perspective, Sydney saw the largest slowdown in demand, with South-East Queensland and Perth holding up well.

 

While rental growth is slowing from record highs, it remains well above trend, consistent with tight vacancy conditions. Melbourne saw the strongest growth, with Melbourne West the top-performing precinct nationally (+8.0% QoQ). Brisbane growth was robust in the infill Trade Coast precinct, while the land constrained South precinct was the top performer in Sydney. Rental growth in Sydney’s Outer Central West, where land is more abundant, was not as strong.

Almost 500,000sqm of industrial supply was completed in the first quarter of 2024. A further two million sqm4 of supply is slated for completion over the balance of the year, however construction delays may see timings slip. If all the projected supply is completed in 2024, it would represent the second highest level of completions in a calendar year behind 2022 (2.7m sqm). Projects are heavily concentrated in the land-rich, outer precincts, with 66% of expected 2024 supply to occur in just four precincts (of 22 nationally). Ongoing elevated levels of supply will likely lead to greater availability of space and a further softening of rental growth.

There was a rebound in transaction activity over the quarter, with dollar volumes exceeding the five-year average and hitting the highest level since September 2022. Activity was dominated by Sydney, in particular ISPT and Unisuper’s joint acquisition of a 280 hectare greenfield development site in Badgerys Creek. Consistent with other sectors, prime industrial yields expanded over the quarter along the East Coast, with the smaller markets of Adelaide and Perth unchanged. Sydney saw the greatest degree of softening, but still has the tightest yields nationally.

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Outlook

The global economy is slowing but at a relatively measured pace, engendering optimism that a “soft landing” can be achieved. Australia’s economy is in a similar position, with inflation slowing but employment conditions remaining resilient. Markets are becoming more confident the rate hiking cycle is at or near its end, which should help ease uncertainty and improve liquidity for property later in the year.

While an economic slowdown is expected over 2024 and early 2025, a more significant contraction (i.e. recession) is looking less likely. Businesses will continue to review their space requirements as they adjust to hybrid working, though the balance between in-office versus remote is expected to shift back towards the office over 2024. Location continues to be an important driver of occupier preferences, combined with amenity and building quality (at a given price point).

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How did the Cromwell Funds Management fare this quarter?

With the Cromwell Direct Property Fund’s property portfolio completely revalued externally in November and December 2023, no external revaluations were completed in the March quarter. With the revaluation process and half-year accounts released, the Fund recommenced accepting applications and offering the Distribution Reinvestment Plan (at a 5% discount) from 25 March 2024.

The Fund continues to experience positive leasing outcomes, especially in its Brisbane based assets. The strategy to build quality speculative fitouts and improving amenity with 3rd spaces has helped improve occupancy metrics, tenant engagement, and improving rental growth.

Both the Cromwell Riverpark Trust’s Energex asset (CRT) and Cromwell Trust 12’s Dandenong asset (C12) had solar panels installed. The installation is awaiting grid approval, and the work will help maintain (for CRT) and obtain (for C12) a 6-star NABERS rating.

Read more about the Cromwell Direct Property Fund: www.cromwell.com.au/dpf.

Past performance is not a reliable indicator of future performance.

Cromwell Funds Management Limited ACN 114 782 777 is the responsible entity of and issuer of units in the Cromwell Direct Property Fund ARSN 165 011 905.

Before making an investment decision in relation to the Fund it is important that you read and consider the Product Disclosure Statement and Target Market Determination available from www.cromwell.com.au/dpf, by calling 1300 268 078 or emailing invest@cromwell.com.au.

 

  1. Labour Force, ABS
  2. Retail Trade, ABS
  3. Hedonic Home Value Index, CoreLogic
  4. Projects with a status of Under Construction, Plans Approved, or Plans Submitted
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.

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