rebeccaquade, Author at Cromwell Funds Management
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January 22, 2024

Cromwell releases annual ESG report, details full scope 3 inventory


In January, Cromwell released its most detailed, comprehensive ESG report to date. This report serves as a snapshot of how the business is progressing towards meeting our environmental, social, and governance commitments over the short and long-term.

The report was developed in collaboration with all relevant disciplines across the global business, and aligns with major reporting standards, including the Sustainability Accounting Standards Board and the Global Reporting Initiative. It has been designed to provide transparency through qualitative and quantitative data, while showcasing the Group’s effort to deliver tangible positive impacts, citing case studies from across the business.

Most significantly, in line with the organisation’s desire for greater transparency, this recent report details Cromwell’s full scope 3 emissions inventory disclosure for the first time.

What ESG progress means for investors

Increasingly, ESG reporting is being used by investors as another way to track an organisation’s activities and keep businesses accountable for their actions. Some investors use ESG results to determine poor performers, associating the factors that cause companies to receive low ESG ratings with weak financial results; some investors seek out high ESG performers, expecting exemplary ESG outcomes to drive superior financial results.

ESG reports are a key source of ESG performance information relied on by investors and stakeholders to make informed decisions about an organisation’s impacts. Investor and stakeholder expectations around ESG disclosure are increasing and reporting standards are rising to respond to that expectation.

Indeed, the term “ESG” was first mentioned in the United Nations Global Compact “Who Cares Wins” report in 2004 and has now become synonymous with the ability to demonstrate good corporate citizenship. Industry trends, as well as independent studies, indicate that investors are now wanting to see tangible ESG results.

A 2022 Ernst & Young Global Corporate Reporting Survey, released in November that year, found that 78% of investors want companies to focus on environmental, social, and governance activity, even if it hits short-term profits.

These days, a company’s risk profile is raised in the eyes of investors if it fails to consider ESG risks adequately and disclose its approach to them. Among other things, this makes it difficult for a company to access capital and can over time, render it ‘un-investable’ to investors, many of whom now have ESG or green mandates.


ESG and our tenants

As a commercial real estate investor and property manager, meeting the diverse needs of our tenants remains a high priority.

Through regular, ongoing engagement and detailed annual surveys, our tenants have outlined that helping meet their own ESG requirements and ambitions needs to be a key priority for Cromwell as the building owner. By helping meet these needs, we significantly increase tenant retention across our portfolio – and attract new long-term blue-chip tenants.

Cromwell’s October 2023 Tenant Satisfaction Survey Portfolio results showed that 66% of respondents rate sustainability as important or very important in their organisation’s decision to lease; and almost 60% of respondents are already at net zero, considering net zero, or already working to become net zero organisations.

For instance, over the past 12-24 months, state and federal government departments have put increased emphasis on restricting leasing properties that can’t demonstrate a credible net zero pathway for the building.

With government tenants making up a significant percentage of our Australian leasing pool, Cromwell has committed to ensuring that we take necessary steps in improving our ESG performance to retain these crucial tenants.

In this way, we satisfy current tenant needs – and future-proof existing buildings – to increase tenant retention, improved rental yields, and deliver for our investors.

This report covers Cromwell Property Group’s environmental, social and governance (ESG) performance for the year ending 30 June 2023.

The significance of understanding scope 3 emissions

Scope 3 emissions – also known as ‘value chain’ emissions – are indirect greenhouse gas emissions both upstream and downstream of an organisation’s main operation. Consequently, for this reason, they are also traditionally the most challenging emissions scope to calculate and address for many businesses as they are not directly controlled by the organisation.

Regardless, the UN Global Compact has found that scope 3 emissions generally make up more than 70% of an organisation’s total emissions footprint and it is accepted that understanding them is critical to identifying the greatest reduction hotspots, avoiding future value chain risks associated with the transition to a zero-carbon economy, and mitigating against greenwashing.

Group Head of ESG Lara Young said that reducing scope 3 emissions, and including this emission scope in net zero carbon targets, is critical to ensuring legitimate net zero targets that deliver tangible change. Addressing scope 3 emissions, she said, can deliver substantial business benefits by providing a clear transparency, understanding, governance, and oversight of an organisation’s full value chain and the evidence of the positive impacts delivered.

“Despite the industry challenges of data quality and availability for scope 3 emissions, the Group is proactive with joint venture partners in Oceania – and its supply chain partners, clients, and tenants globally – to collate scope 3 data via the roll-out its green lease initiative and ESG schedules,” said Ms. Young.

“Cromwell has committed to positively contributing to the communities in which we operate, and that goal involves supporting tenants and investors with achieving their net zero targets and evolving ESG needs.”

“Cromwell’s FY23 ESG report is the first time that Cromwell will publicly disclose scope 3 emissions, and this will place the Group among the minority of industry peers that publicly disclose this data. This outcome is a testament of the Group’s capability and desire for full transparency.”

Cromwell’s FY23 ESG report is the first time that Cromwell will publicly disclose scope 3 emissions, and this will place the Group among the minority of industry peers that publicly disclose this data.
Lara Young – Group Head of ESG, Cromwell Property Group


Progressing on our ESG commitments

The FY23 ESG report shows that Cromwell made notable advancements toward our ESG commitments during FY23 – including the development and implementation of our updated ESG Strategy; preparing a globally aligned approach to decarbonising the business to meet our targets of net zero scope 1 and 2 emissions by 2035, and all scope 1, 2, and 3 emissions by 2045.

This activity is supported by emissions abatement cost modelling for our Australian and European portfolios to facilitate emissions reductions and associated decarbonisation costs.

The report also highlights the progression the business has made in the past 12 months regarding specific ESG results. Among our key achievements, emissions intensity (scope 1, 2, and 3) was reduced by 12% in Australia, compared to the previous financial year; European assets recorded reductions of 22%.

Cromwell’s Direct Property Fund was third in the Australian NABERS Sustainable Portfolio Index (SPI) – the highest ranked geographically diversified fund in Australia – and Cromwell’s Australia investment portfolio was fourth in the same index.

Cromwell Polish Retail Fund (CPRF) achieved a five-star rating and a Cromwell record-high overall score of 90 points, ranking 11th out of 32 European retail non-listed peer funds and 17th out of 87 in the European Retail category.

And, significantly, Cromwell’s Australian gender pay gap decreased by 44% since it was first calculated in FY21.

Lara Young said that, among other metrics, these key achievements highlighted the progress the organisation is making.

“We know that ESG is not just about carbon emissions. While reducing emissions is crucial, this cannot be at the expense of biodiversity, social value, or natural capital. These topics are all interlinked and the Group recognises we cannot be successful if focusing on each in isolation,” said Ms. Young.

McKell Building case study

One of the largest, and most involved, ESG-led projects this year was the electrification of the McKell Building in Sydney’s CBD.

The multi-million-dollar project has involved converting the building’s existing commercial gas-fired heating system to an electric heat-recovery reverse cycle heating, ventilation, and air conditioning (HVAC) system.

Cromwell’s Head of Property Operations, Tessa Morrison, said the upgrade of the 24-storey building has been designed to help ‘future-proof’ the asset by replacing outdated, 1970s-era infrastructure with modern, energy saving equipment.

““The McKell building is a 1970s-constructed building with an existing NABERS 5.5 Star energy rating, so while it is already significantly energy efficient, we are undertaking this project to reduce emissions and drive further energy efficiencies,” said. Ms. Morrison.

“This is the first time that a multistorey, 25,000sqm commercial building in the Sydney CBD has undergone an electrification upgrade – and we’re excited to have engaged experienced mechanical air conditioning contractor Velocity Air to help deliver the project.”

Efficiencies in the new reverse cycle HVAC system will mean that hot air removed as part of the building’s air conditioning process will be recycled back into the system for use elsewhere, including heating the building’s water.

Looking long-term

Through its data informed approach, Cromwell is working focus on the broad spectrum of the ESG agenda, while prioritising the most relevant aspects. Cromwell recognises that the industry needs to remain pragmatic, but also strike a balance with a wholistic systems view.

Cromwell’s key long-term targets remain:

  • Net zero operational emissions (scope 1 & 2) by 2035.
  • Entire portfolio (scopes 1, 2, & 3) including tenant and embodied carbon by 2045.
  • Significantly reduce our gender pay gap year on year.
  • Achieve 40:40:20 gender diversity at all levels.
  • Integrate ESG into risk register and business strategy, including objectives and key results.

“Cromwell recognises the ESG challenges that the property industry faces; however, we also recognise the opportunity to deliver tangible positive impacts. The Group has a global in-house ESG team and dedicated Australian and European teams that supporting all Cromwell ESG targets and activities,” said Ms. Young.

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November 29, 2023

In conversation with… Roxanne Ewing

Head of Corporate Operations, Cromwell Property Group

As one of the senior leaders within Cromwell, Roxanne has spent years helping guide the direction of the business – including fostering an environment where staff can thrive. As workplaces continue to evolve, Roxanne continues to explore how Cromwell can be a positive work environment.


1. It’s safe to say you’ve got a wide-ranging role at Cromwell, Roxanne – can you walk us through some of the key responsibilities you take on?

I do have a broad role here – and that means every day is different, which I love.

I am accountable for the People and Culture, Marketing, and Operations teams at Cromwell – so, in a nutshell, I’m responsible for ensuring that Cromwell has the right talent to execute on its strategy and deliver for our investors; execute on marketing strategies that attract and retain investors; and support the operations of the business from an office and administrative perspective.


2. You’ve been Cromwell’s Head of People and Culture in the past – and helped shape our current organisational values. How did that process come about?

Everyone has heard the old “culture eats strategy for breakfast” adage but, for me, culture eats everything; culture is everything. Without the right culture, an organisation cannot succeed – and values are at the core of that. Values are the handful of words that attempt to sum up the enormity of an organisation’s culture and vision.

It’s no secret that Cromwell has undergone a significant amount of evolution of the past few years, as all organisations do. Like any organisation, we’re not stagnant – and we had shifted significantly enough to justify redefining the terms that captured both who we were, and who we wanted to be.

And we could only achieve that by engaging everyone in the conversation. Over a three-month period, we engaged with our entire business – we asked people what our vision meant to them, who they felt we needed to be in order to achieve their best, as well as what our current strengths were that we could leverage. We also had transparent discussion about what activities we needed to stop doing.

It was a surprisingly simple process. There was general consensus about our strengths – we’re respectful, we care, we’re inclusive and we’ve got great people – as well as about those areas that we would need to focus on if we’re to achieve our vision: increased agility, collaboration, and innovation.

We solidified the values that we would live by during the next stage of our evolution as Collaborative, Progressive and Accountable.


We solidified the values that we would live by during the next stage of our evolution as Collaborative, Progressive and Accountable.
Roxanne Ewing – Head of Corporate Operations, Cromwell Property Group

3. Over the past five or six years in particular, there’s been an undeniable societal shift in attitudes on diversity and inclusion, gender equality, and cultural shifts/accepted norms. How does the ever-changing society attitude change translate into the workplace?

I think that shift started long before then, but certainly in more recent times we have seen government, regulatory bodies, talent, and the broader community really begin to hold organisations accountable for their role in diversity outcomes, as they should. Organisations, particularly large ones, have the power to make real and lasting change in this regard. And why wouldn’t they? It’s great for business.

We’re two years into our global five-year Diversity, Equity, and Inclusion journey, which has three simple goals; create a culture of respect and inclusion, foster and value diversity; and ensure equity.


4. What do you see as Cromwell’s role in the lives of our people as an employer? Is it as simple as just providing a place to work?

No, we want people to love their time at Cromwell and when they decide it’s time to move on, leave us as better people than when they joined.

For a lot of people, work significantly contributes to their meaning, their purpose, and we’re very keen to help them fulfil that. In fact, at one of our recent Leadership Summits, we focused on how we can help our people reach a state of engagement, by meeting their psychological needs – physiological, safety, belonging, esteem and self-actualisation.

At Cromwell, this encompasses providing for people’s basic needs with good remuneration, stability, and a physically and psychologically safe work environment. Creating a culture that is inclusive, allows people to bring their true self to work, and provides challenging and interesting work is critical.  It also involves giving frequent feedback and recognition and the ability for our people to continually grow and develop.  And finally, we look to give people a vision and a purpose they can connect with.

We know we play a huge part in people’s lives, and we take that very seriously. We’re far more than a place to work, we really want to help our people achieve their professional and personal purpose.


5. What operational targets has Cromwell set to improve ourself as an employer?

What gets measured, gets done – and we have plenty of targets! In the DEI space, and as part of our commitment to the Property Champions of Change Coalition, we’re using a 40:40:20 metric, a gender pay gap and a gender pay parity target to help keep ourselves accountable to our DEI Strategy.

For those that haven’t heard the term, 40:40:20 is about achieving 40% male, 40% female, and 20% other/discretionary gender representation in our workforce – we’re seeking to achieve that outcome at all levels of our organisation and we have already done so at the Executive, Senior Leader, Team Leader, and Emerging Leader levels.

Our target to reduce the gender pay gap year-on-year is an excellent measure of whether we’re achieving equality, as well as meeting our gender targets. Since setting this target, we’ve reduced our pay gap by over 20%, and we’re still making good progress.

We’ve also set ourselves an employee engagement target of 70%. Engagement is the level of emotional connection our employees have with our business and directly correlates with the level of discretionary effort they’re willing to exert. We saw a 9% increase in employee engagement over the course of 2023 and we’re hoping to keep that trend strong.

6. How has post-Covid hybrid working been addressed by Cromwell, and how are we shaping our office space to suit the needs of our workforce?

We have an ‘agile working’ approach at Cromwell. This approach dictates how and when our people work, and we recognise that agile working comes in all different shapes and sizes and will mean different things for different people and different roles.

Our people work flexible work hours, whether they be part-time, job-sharing, or simply altering their start and finish times to suit their lifestyle. It may also include different types of time-off and/or breaks from work altogether with our Career Break option. And, of course, it  pertains to location in terms to where work happens, whether that be in a Cromwell office, at an employee’s home or somewhere altogether different.

At first, we felt compelled to put all sorts of rules and guidelines around agile working, but we’ve stripped a lot of these away. Our culture is one of trust, accountability, and strong relationships between employees and their leaders. On the whole, we generally leave it to the employee and the people leader to agree an agile working approach for each individual; something that works for them.

Collaboration is one of the company values and we do love to see our people connecting and collaborating when it suits them. As a result, we’ve designed a new Brisbane office to cultivate more meaningful relationships between our teams. We’re taking up residence in one our DPF assets, 100 Creek Street. It’s a conveniently located facility with great amenities that align with what we want to offer our people.

The new office is designed specifically for our people – and around our agile working approach.  It’s designed to be light, green, comfortable, accessible and to have a space for every activity our people may want to undertake. We know that our people will work remotely when they want quiet, focused time and therefore we have put a focus on oversupplying formal and informal break out and collaboration spaces in the office. We also recognise that life doesn’t stop just because you’ve chosen to work from the office, so we have incorporated wellbeing spaces such as the wellbeing and multi-faith rooms. It’s a really exciting time for Cromwell and we can’t wait to welcome people to our new workspace in January 2024.

The new office is designed specifically for our people – and around our agile working approach.  It’s designed to be light, green, comfortable, accessible and to have a space for every activity our people may want to undertake.

7. Are there any initiatives that Cromwell has rolled out that you’re particularly proud of?

Yes! There’s too many to list here, really. I’ll focus on a few of the more recent ones.

Over the last 12 months, we have partnered with some causes that are really closed aligned with our culture, strategy and values.

This includes Relove – a charitable organisation that partners with corporate entities to rescue furniture and whitegoods and use them to furnish homes for people experiencing domestic violence or seeking asylum. As part of our participation in ‘16 Days of Activism’ against gender-based violence, we were able to help them furnish five homes as part of their 100 Homes Appeal.

Likewise, during the FIFA Women’s World Cup, we were the principal sponsor of the Moriarty Foundations’ Indigenous Footballer’s “call time on inequality” campaign. The John Morarity Football programme is Australia’s longest running, and most successful, Indigenous football initiative, with more than 2,000 Indigenous girls and boys participating.

I’m also really proud of our work in the gender equality space. We’re an active member of the Property Champions of Change Coalition, a property industry coalition working to achieve a significant and sustainable increase in the representation and equality of women in the property industry. Though we joined the charge relatively late in the game, we have made enormous headway and currently have some of the best family-friendly policies and the second lowest gender pay gap within the coalition.

And finally, I’m proud of the major cultural shift that we’ve undergone in the last 12 to 24 months. We’ve taken firm stances on our view of diversity, equity, inclusion and respect and we’ve put our money where our mouth is and significantly improved our flexibility, wellbeing, family-friendly, remuneration, and time off benefits.

8. What do you enjoy most about your role?

The fact that I get to do all the above! I have so much ability to influence the lives of our people, and those in our broader community. Absolutely every day is different, but the one thing they have all have in common is the power to make a difference, in one way or another.

I have been with Cromwell for a very long time and my role has never stagnated. I love the people that I work with in the Marketing, People and Culture and Operations teams as well as our broader Australian team and I’m inspired by what we’re here to do.

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November 28, 2023

Large format retail: Sticking to the fundamentals

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

While most property types have experienced a performance slowdown this year on the back of rising interest rates, retail has been comparatively resilient. The sector was already being viewed with some caution pre-COVID due to the impacts of e-commerce, contributing to less substantial cap rate compression through that phase of the cycle – over the last five years, retail saw a cap rate low of 5.2% compared to 4.8% for office and 4.1% for industrial1. This different starting position has meant the negative valuation impact from cap rate expansion has been less pronounced.

The sector has also benefitted from strong fundamentals, namely strong consumption growth and a muted supply pipeline. Incomes have risen, retail spending’s share of wallet has increased, and population growth has surged. These drivers have seen Australian retail trade grow by 28% since Feb-20, with spending levels sitting 16% above the pre-COVID growth trend2.

One of Cromwell’s preferred exposures to retail is Large Format, a sub-sector that isn’t often in the limelight. These assets don’t have the scale or luxury brands of a major shopping centre. It’s a no-frills, back to basics retail proposition – but that’s not a bad thing. While underwriting assumptions do have to account for a weaker consumer outlook over the next 12 months, Large Format is expected to benefit from resilient fundamentals, offers an attractive yield and “clean” income, and is better positioned to leverage e-commerce as an opportunity rather than a challenge.

Population growth is a powerful driver of demand


Nominal retail consumption growth can be boiled down to three buckets:

  1. People paying more for the stuff they buy (retail price inflation)
  2. People buying more stuff (real growth per capita)
  3. More people buying stuff (population growth)

Of the three, population has been the most significant driver of retail growth over the last decade, averaging 1.4% p.a3. It has strengthened further post-COVID, with Australia recording population growth of +2.2% in the year to March3 and preliminary indicators of net overseas migration suggesting the pace hasn’t dropped off over the course of the year. The growth tailwind is expected to persist, with population forecast to grow by 1.4% p.a. from 2022-23 to 2032-334.


Positively for Large Format and its typical occupiers, Australia’s population growth skews to younger families. Around 60% of growth is due to net overseas migration, of which circa 80% comprises those aged under 35. This demographic is central to household formation and the retail activity that comes along with it, which is more heavily represented in Large Format assets (e.g. furniture/appliances).

Another boost to demand is the changing nature of dwelling composition. Australia is seeing the number of occupied dwellings increase faster than the population, as single person households become more common5. This has resulted in a lower average household size, or thought of another way, more dwellings required per person. While people are increasingly living in smaller dwelling types (e.g. apartments versus houses), we expect the net result to be greater demand for household goods and furnishings.


The growth of the under 35 demographic is central to household formation and the retail activity that comes along with it, which is more heavily represented in Large Format assets (e.g. furniture/appliances).

Clean income and an attractive yield


In a time of slowing growth and elevated inflation, the ability to generate stable, growing income is an important driver of investment returns. Large Format’s yield nationally is 6.1%6, higher than many commercial and residential property sectors. We also consider the yield to be “cleaner” – what you see is what you get. Compared to major shopping centres for example, which are complex structures with substantial plant and equipment, often less capital expenditure is required to maintain a Large Format asset. This means the post-capex yield, or the money that actually ends up in your pocket, may be more attractive than a simple comparison of headline yields suggests.

The income underpinning the yield also grows over time, in contrast to the fixed nature of bonds. Like the broader retail sector, Large Format leases typically stipulate rent escalation each year of 3-5% or a CPI-linked amount, usually providing growth in excess of inflation. The income stream is dependable, with the majority of Large Format income derived from 5–10-year leases to ASX-listed or national retailers, such as Bunnings, The Good Guys and Freedom.

We believe the runway for rental growth in Large Format is sustainable, given the lower starting level and attractive economics for retailers. Mosaic Brands recently announced plans to open 40 “mega stores” through to Jun-24, as the larger format is 3x more profitable than their normal store size7. For some assets, further growth can be derived from intensification – development of unutilised land, car parks, or air rights into income-generating improvements.




Online’s share of Australian retail trade has increased from 5.1% five years ago to 10.7% today8. The rise of e-commerce has dampened demand for physical retail space relative to household consumption, particularly across discretionary shopping centres with large exposures to categories such as clothing and department stores. Cromwell forecasts online’s share of spending to increase to 20% by 2030, however there are several reasons why Large Format can view the shift as an opportunity, given its role in omnichannel retailing.

From consumers’ perspective, Large Format minimises much of the friction associated with a traditional shopping centre experience – friction which turns shoppers towards e-commerce. Convenience is the number one reason for purchasing online9,10, as large multi-level shopping centres provide a frustrating car parking11 and navigation experience. In contrast, Large Format assets are often a simple rectangular layout with large on grade or basement car parks. These assets can provide the benefits of a physical shopping experience, such as better customer service8 and the ability to touch and trial products12, while minimising the painpoints. In-person shopping is particularly valued across Large Format’s typical retail categories such as homewares and home improvement.

For retailers, Large Format facilitates an improved omnichannel proposition in a number of ways. Rents are typically in the range of $300-600 per square metre, much lower than traditional shopping centres and closer to levels being seen across industrial assets today. Sites are generally large, flat, and designed to be accessible to the heavy vehicles delivering bulky goods to occupiers. Assets are also often well-located, with ample arterial and motorway connections servicing significant population catchments. These attributes make Large Format assets well suited to the full suite of omnichannel product “delivery” options, including buying in store, click and collect, and ship from store, while also offering reasonably cost-effective inventory storage – Nick Scali for example stores 55% of inventory in its showrooms13. In this respect, Large Format can offer investors a quasi-industrial exposure spanning warehousing and fulfilment, with the added fillip of revenue generation (making sales).

The physical store presence also aids in reducing last mile reverse logistics costs14 and processing times15, and provides retailers with an additional opportunity to engage with customers and generate a sale when products are being returned. By offering a seamless omnichannel experience, retailers can drive customer engagement and loyalty.

Customers’ preference for omnichannel is evidenced in trading outcomes, with “Bricks & Clicks” retailers winning online market share at the expense of “Digital Native” retailers16, and multichannel customers spending 2-3x more than single channel customers17. Omnichannel is important to customers and retailers alike, and Large Format’s characteristics can make it a preferred component in that proposition, particularly as e-commerce increases its share of sales and industrial rents reach higher levels.

Large Format is an omnichannel hybrid of retail and industrial, offering consumers a “touch and trial” shopping experience and retailers a cost-effective shopfront and inventory storage.

Supply is constrained, good news for existing owners


One of the reasons retail in Australia has avoided the “dead mall” phenomenon seen in the US is sensible planning policy and constructive relationships between developers and councils. In the US, developers have taken advantage of lax policy to build more than double the shopping centre floorspace per capita than Australia18, causing supply to considerably outstrip demand and leading to significant space handbacks and store closures. Australia, by comparison, has restricted development to more sustainable levels, raising barriers to entry and lowering the likelihood of value-destroying competition impacts for both landlords and retailers. While there are more land zones where Large Format is permissible compared to traditional shopping centres, the lack of excess shopping centre space more broadly means a better supply-demand balance across the whole spectrum of retail typologies.

In addition to the above, Large Format supply has been constrained more than normal by rising construction costs, labour and material shortages, and a lack of suitable sites, exacerbated by competition from industrial uses. The characteristics which make a site compelling for Large Format (size/configuration/access/location) are also desirable to industrial facilities. With industrial vacancy below 1%19 and yields remaining tighter than other sectors1, developers are prioritising industrial over other uses such as Large Format. A recent example is Goodman’s 2022 acquisition of Alexandria Homemaker Centre with the intention of future conversion to logistics, which will result in the withdrawal of Large Format space from the market (a positive for existing asset owners). Such transactions also highlight how Large Format centres can be used as a way to land bank large sites in tightly held corridors, with the benefit of income generation over the hold period.

Large Format Outlook


The outlook for demand is robust with retailers continuing to look for space – Super Retail Group for example is looking to open an additional 61 stores by Jun-26, while the likes of Baby Bunting, Bedshed, Nick Scali and Plush require a combined 125+ locations to reach their target store networks20. The vacancy rate has tightened to 3.2%21, its lowest level since at least Jun-17, meaning limited space is currently available and future availability will be constrained by the muted supply pipeline. These dynamics are expected to create conditions conducive to rental growth, which CBRE forecasts will run at +3.0% p.a. nationally from 2023 to 202622.

Stock selection is key, with Large Format performance closely linked to location, the strength of the surrounding catchment (i.e. income/population growth), and impacts from competition. Metropolitan sites in land-poor markets are preferred given the protection that scarcity (and lack of competition) provides to valuations over time – acquiring at attractive pricing is a key challenge for these types of assets. Dominant assets in fast-growing non-metropolitan markets can also be attractive if the risk of future competition can be adequately priced.




  1. The Property Council of Australia/MSCI Australia Annual Property Index, MSCI (Jun-23)
  2. Retail Trade August 2023, ABS (Sep-23)
  3. Based on analysis by the Centre for Population, National population projections in the 2023-24 Budget; Cromwell (May-23)
  4. National, state and territory population, ABS (Sep-23)
  5. ABS 2021 Census; Cromwell
  6. Australian Retail Figures Quarterly Market Report, 2Q 2023 (CBRE)
  7. FY2023 Market Update, Mosaic Brands (Aug-23)
  8. Rolling 12-month basis as at Jul-23. ABS Retail Trade (Aug-23)
  9. IAB Australia and Pureprofile Australian Ecommerce Report 2023
  10. Shopping Pulse, Klarna (Q2 2023)
  11. Bricks & Clicks, UBS (2019)
  12. Retail Monitor, Australian Consumer and Retail Studies, Monash Business School (Nov-22)
  13. FY23 Results Presentation, Nick Scali (Aug-23)
  14. Wallenburg, Einmahl, Lee & Rao (2021)
  15. McKinsey (2021)
  16. Inside Australian Online Shopping, Australia Post (2023)
  17. Myer (Sep-23); Coles (Feb-21); Accent Group (Aug-18); Pallant et al (2020); KPMG (Dec-22)
  18. SCCA (Sep-23)
  19. Australian Industrial and Logistics Figures Q2 2023, CBRE (Jul-23)
  20. Company reports; Cromwell (Sep-23)
  21. JLL Research (Jun-23)
  22. Large Format Retail Australia, CBRE (May-23); Cromwell. Rental growth refers to Prime net face rents (AUD/sqm).

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October 11, 2023

Redefining the office flight to quality: A Sydney CBD case study

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

“Flight to quality” has been the real estate industry’s phrase of the year, particularly as it pertains to the office sector. While Cromwell agrees that a flight to quality is occurring and will continue to play out over the medium-term, our opinion of what that flight actually is – and indeed our definition of quality – is somewhat contrarian.

Quality has become synonymous with Premium – the top grade of office buildings. These buildings are modern developments with the largest floorplates, most internal amenity, and luxurious finishes and fitouts – and which naturally charge the highest rents. While this type of asset is an important part of the market, it’s worth assessing whether the popular narrative fits all the facts.

Are occupiers flocking to Premium assets at the expense of Secondary stock? Does the top-end of town hold all the cards?

Net absorption is important but doesn’t tell the whole story


Net absorption is the metric often cited as evidence of the flight to (Premium) quality. In the Sydney CBD, Premium stock has recorded the strongest net absorption over the last 20 years at around +624,000 square metres (sqm), an increase in occupied stock of +137%. A Grade’s net absorption (+270k sqm) has been the second strongest over that time period, with the amount of occupied space increasing +18%. On face value, it’s easy to see why the “Premium is best” narrative has emerged – but there’s more to the story!

Premium has also seen the largest increase in total space.

Net absorption is the change in occupied (leased) space over a given period (often a quarter or year), represented in square metres. It is calculated by subtracting the amount of occupied space at the start of a period from the amount of occupied space at the end of a period. Positive net absorption means the amount of occupied space has increased, while negative net absorption represents a decrease.

Growth in occupied space is an expected by-product of the substantial increase in supply. On the other side of the coin, B Grade has recorded negative net absorption but also a decrease in total space – occupiers can’t lease space that doesn’t exist.

This dynamic is often seen in the lower grades as buildings are “withdrawn” (removed) from the market through conversion to different uses (e.g. residential). When we consider that rents are a function of demand and supply, it becomes clear that looking only at net absorption provides an incomplete picture of market conditions – we also need to look at the supply side of the equation.

On face value, it’s easy to see why the “Premium is best” narrative has emerged – but there’s more to the story!

Vacancy paints a different picture


Vacancy rates highlight a deterioration of demand relative to supply at the top end of the asset grade spectrum. In the Sydney CBD, Premium has the highest vacancy rate in absolute terms and when compared to its historical average.

B Grade has proven more resilient from an occupancy perspective, with vacancy actually decreasing over the last year.



Despite elevated vacancy, Premium’s net effective rental growth has outpaced A Grade and B Grade over recent quarters. There are a couple of potential explanations for this counterintuitive result.

Time lags: It takes time for changing conditions to be grasped by market participants, for negotiations to be had and leases signed. Premium had the lowest vacancy rate until mid-2022, with its main occupiers adopting a “wait-and-see” approach to space decisions through the pandemic. Now, Premium occupiers are handing back space and driving vacancy higher, but current rental outcomes are reflecting the tight conditions of prior quarters.

Affordability: The spread between Premium and A Grade rents narrowed over 2021-22 as Premium incentives increased. Industry feedback suggests occupiers have taken advantage of the relative affordability to upgrade, taking up less space but at a higher rate per sqm. This is positive for market rental growth but less so for income growth, given the occupancy effect. We expect Premium upgrading to run out of steam as affordability worsens, with the spread recently increasing to its widest level since 2014.

Incentives are financial ‘sweeteners’ offered by landlords to encourage tenants to lease space. Common incentives include contributions to tenant fitout costs, rent-free periods, and rental abatements where the amount payable is reduced for a period of time. The rent received by a landlord after incentives are accounted for is referred to as an “effective” amount.


In any case, for investors, there’s limited value in knowing today’s performance – what really matters is the future.

Good things come in small packages


In our view, it will be difficult for Premium stock to maintain the current pace of rental growth, with A Grade stock likely to outperform over the medium-term due to lower vacancy, a less substantial supply pipeline, and favourable occupier trends.

Cromwell estimates there are 265k sqm of Premium space in the Sydney CBD which will need to be leased in the near term based on space currently vacant or completing by the end of 2024. This “baked in” amount is equivalent to 19.7% of current Premium stock. Future developments may deliver new supply to the market post-2024, however we only consider 43k sqm as highly likely on a probability-adjusted basis.

A Grade has a larger amount of space requiring leasing (403k sqm); however, it is smaller as a proportion of existing stock (18.8%). Unlike excess B Grade stock which may be withdrawn from the market via change of use, the only feasible option for Premium space is absorption via leasing. On this front, the Premium end of the market faces some challenges.

Space contraction impacts from work-from-home are being felt most keenly by assets with large floorplates. These buildings are expensive to divide into smaller tenancies and typically cater to the largest occupiers. Research1 points to an inverse relationship between occupier size and office usage, which is then being reflected in organisations’ plans to expand or contract their office footprint. The industries that predominantly occupy Premium buildings (financial services, professional services, tech) also demonstrate a lower propensity to use the office post-COVID.

Australian leasing data corroborates the research findings. Net absorption has been far stronger across smaller (<1,000sqm) occupiers than large occupiers. The tendency to expand has also been far more positive, with smaller occupiers on average expanding their footprint by ~20% (national leasing deals from 1Q21 to 2Q22) compared to an average contraction of ~13% for occupiers larger than 3,000sqm2.

We believe the in-office bias of smaller occupiers versus larger occupiers reflects the nature of work typical across these organisations. Bigger firms are more regimented and siloed, with large administrative “back office” functions that predominantly perform focused tasks individually. These firms may have also invested more heavily in digital collaboration tools which facilitate remote work across a more geographically dispersed workforce. Smaller firms are more dynamic, with employees wearing multiple hats and undertaking work that tends to favour face-to-face interactions. Regarding smaller firms’ space expansion, this may be linked to their much stronger headcount growth through the pandemic. Businesses with 5-199 employees saw employment growth across the main office-using industries of 4.6% p.a. from Jun-19 to Jun-22, compared to -0.2% p.a. for businesses with 200+ employees3.


One of the arguments often made against exposure to smaller occupiers is that they are riskier than large occupiers, but the data shows this isn’t the case. While very small firms do fall over more often, those with 20-199 employees have nearly identical survival rates to firms with 200+ employees. The smaller occupier bracket is also broader and more diversified, with office-using businesses spanning many industries. By comparison, the large firm bracket is dominated by financial and professional services. Overexposure to large occupiers can also increase the risk that a significant portion of an asset becomes vacant at a single point in time, rather than being spread over a manageable leasing horizon.

Price doesn’t always equal quality


Conflating luxury with quality ignores the needs of many office occupiers. While the largest companies attract the most attention, most office-using Australian businesses are small and medium-sized enterprises (SMEs)4. With cost being the top driver of real estate decisions5, these SMEs are in the market for a Toyota, not a Rolls-Royce with all the extras. They want the highest quality office, in the best location, but within their price bracket. So then, what is “high quality” office? Ultimately, it’s space which meets the needs and preferences of its target occupiers.

Some occupier preferences are timeless and will persist no matter how workstyles and space usage evolve, for example availability of natural light, convenient access to transport and plenty of nearby amenity (e.g. dining and gyms). These are hygiene factors valued by occupiers of any industry or size.

The pandemic has rendered some requirements less important. Floorplate size has historically been a measure of quality and is one of the criteria that determines whether a building is considered Premium or a lower grade. But with occupiers’ office usage shifting towards collaboration and social connectivity, a smaller floorplate can create more incidental interactions and a better ‘buzz’ in the office. While there is a minimum viable size in terms of efficiency and layout, we’re finding bigger isn’t always better in the eyes of occupiers.

Other requirements have increased in importance as occupiers shift to a new way of working. A greater level of embedded technology is expected, to ensure a flexible working model can be facilitated. Greater diversity of spaces is needed to support focused work, collaboration, and flexibility, with implications for building layouts and landlord-led fitouts.

Sustainability also continues to increase in importance, with a wider array of organisations focusing on both the financial and social benefits it can provide, including staff attraction and retention.

Greater diversity of spaces is needed to support focused work, collaboration, and flexibility, with implications for building layouts and landlord-led fitouts.

Not always the more sustainable choice


The preference for sustainable space is becoming more tangible and spans a variety of stakeholders, including end users, occupiers, and investors. Premium buildings often have the highest sustainability ratings (e.g. NABERS), something which is used to support the view that occupiers will increasingly gravitate to these assets over time. But again, these ratings don’t tell the whole story.

While new Premium assets are top performers from an operational emissions perspective (e.g. energy usage), production of building materials and construction activities are the largest producers of embodied carbon emissions6. As the grid decarbonises, embodied carbon’s share of built environment emissions is expected to increase from 16% in 2019 to 85% by 20506 – in the pursuit of net zero, minimising the demolition of existing buildings and the construction of new ones will become far more important than building-specific energy efficiency. As the importance of embodied carbon becomes more well known and stakeholders adopt a whole-of-life view of emissions, newly built Premium assets may not be considered the greener option.

Embodied carbon: the emissions generated during the manufacture, construction, maintenance and demolition of buildings – Green Building Council of Australia (GBCA)


Is this only a Sydney theme?

While this paper has focused on the Sydney CBD for simplicity and brevity, we see the same dynamics playing out in Melbourne. The CBD Premium vacancy rate is almost 19%, and Cromwell forecasts the amount of Premium stock will increase by 15% by 2026 based on new supply currently under construction. The same occupier trends are also occurring, with small occupiers recording positive net absorption of over +23k sqm since Dec-19, compared to negative net absorption of almost -241k sqm for large occupiers.

We believe the flight to quality is occurring across all grades – not just Premium – as occupiers seek space that is well-located, offers high amenity, and enables a flexible approach to working, but within their price bracket.

Look beyond the headline


“Flight to quality” has been a popular theme in the office sector. While positive net absorption has been used to support the notion that Premium buildings are outperforming lower grade assets, the metric can’t be looked at in isolation. Investors gain a more comprehensive understanding of market conditions by also considering other factors such as vacancy, supply impacts and occupier demand trends. We believe the flight to quality is occurring across all grades – not just Premium – as occupiers seek space that is well-located, offers high amenity, and enables a flexible approach to working, but within their price bracket. In our view, the A Grade segment of the market is best-positioned as it occupies an affordability-quality sweet spot, supported by ongoing demand from smaller occupiers and a smaller supply pipeline.



  1. Empty spaces and hybrid places (McKinsey, Jul-23); U.S. Office Occupier Sentiment Survey (CBRE, May-23)
  2. Australian Office Footprint Analysis (CBRE, Oct-22)
  3. ABS (May-23); Cromwell. Main office-using industries includes: Information media and telecommunications; Rental, hiring and real estate services; Professional, scientific and technical services; Administrative and support services; Education and training (private). Financial services employment breakdown is not published by the ABS.
  4. SMEs defined as businesses with 5-199 employees, within the same office-using industries as previously defined.
  5. What Occupiers Want (Cushman & Wakefield, Jul-23)
  6. Embodied Carbon & Embodied Energy in Australia’s Buildings (GBCA; thinkstep-anz, Aug-21)
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September 5, 2022

Understanding the commercial property market


Australians’ love affair with, and focus on, residential property means that a whopping 68% of the average household’s total wealth is allocated to this one asset type1. Most investors will understand this lack of diversification increases risk and introduces volatility.

The defensive characteristics of property, however, are still very much in demand from yield-hungry investors and one option available to them is to consider commercial property as an alternative to their residential investments.

Property in your portfolio – beyond residential

Security of income from commercial property is generally higher than residential property due to the binding nature and longer term of commercial leases. Additionally, commercial tenants’ financial covenants are often superior. Commercial tenants are also often responsible for the majority of outgoing expenses whereas residential tenants are not, providing investors in commercial property with a higher percentage of rent received.

According to CoreLogic2, average rental yields for houses in Australian capital cities fell to a record low of just 3.1% in 2016, compared to commercial property yields of 6.3% for the year to 31 December 20163. Both types of property offer the potential for capital growth.

Like all investments, there are risks and traps associated with commercial property, and investors need to understand the characteristics of the asset class before committing.

Commercial property sub-sectors defined

Commercial property refers to all non-residential real estate and is divided into three main sub-classes – office, retail and industrial.

  • Large number of diverse sub-sectors
  • Wide range of grades of property, from premium quality office towers to basic suburban office blocks
  • Options include entire properties as well as strata floor plates and individual offices within buildings
  • Location varies from CBD, outer CBD, regional and suburban, also impacting on grade
  • Large number of diverse sub-sectors
    • Options for investment include large metro centres, regional centres, specialist retail hubs and individual assets
    • Locations vary from CBD to metro to regionals and suburban
  • Large number of diverse sub-sectors
    • Options for investment include large metro centres, regional centres, specialist retail hubs and individual assets
    • Locations vary from CBD to metro to regionals and suburban
  • Large number of diverse sub-sectors
    • Options for investment include large metro centres, regional centres, specialist retail hubs and individual assets
    • Locations vary from CBD to metro to regionals and suburban

Table 1: Features and General Return Profile of sub classes

Office Retail Industrial
  • Large number of diverse sub-sectors
  • Wide range of grades of property, from premium quality office towers to basic suburban office blocks
  • Options include entire properties as well as strata floor plates and individual offices within buildings
  • Location varies from CBD, outer CBD, regional and suburban, also impacting on grade
  • Large number of diverse sub-sectors
  • Options for investment include large metro centres, regional centres, specialist retail hubs and individual assets
  • Locations vary from CBD to metro to regionals and suburban
  • Sites are frequently custom-built/designed for specific tenants
  • Individual industrial properties vary considerably from one to the next
  • Lower barriers to entry than retail or office due to fact that properties are typically cheaper and quicker to construct
General return profile
  • Yields sit between retail and industrial
  • Yields differ substantially depending on the grade of the property (premium property is generally lower yield than lower grade properties for example)
  • Provides the lowest yield of the three core commercial sectors
  • Often requires greater capital expenditure (capex) than other sectors
  • In challenging economic times, non-essential retail can struggle
  • Provides the highest yield
  • Lower capital growth potential due to the fact that location is often outside of major centres
  • Specialist industrial properties can be difficult to re-lease if tenant leaves


Options for accessing commercial property

In general terms, investors have two options – they can buy a property directly themselves, or pool their money with others.

Direct investment can definitely pay big dividends – many a family fortune has been founded on the back of astute accumulation of commercial property, but for the majority of individual investors, buying and managing a commercial property is neither possible nor sensible. The high cost of most commercial property makes it financially out of reach, and maximising returns from a commercial property requires serious skill and expertise, which individual investors may not have.

Direct commercial property investment within an investor’s SMSF is becoming more common, in particular where members own commercial premises and look to transfer them into their fund. There are, however, barriers to this in the form of SMSF borrowing and contribution caps legislation, and it could also be considered questionable in terms of diversification where a person’s income and superannuation fund both rely on the one place of business.


1. Listed property (A-REITs) investment – property, in a liquid form
A-REITs were discussed in detail in our last issue, and the characteristics are examined briefly again as follows:

Benefits Considerations
  • Liquidity Professional management of the property portfolio
  • Small investment gives access to a large, diversified portfolio
  • Smooth income (yield) underpinned by commercial leases as well as the potential for capital gain when properties are sold
  • Reliable income levels – A-REITs must distribute at least 90% of their income to investors in the form of distributions
  • Income may be tax-advantaged due to the favourable tax treatment of property depreciation by the ATO
  • Transparency
  • Gearing levels (watch they are not too high)
  • A-REITs are subject to general market sentiment and movements (unrelated to the underlying property portfolio) and are closely correlated with equity markets
  • Do not provide as direct an exposure to property as an unlisted trust does
  • Do not provide significant diversification benefits to equities


2. Unlisted property – trading liquidity for a more direct property exposure
Unlisted property trusts are also known as property funds, syndicates, or schemes. They allow investors to buy units in a professionally managed trust which directly holds investment property or properties. Unlisted property trusts can be closed-end (fixed duration of usually 5-7 years) or open-end (no set duration with limited liquidity throughout).

Benefits Considerations
  • Potential for direct access to a high quality portfolio
  • Smooth, stable reliable income stream as 100% of rent (net of expenses) from the property portfolio is distributed to investors in the form of income
  • Income can be tax-advantaged due to the ATO’s favourable treatment of depreciation of property assets
  • Returns are closely linked to the underlying property assets and are less affected by general market movements than returns from A-REITs
  • Value is based solely on the valuation of the underlying assets, which generally occurs annually
  • Unlisted trusts are not highly correlated to other asset classes
  • Good hedge against inflation as lease payment increases are usually inflation-linked or have fixed increases
  • Initial investment in an unlisted trust is usually much larger than for an A-REIT, typically with minimums of $10,000 or more
  • Closed-end unlisted trusts are illiquid during the term of the trust and can be difficult, if not impossible, to exit the trust
  • Open-end unlisted trusts may offer some liquidity but investors need to understand the mechanics of the term or duration of the trust


The bottom line: commercial property is a valid alternative when investors have so much of their wealth tied up in the residential sector.

Commercial property investment has historically delivered attractive risk adjusted returns with an average (annualised) total return (inclusive of income and growth) of 11.0% over the last five years, 8.9% over the last ten years, and 10.5% over 15 years, up to December 2016, according to the MSCI All Property Universe Index (which is published by MSCI’s analysis of over 1,440 Australian commercial properties)3.

Whether purchasing commercial property directly or by pooling your funds with others and investing into REITs or unlisted property trusts, the benefits of investing into commercial property certainly should be considered within a diversified portfolio.



1. Australian Bureau of Statistics (ABS), Australian National Accounts: Finance and Wealth, September 2016, Release 5232.0
2. CoreLogic Hedonic Home Value Index, December 2016
3. MSCI IPD All Australian Property Index December 2016

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June 5, 2022

Making sense of commercial property yields


In a low interest rate environment, commercial property continues to offer attractive opportunities for income-hungry investors. But what drives commercial property yields? How do they impact asset prices? And how are they affected by changes in interest rates and bond markets?

For investors seeking a reliable income stream, commercial property can offer very attractive opportunities; especially at a time when bonds and fixed income rates are at record lows.

In our article, Understanding the Commercial Property Market (Insight, Autumn 2017), we compared residential property yields with those of commercial property. The one year results favoured commercial property, with a yield of 6.3% in the year to 31 December 20161, in comparison with average residential property rental yields hitting new lows of just 3.1% in Australian capital cities over the same time frame2. As further comparison, Australian shares currently offer an average yield of around 4.2%3.

So, while commercial property yields have moderated along with other investment returns as interest rates have fallen, the sector still remains a leader on yield. This isn’t simply a coincidence. In many ways, yield is the key to the commercial property market, driving both investor behaviour and asset prices.

Yields, prices and cap rates
In the residential property market, price often drives yields, rather than the other way around. Spurred on by sentiment or the hope of capital gains, residential property buyers have recently bid up the price of housing to exceptional levels, even while rents have remained relatively static.

As a result, residential rental yields have fallen dramatically, to levels well below those offered by other asset classes. Despite today’s low interest rate environment, many residential property investments now generate yields lower than the cost of borrowing, leaving investors with a potential loss, unless they can later sell at a high enough price to recover their costs (the strategy known as negative gearing).

In contrast, negative gearing is not a strategy pursued by commercial property investors. Not only do commercial property investors generally seek higher yields to cover their cost of debt, they typically value properties based on the rental income they can generate — similar to valuing a business on a multiple of profit.

A key concept here is the capitalisation rate or cap rate. Calculated by dividing a property’s net rental income by its value, cap rates are widely used to assess and compare potential commercial property investments. As a result, the value of a property often depends on the yield that investors are willing to accept.

Let’s look at an example to see how it works:

Imagine an investor owns a building valued at $10 million which generates a net income of $700,000 per year.

As a result, the building’s cap rate is: $700,000 ÷ $10,000,000 = 7%.

Now suppose that the same investor has the opportunity to buy a second building, which generates a net income of $1 million a year. How much should they be willing to pay for it?

Assuming they want to achieve the same 7% cap rate as their first investment, they would value the new building at:
$1,000,000 ÷ 7% = $14.28m.

But if they were willing to receive a cap rate of only 5%, they would be willing to pay more – up to
$20 million ($1,000,000 ÷ 5%).

That’s important, because investors don’t make decisions about yields in isolation. Instead, they are influenced by a range of factors, particularly changes in interest rate settings and the yield offered by other investments, especially bonds. Which is why changes in interest rates and bond yields can impact commercial property prices so strongly.



1. MSCI IPD All Australian Property Index, December 2016.
2. CoreLogic Hedonic Home Value Index, December 2016.
3. ASX/S&P ASX200 dividend yield as at 12 May 2017. Source: Morningstar.

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March 16, 2022

How can commercial real estate hedge against inflation?


Inflation can be detrimental to an investor as it chips away at savings and investment returns. Where inflation picks up, investors often turn to real assets such as real estate as a hedging strategy. Here, we outline a number of ways in which commercial property can act as a hedge to inflation.

Value increase for existing stock
An upside for investors is that inflation can lead to an increase in property values.

Rising inflation can lead to an increase in the cost of building materials for developments in one of two ways. First, should interest rates rise, it would lead to higher borrowing costs and resultingly, increases in the cost of building materials for developments.

Second, and most relevant in the current environment, supply constraints have made access to building material increasingly scarce, thereby driving prices up.

Both of these factors lead to new construction becoming increasingly less attractive or viable. As a result, this can limit the supply pipeline and increase the price for existing properties.

Value-add office strategies an alternative to new builds
According to JLL, demand and occupancy throughout the pandemic of modern, quality office stock has outperformed the market as COVID-19 has heightened awareness of health, safety and sustainability. As construction of new stock is strained, this will likely result in an uptick in value-add strategies to redevelop or retrofit older stock with a particular focus on occupant wellness.

Lease structure
Commercial property leases can include fixed annual rental increases, giving investors an income boost that offsets the effects of higher inflation. It is common for annual rent increases to be set above the long-term inflationary outlook, or even specifically tied to increases in inflation.

For example, a long-term lease to a government tenant in an office building might have annual rent increases structured at a fixed rate plus CPI inflation. For quality, well-located stock in an environment with heightened demand due to less stock coming to market, landlords are in a position to charge higher rent.

The downside is that if inflation is too high, it is harder for investors to capture rental growth at or above inflation, resulting in a hit to income streams.

Where are investors looking?
According to JLL, investment into commercial real estate across the Asia Pacific region is tipped to increase by 15% in 2022, after a 30% increase in 2021. As economic activity stabilises, travel restrictions continue to lift and employees return to cities, office investment is tipped to increase by between 20% and 30% this year.


Higher quality assets with lower levels of vacancy, often leased on long-term deals to government, listed and blue-chip tenants will continue to curry favour with investors due to their ability to provide access to regular, reliable income through market ups and downs.

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October 6, 2021

Future-proof your commercial property portfolio

Chris Hansen


Real estate offers investors an opportunity, not available in other types of assets such as bonds or shares, to add additional value to their original investment through asset development, refurbishment or enhancement initiatives.

For investors who do not want to just ‘buy the market’ building, refurbishing or improving property can be expensive, but done smartly, it can be well worth the capital outlay. Indeed, as markets run hot, now is an opportune time for property owners to look at development opportunities in their portfolios.

Why develop?
There are a number of benefits that accrue to the various stakeholders within the development process. Developments can help revitalise local areas and neighbourhoods, provide jobs before, during and after construction, and the economic benefits can spread up and down the supply chain.

Private investors investing in a development or asset enhancement initiative will usually only proceeds when they believe the opportunity will provide them with an appropriate risk-adjusted return.

While the level of return each may seek will be bespoke to their particular situation, the return for commercial office development is generally realised through the delivery of a higher quality asset, in a good location, supported by improved amenity which in turn will attract a strong, or stronger, tenant covenant. The asset is then valued based on the security of this income over the duration of the hold period and eventually the development profit when it’s sold.

Workplaces drive change
Workplaces were evolving even before COVID-19. The pandemic has simply accelerated the process and many tenants are proactively reviewing their future office requirements, from location to amenity and the design and use of space as well as sustainability, wellbeing and health and fitness benefits.

To attract and retain quality tenants, landlords need to continue to provide versatile and well-managed environments that allow tenants to maintain a positive workplace culture while balancing work-from-home arrangements and facilitating the safe return of employees to the office.

Enhanced technology is a critical factor for improving building services infrastructure and operations and the customer experience of the occupants. Properties that can better service tenants’ requirements will be more desirable, allowing them to secure quality tenants and reliable cashflows than those that do not. This will make them more appealing to investors when the time comes to sell.

Managing risk
Development can be expensive but, with a good development strategy, the uplift in yield and capital value more than compensates for the cost.

An integrated approach to risk management is key. This requires expertise in development, project management and sustainability, as well as technical knowledge and skills and an in-depth understanding of what prospective tenants and the market are looking for. Being able to identify attractive locations and submarkets, down to specific streets and buildings, also helps minimise risk.

Cromwell’s redevelopment of 19 National Circuit, Canberra is a good example. With a 20-year history of investing in the ACT, Cromwell was comfortable progressing a development given the site’s location in the tight Barton market. The property is within close proximity of Parliament House and other key federal government agencies and opposite the National Press Club of Australia. There is hotel accommodation both adjacent to, and across from, the site.

Deep and ongoing working relationships with tenants are also invaluable. Understanding tenants’ changing requirements not only assists in retaining occupancy, it also provides opportunities to create value and informs development decisions.

Cromwell’s proposed development at 475 Victoria Avenue, Chatswood, which seeks to increase the precinct’s floorspace with an additional commercial offering and alternative to the existing commercial towers, has been heavily influenced by a rethinking of the modern workplace for the benefit of both existing and future tenants.

The end-of-trip facilities, as well as the heating, ventilation and air-conditioning (HVAC) system upgrade and office foyer refurbishment, in addition to the new commercial office development, have been designed based around key sustainability, safety and hygiene considerations.The project is targeting a minimum 5-Star Green Star rating, as well as a 5-Star NABERS Energy and Water rating. The development will be complemented by the planned Chatswood to Sydenham Metro Rail expansion due in 2024.

Understanding tenants’ changing requirements not only assists in retaining occupancy, it also provides opportunities to create value and informs development decisions.

A counter to inflation
A development strategy can also help commercial property investors future-proof their investment against inflation. Worldwide, inflation rates have been supressed by the effects of COVID-19, but many experts are forecasting above-average medium-term rates as countries emerge from the pandemic.

Real estate is a hedge against inflation. This is because commercial property leases can include fixed annual rental increases, giving investors an income boost that offsets the effects of higher rates.

Higher inflation also generally signifies increased economic activity, which can lead to increased demand for properties. Higher demand therefore allows landlords to increase rents, particularly if it comes at a time where there is less new construction, which can occur in such environments.

This is due, in turn, to the increase in costs of building materials, making development more expensive, therefore increasing risk in some cases, and ultimately influencing returns. When coupled with higher borrowing costs, new construction can become less attractive, although this does depend on the individual opportunity.

Take control
Investors who respond to changing tenant needs and actively seek to add value through development and asset enhancement initiatives can improve their returns, subject to a keen appreciation and understanding of market conditions. With current low inflation rates and borrowing costs, this is an ideal time for property investors to consider the development opportunities within their portfolios.

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December 9, 2019

The essential guide to investing in unlisted property trusts

Property is one of the favoured investments of Australians due to its potential to provide both income and capital return. Its low volatility relative to other asset classes, such as equities, is a strong attraction.


The different property asset classes

Property is an asset class which is usually separated into two distinct groups – residential and commercial.

Residential property, which can include your own home, holiday home or residential investment property, is the most commonly held type of property investment by volume. Commercial properties are generally used for business purposes and are usually divided into four categories: retail, office, industrial and specialty.

The fundamental difference between commercial and residential property is that commercial property investments are generally made on the basis of yield. The value of a commercial property is based on the income return it will provide to an investor, which is known as the capitalisation rate. The value is affected by factors including the lease terms, quality of tenant and other building attributes.


Various methods to invest

There are a number of ways through which investors can gain exposure to commercial property, ranging from direct investment, private syndicates, pooled professionally-managed property trusts, ASX-listed real estate investment trusts (A-REITs), or unlisted property trusts.


Benefits of investing in an unlisted property trust

There are several benefits investors gain from investing into a commercial property trust:

  • Investors’ funds are pooled, providing access to assets they could not otherwise purchase individually, such as large office buildings or major shopping centres;
  • Internal gearing is non-recourse to investors, which means if there is a default, the issuer of the debt (usually a bank) can seize the collateral but cannot seek out the investor for any further compensation. This reduces the risk to each individual investor;
  • Regular income stream, with distributions ranging from monthly to six-monthly payments;
  • Investors share in any capital growth, proportional to their holding in the trust;
  • Potential for tax-deferred income, increasing investors’ after-tax return;
  • Professional management, covering due diligence, debt, property and tenant management;
  • Liquidity (dependent on the structure used); and
  • Only a small investment is required, allowing investors to more easily diversify across properties and managers.


How does an unlisted property trust work?

Unlisted property trusts provide an investment with characteristics most like a direct purchase of a commercial property, with the added benefit of professional management.

As unlisted property trusts are generally priced based on the underlying valuation of their property assets, their price volatility is a lot lower than A-REITs and the value of the investment is primarily influenced by movements in the commercial property market rather than by the broader share market.

There are two types of unlisted property trusts, open-end property funds and fixed-term, closed-end property trusts (often referred to as syndicates).

Open-end property funds

Open-end funds don’t have a maturity date or a finite number of units. Instead, they can continue to issue units so long as they raise money, using the new funds to purchase additional properties.

As there is no specific maturity date, to allow investors to exit the investment the fund must have some other method of liquidity. Liquidity is usually provided by holding a portion of the fund’s assets in cash, using new investors’ funds to pay out exiting investors, or selling assets if necessary. This can allow investors to exit at regular intervals.

As with A-REITs, these funds tend to have a number of assets to increase diversification, but it is at the manager’s discretion to buy or sell assets, so investors do not have certainty over the properties they are investing in.

Fixed-term, closed-end property trusts (syndicates)

Syndicates contain one or more properties that will be held for a specified period of time, usually five to ten years. At the end of the specified time, investors will vote on the future of the trust, with the default outcome usually that the property be sold, the trust wound up and investors paid out. Syndicates should be considered illiquid investments and you need to have an expectation that you will remain in the investment for the full investment term.

Market volatility has dramatically increased investor interest in simpler syndicate investment vehicles since the GFC. Syndicates provide a strong proxy for the direct purchase of commercial property. They are generally fairly easy to understand and you know for certain which property (or properties) are going to be owned. Therefore, if you don’t like the property, you simply don’t make an investment in that trust.

Single property syndicates don’t provide any diversification on their own, but because the minimum investment is generally as low as $10,000, you can combine investments in a number of syndicates to provide diversification by property, location, sector and manager.

Ideally, you would also choose syndicates with different maturity dates, so you are not reliant on the property market being strong at a given point in time.

Property management

A key reason for using an unlisted property trust is gaining the expertise of a property 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 buildings are managed properly, and their capital value and appeal to current and prospective tenants is maintained.

Property management includes leasing, ongoing maintenance of buildings, building concierge services, fire safety and other compliance requirements and, most importantly for investors, making sure rent is collected! Investors pay for these services, but they will already be taken into account in the forecast distribution rates in the given trust.

Costs and fees

The trust will generally be charged acquisition fees, ongoing management fees, property management fees and various other fees by the manager depending on the individual trust, its assets and structure. The trust is also likely to pay stamp duty for the acquisition of properties plus legal and other costs.

Any returns forecast will take these fees and costs into account. ASIC requires all managers to display their fees and costs in a consistent format in the Product Disclosure Statement (PDS), which makes it easy to compare the fees associated with various unlisted property trusts.


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


Getting out

Fixed-term trusts

These are essentially illiquid throughout their term unless you or the fund manager can identify someone to purchase your units. At the end of the trust’s term, the property is sold, the trust wound up and investors paid out proportionately to the units they hold.

Open-end funds

Each open-end property fund will have a different liquidity mechanism, but as the underlying property assets are illiquid, the ability to exit the fund will have limitations. Common ways of providing some liquidity is to hold some of the fund’s assets in cash, using cash from incoming investors or, if demand is high and market conditions allow, selling assets.


Reviewing an unlisted property trust

The manager of an unlisted trust provides you with a lot of information about the trust and its assets in the PDS, so it is important to read and understand it – particularly the ‘Risks’ section. Third-party organisations such as Lonsec and Zenith are also useful, as they provide a detailed review of the trust and its assets.

There are a number of additional aspects of a trust that are worth reviewing. These include the manager, distribution yield, property asset – inclusive of all the considerations within, such as location, building quality, growth, tenants, lease and green credentials – the trust structure, fees, borrowing and more.

For more in-depth information on this topic, download Cromwell’s Essential Guide to Investing in Unlisted Property Trusts at

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Home Archives for rebeccaquade
December 18, 2017

Anatomy of a great commercial property investment

Patrick Weightman


The right commercial property investment can deliver strong and sustainable returns over the long term, but not every property has the same potential. Here are seven key features to look for in a stand-out property.

What makes the perfect commercial property investment? The truth is that there is no single right answer. A great deal depends on your investment strategy and the role each asset is destined to play in a larger portfolio – whether as a core income generator or an asset that can be transformed over time to create added value.

Nonetheless, successful investments do tend to have key features in common – features that can only be uncovered by disciplined analysis of each asset’s fundamentals. They all impact asset returns, even when the return hurdles differ between asset types.


Here are seven of the most important features:

1. High quality tenants
Given the role income plays in commercial property returns, finding the right tenants is the first and most important consideration. A reliable tenant, such as a government agency or a sizeable business with a healthy balance sheet and strong cash flow, is the single best guarantee of your future income. They represent the lowest risk in terms of being able to meet their lease obligations and the highest probability of resigning leases due to the cost to them if they relocate. If a property is multi-tenanted, rather than a single-occupancy asset, high-quality tenants can also attract other reliable tenants.

2. Attractive facilities
Tenants are not just attracted by the look and feel of a building. It must provide the services they expect, like functioning lifts, adequate lighting, good air conditioning and a quality fit-out (to name just a few). Beyond expectations of basic services, tenants will be attracted to properties which meet their specific needs. If the location isn’t easily accessible by public transport, more car parking spaces or private transport options (like a regular shuttle bus) will be required.

Adding green infrastructure, like solar power, permeable pavements and green roofs, whilst requiring higher initial capital investment, can reduce outgoings and increase the value of the asset. Meeting a tenant’s green credentials is another way to attract stable, long-term tenants who can only occupy properties which meet their organisation-wide standards.

If sufficient capital has not been set aside to bring the building up to expected standards, and then maintain it, this can have a negative impact on the long-term return of that asset.

3. An appealing location
A property has to be in a location where it can attract and retain tenants to generate the underlying income required. However, that doesn’t mean you should only focus on city centres, or assets in high-density areas. A diversified portfolio is likely to include assets in CBD, metropolitan and regional locations.

Outside of the CBD, regional locations tend to offer more car parks at a lower rate, lower occupancy costs and larger floor plates that support greater workplace efficiencies. Regional locations may also meet needs unique to employment providers in the local area.

CBD locations often have significantly higher land and building costs plus high incentives to win leases. These can all cut into profit margins.

4. The right leasing structure
Most commercial property investors know that a property’s WALE, or “weighted average lease expiry”, can be an important indicator of the security of future cash flows. A higher WALE indicates that tenants (weighted by either rental income or lettable area) are locked into their leases for some time to come. Though long leases with fixed rental increases can provide stability, they may not always deliver the best returns over the life of the asset.

When demand is exceptionally strong, an asset with a short WALE can potentially allow you to reset new or renewed leases at a rate higher than would have been available through fixed rent reviews of either 3% or CPI. Nonetheless, short WALEs do have obvious downsides. They include the capital cost of resetting leases, which can be substantial – especially in markets like Perth and Brisbane, where high tenant incentives are common.

5. The potential for repositioning
A property with tenant vacancy can still be a good investment, as long as you understand the reason for the vacancy and how it can be repositioned to attract new tenants. In fact, assets that offer scope for repositioning can be highly valuable additions to a portfolio, with the potential to improve both yields and valuations through enhanced rental income. Having a vision, knowing your potential tenants and knowing how to reposition an asset to meet both market and tenant requirements is where experience really comes into play.

A property with tenant vacancy can still be a good investment, as long as you understand the reason for the vacancy and how it can be repositioned to attract new tenants.

6. Financial analysis
While leases can be structured so that the tenant pays part, all or none of the outgoings, it’s still important to have a clear understanding of all the outgoings over the life of your investment. Every dollar spent on the asset reduces your potential return, unless it clearly increases the property’s appeal, and thus, it’s long-term value.

If a vendor estimates $1 million in annual outgoings, but your analysis suggests a figure closer to $1.5 million, that difference can have a significant impact on the profitability of the investment – which is why thorough due diligence on a property is absolutely essential.

Equally important is an analysis of the capital expenditure required to maintain, improve or position the asset so it can achieve the rents as forecast.

7. Compatibility with your investment strategy
Finally, but perhaps most importantly, it’s important to assess whether an asset fits your portfolio’s overall asset mix as well as an informed market outlook. For example, an investor with a well-established portfolio might consider a low-cost refurbishment and repositioning opportunity in a location that has unrealised future potential; whereas an investor seeking a core holding might prefer
a proven income-generator in an established area.


Taking a disciplined approach

Finding the right investment takes discipline. An analytical framework that helps identify successful investments and a thorough analysis of each property’s fundamentals can help you effectively make your money ‘on the way in’ to a long-term investment.