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Unlisted property – an update

Article
5 May 2020


Author: Mark Pratt, Executive General Manager – Property, Australian Unity

We’ve had many conversations with investors over the last few weeks and we know from these discussions that there is a good level of awareness about how valuations of assets may be affected by the pronounced market and environmental conditions that we continue to experience.

We’ve had several questions about how Australian Unity is approaching valuations for our portfolio of properties at this time, our current thinking on the Commercial Tenancy Code of Conduct, its potential impact on our tenants, the valuation of our assets and returns for investors. The Code was announced by National Cabinet, but as yet has not been fully implemented by all states and territories.  

Patience, perspective and a longer-term view

For more than two decades, Australian Unity has focused on managing true-to-label property funds that aim to provide investors with consistent income with the potential for capital growth.

As a 180-year old mutual organisation, our view is that unlisted property investments are better placed to realise their potential when a longer-term view is taken. It is this patient perspective and insight that has delivered returns for our investors through market cycles. We will aim to continue to deliver returns for investors during and after the uncertainty we face today. 

Below is a snapshot of some of the questions we have received from financial advisers and investors in recent weeks and our answers.

How is Australian Unity’s property business approaching valuations in the current environment?

Market conditions are changing more rapidly than we have ever seen, and as a result we are considering the valuation of our Fund’s assets over short and medium-term horizons. 

We are currently working through a schedule that plans for the majority of our circa. 85 assets to be independently re-valued before 30 June 2020 to ensure that the current market sentiment is reflected.  

Our property portfolio comprises some 59 healthcare and social infrastructure assets, including hospitals and medical centres; retirement and aged care accommodation; a handful of well-located neighbourhood shopping centres, anchored by major supermarkets; one of Australia’s largest and busiest service stations; a small number of strategically-located commercial office properties and industrial warehouses; and a growing portfolio of social infrastructure assets in senior living and disability accommodation.    

  • For assets with a tenancy profile that includes multiple small to mid-sized tenants, we expect valuations may be impacted. For example, this may result from extended allowances for leasing, or an increase in incentives, or lower rental growth projections. The impact will vary for each property but is expected to be a market-wide issue.
  • For single tenant properties or properties that have longer weighted average lease terms, we expect valuations to be impacted to a lesser degree. In our portfolio, these types of properties generally include our hospitals and other healthcare and social infrastructure assets, which can have lease terms of more than 15 years.
  • We expect the impact on capitalisation rates is potentially less likely to be material in the short-term as our independent valuers reconcile the impact of events on market prices and the circumstances around asset sales. We’ve also seen that in this environment valuations are taking longer as a result of social distancing requirements.

 

What is the expected impact of the National Cabinet’s Commercial Tenancy Code of Conduct announced on 7 April 2020?

At this stage, it is too soon to accurately determine the impact of the measures outlined in the National Cabinet’s Commercial Tenancy Code of Conduct (Code) across  our entire portfolio of  assets, or the specific impact on income for each of our unlisted Funds (Healthcare Property Trust, Diversified Property Fund and Property Income Fund).

The Code is a focal part of the Government’s relief plan for business and sets out the relief which may be available to small and medium enterprise (SME) tenants in multi-tenanted buildings.

The Code has the requirement for landlords to offer tenants proportionate reduction in rent - in the form of waivers and deferrals,  based on the reduction in the tenant’s trade. Rental waivers must constitute at least 50% of the total rent reduction.

At the time of writing, the implementation and regulation of the Code remains a work in progress, with its detailed implementation to be managed by each state and territory. Australian Unity has properties located in all of Australia’s states and territories (except Tasmania and Northern Territory) and we will actively work with our tenants to identify how we can provide support during this unprecedented time. Importantly, the Code makes it clear that leases are to be dealt with on a case by case basis.

As soon as more information is available, we will provide investors with an update and details of any potential impacts to their investment.

Important information

Units in the Diversified Property Fund and Property Income Fund are issued by Australian Unity Property Limited ABN 58 079 538 499, AFS Licence No 234455. Units in the Healthcare Property Trust are issued by Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No 234454. Information provided here is general information only and current at the time of publication and does not take into account your objectives, financial situation or needs. In deciding whether to acquire, hold or dispose of the product you should obtain a copy of the Product Disclosure Statement (PDS) and seek professional financial and taxation advice. This information is intended for recipients in Australia only. Past performance is not a reliable indicator of future performance.

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