REAL ESTATE MARKET OUTLOOK AUGUST A Specialist Funds Manager And Developer Providing Real Estate Wealth Solutions

Transcription

1 REAL ESTATE MARKET OUTLOOK AUGUST 2015 A Specialist Funds Manager And Developer Providing Real Estate Wealth Solutions 1

2 BUSINESS STREAMS AN ASX LISTED REAL ESTATE FUND MANAGER AND DEVELOPER PROVIDING REAL ESTATE WEALTH SOLUTIONS FOR PRIVATE CLIENTS AND SELECT INSTITUTIONS Funds Management Direct Direct Balance Sheet Balance Sheet Income, Value-add & Development Funds Social Infrastructure Residential Office Retail Listed & Unlisted Funds A-REIT Securities Fund Debt Fund Value-add & Development Social Infrastructure Residential Office Retail Underwriting Funds Fees Acquisition Management Performance Returns & Fees Dev Profits Pref Equity Interest Income Development Mgt Fees Offers listed and unlisted real estate funds to private clients and select institutional investors $917 million in funds under management 1 On balance sheet activities focus on value-add and opportunistic (development) investments Market capitalisation of $155 million 1 1 As at 30 June

3 FUNDS MANAGEMENT Public Markets Equity (Listed) Listed A-REITs Folkestone Education Trust (ASX: FET) A-REIT Securities Funds Folkestone Maxim A-REIT Securities Fund & SMA $917 Million in FUM and 7,291 Investors 1 A menu of real estate funds across: public (listed) and private (unlisted) markets, debt and equity to meet the various risk/return requirements of our clients sectors - office, retail, residential and social infrastructure Private clients and select institutions Private Markets Equity (Private Funds) Income Funds Altona North CIB Oxley Sydney Olympic Park Wollongong Development Funds West Ryde Truganina 1 As at 30 June 2015 and includes Folkestone and all its funds. 3

4 ECONOMIC OUTLOOK 4

5 Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14 Mar-17 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 $bn ECONOMIC CONDITIONS NATIONAL GROWTH Australian GDP Growth: Private New Capital Expenditure: % Mining Manufacturing Other Industries 5.0% % 3.0% Average = 3.1% % Average = 2.8% % 0.0% -1.0% % 0.0 Source: ABS, Bloomberg, RBA Economic growth remains below trend the transition from mining has been slow Businesses appear reluctant to invest until the economy improves The RBA has pushed the timing out for a recovery in non-mining investment until later in

6 VIC WA NSW QLD ACT SA TAS Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 ECONOMIC CONDITIONS STATE GROWTH Population Growth: Year to Dec 2014 State Final Demand: No. of People % Increase NSW VIC QLD WA 120, ,000 80, % 1.8% 1.6% 1.4% 1.2% 15.0% 12.0% 9.0% 6.0% WA 60,000 40, % 0.8% 0.6% 3.0% 0.0% NSW VIC 20, % 0.2% 0.0% -3.0% -6.0% QLD Source: ABS Population growth has slowed in the past year but still high for a developed nation VIC recorded the strongest growth (1.8%) and was just below NSW in terms of absolute growth WA and QLD population growth has slowed due to mining downturn Economic growth across the States reflecting the economic transition from mining 6

7 PROPERTY MARKET OUTLOOK 7

8 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 June-15 Secondary Office Bulky Goods Neighbourhood Retail Prime Office Sub-Regional Retail Regional Retail Syd Secondary Syd Prime Industrial AUSTRALIAN MARKET CONDITIONS CAP RATES Cap Rates vs. 10 Year Bond Yields: Cap Rates vs. Historical Peak and Average: June 2015 CBD Office Major Regional Retail Spread From Historic Avg. Spread From Previous Peak 10.0% Neighbourhood Retail 10 Year Bonds Industrial Warehouse Still not back to pre-gfc levels 2.0% 9.0% 8.0% 1.5% 7.0% 6.0% 1.0% 5.0% 4.0% 0.5% 3.0% 2.0% 0.0% Source: MSCI, IPD Disconnect between capital markets and space markets highlighted in recent sector dynamics: cap rates have firmed while vacancy rates remain elevated and income growth is subdued prices being driven by weight of money not underlying real estate fundamentals Cap rates have fallen most for industrial lowest spread from historical average Expect further cap rate compression in FY16 driven by weight of money 8

9 AUSTRALIAN MARKET CONDITIONS OFFICE Sydney CBD Office Vacancy Rates: Dec 2014 Jun 2015 Dec-14 Jun-15 Prime Effective Rental Growth: Year to June 2015 Melbourne CBD Melbourne Sydney CBD Brisbane Canberra Adelaide Brisbane CBD Canberra Adelaide CBD Perth Perth CBD 0.0% 5.0% 10.0% 15.0% 20.0% -20.0% -10.0% 0.0% 10.0% Source: JLL Vacancy rates reflect divergent economic growth prospects of the major markets Sydney the only CBD market to record a single digit vacancy 7.8% Effective rental growth has been subdued in Sydney and Melbourne and negative in other CBDs due to high vacancy and elevated incentives 9

10 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Index % Change pcp AUSTRALIAN MARKET CONDITIONS RETAIL Retail Sales vs. Consumer Confidence: Retail Turnover by Type: Year to June Consumer Confidence (LHS) Retail Sales (RHS) Houshold Goods Cafes, Restaurants & Takeaway Total Food Retailing Clothing, Footwear & Accessory Other Retailing Department Stores 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% Source: ABS Retail sales growth has improved but driven by household goods (impact of strong housing market) Consumer confidence remains weak therefore cautious on spending However, lower confidence partly offset by strong population growth, rising house prices and equity values (the wealth effect ) 10

11 Like for Like (Sales Growth) $ '000/sq.m. AUSTRALIAN MARKET CONDITIONS RETAIL Aldi, Coles & Woolworths Annual Sales Growth: Aldi, Coles & Woolworths Sales per Sq.m: ALDI Coles Woolworths ALDI Coles Woolworths 14.0% $ % 10.0% $ % $ % 4.0% $ % 0.0% $ Source: Company Reports and JP Morgan Competition in supermarket sector is increasing ALDI now a genuine third supermarket operator The competition between Coles and Woolworths is not new who is number 1 changes over time 11

12 Annualised Return AUSTRALIAN MARKET CONDITIONS INDUSTRIAL 16.0% 14.0% Investment Performance Across Industrial Sub-Sectors: 1 and 3 Years to June Year Return 3 Years Return 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Warehouse Distribution Industrial Estate Other Warehouse and distribution centres have performed strongly in recent years investors chasing prime assets Industrial performance being driven by: investors chasing higher yields relative to office and retail on-going transformation of industrial landscape more distribution centres and changing land-use of inner ring industrial areas industrial distribution centres demand high due to e-commerce, retail trade and change in transport networks 12 Source: IPD/MSCI

13 AUSTRALIAN MARKET CONDITIONS RESIDENTIAL Dwelling Values Major Capital Cities: 1 Year and 10 Years to June 2015 Sydney Melbourne Adelaide Brisbane Canberra Hobart Perth Darwin 12 Months to June 2015 Average 10 Years to June 2015 (p.a.) -10.0% 0.0% 10.0% 20.0% San Francisco Bengaluru Miami Vancouver Jakerta Tel Aviv Tokyo Dublin Los Angeles Sydney Melbourne Seoul Cape Town Hong Knog Madrid Bangkok London Mumbai Delhi Shanghai Prime Global Cities Index: 1 Year to March % 5.0% 10.0% 15.0% Housing boom has not been uniform across Australia Sydney has been standout performer up 16.2% in the past year however over 10 years it is 5.4% p.a. one of the weakest Sydney and Melbourne, considered global cities - rank 10 & 11 on global basis based on growth in year to March 2015 (latest available nos.) 13 Source: Core Logic/RP Rismark, Knight Frank Residential Research, Douglas Elliman/Millare Samuel, Ken Corporation

14 A-REIT SECTOR OUTLOOK 14

15 Industrial A-REITs Retail A-REITs Total A-REIT Office A-REITs Diversified (% p.a.) A-REIT SECTOR PERFORMANCE 30.0% A-REITs vs. Equities vs. Bonds: A-REITs Equities Bonds 30.0% A-REIT Total Returns: to 30 June Year 3 Years 5 Years 25.0% 20.0% 15.0% 10.0% 25.0% 20.0% 15.0% 5.0% 10.0% 0.0% 5.0% -5.0% -10.0% Year ending June 0.0% Source: UBS A-REITs outperformed equity and bonds in year to June nd time in 3 years Industrial A-REITs were the best performing A-REIT sector over 1 and 3 years 27.5% and 24.0% p.a. Expect performance to moderate in FY16 to longer-term averages circa 10% Short-term volatility (general equity flows in & out of sector/ market sentiment) will continue to be a feature of A-REITs in FY16 A-REIT s in better shape than pre GFC lower gearing, more sustainable pay-out ratios, focused strategies 15

16 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 A-REIT SPREADS A-REIT Sector EPU and DPU Yields vs. 10 Year Australian Bond Yields: Yr AU Bond Yield A-REIT EPU Yield A-REIT DPU Yield 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% Despite strong price performance of A-REITs, spread between A-REIT yields and 10 year bonds still wide - DPU spread circa 225 bps well above long-term average of 60 bps A-REIT yield very attractive relative to other major global REIT markets on both absolute yield and relative spread to 10 year bonds a key reason for strong inflows into A-REITs from global investors High correlation with movement in bond yields A-REITs could come under short-term pricing pressure if bond yields move up 16 Source: JPMorgan, Bloomberg

17 WHY IS FOLKESTONE MAXIM DIFFERENT? High Conviction, Active Manager Experienced in A-REITS and Direct Property FOLKESTONE MAXIM A-REIT SECURITIES FUND Active & Disciplined Investment Process Boutique Investment Manager Our investment strategy and process has been in place since October

18 THE CASE FOR HIGH CONVICTION Variability of A-REIT securities returns to remain wide Property and asset management skills vary across securities Capital management skills and strategies vary across securities More sector specific than diversified A-REIT securities creating opportunities to trade across real estate subsectors On-going diversity of investor base hedge funds, pure equity funds which invest in the sector for different reasons and typically have shorter investment horizons than A-REIT securities funds creating mis-pricing opportunities Rising liquidity levels making easier to actively trade in the sector Concentration risk in Index fund that track the Index top 8 A- REITs more than 80% of Index and more than 50% of Index comprises retail focused A-REITs History of M&A research shows a wide variation of performance in the sector 18

19 DVN CWP FRI AAD PPC INA PBD FLK CMA ENN GMF GTY TOT IDR GDI VLW MGR CHC SGP CMW TOF DXS CIM CQR GPT APZ IOF TIX CDP SCG LLC APW ABP FDC ANI AJD AOG AJA GMG BWP WFD SCP GHC LEP HPI FET RFF GOZ APD ARF NSR LIC A-REIT SECTOR PERFORMANCE Total Returns: 12 Months to 30 June Source: UBS/ ASX/S&P Indices Despite strong performance of A-REIT sector overall still wide variation in performance of individual A-REITs Performance variation driven by: investors focusing on small cap stocks i.e. LIC, NSR, and ARF stock specific issues DVN (withdrawal from M&A activity) and CWP(due to exposure to WA and delay in QLD development) 19

20 A-REIT INDEX - A HIGHLY CONCENTRATED BENCHMARK 8 A-REITs = 82% of S&P/ASX 300 Index 26 A-REITs = S&P/ASX A-REIT 300 Index 20

21 OUR INVESTABLE UNIVERSE A-REITs RDIMs 1 Total Market No. of Securities = 81 Screened Out = 38 Our Universe = 43 Our universe consists of 43 securities compared to the S&P/ASX A-REIT 300 Index of 26 securities 1 Real Estate Developers and Managers 2 Screened out due to factors such as size, quality and location of investment portfolio, business and investment strategy, and management quality 21

22 INVESTMENT OBJECTIVE, PROCESS AND STRATEGY OBJECTIVE: PORTFOLIO COMPOSITION bps to the S&P/ASX 300 A-REIT Accumulation Index over rolling three year periods STRATEGY PORTFOLIO COMPOSITION PORTFOLIO AS AT 30/06/2015 PROCESS: High Conviction No. of Securities in Portfolio 18 Utilise a vigorous high conviction investment process combining in depth fundamental research with disciplined portfolio construction and risk controls STRATEGY: High Conviction High Conviction No. of Non Index¹ Securities in Portfolio No. of Index 1 securities that have ZERO weighting in Portfolio 5 14 To actively adjust the investment mix within the investment guideline ranges High Conviction Tracking Error (ex post) 4.0% ¹ Index-S&P/ASX 300 A-REIT Index 22

23 INVESTMENT PROCESS: PORTFOLIO CONSTRUCTION PORTFOLIO TARGET PORTFOLIO AS AT 30 June 2015 Maximum Number of Securities 20 securities 18 Maximum Holding in a Security < 20% of the portfolio (excluding WFD & SCG) Westfield Corporation 17.3% Target Tracking Error 10% maximum 4.0% Desired Turnover Range 30% - 40% 40% Cash 10% maximum 1.4% Exposure to Folkestone managed A-REITs Other Critical Factors 10% combined maximum exposure to FLK managed A- REITs and no holding in FLK headstock Assessment of liquidity, corporate activity, distributions (cum-dividend), index weight adjustments and market sentiment 5.8% 23

24 PORTFOLIO WEIGHTING PORTFOLIO (%) INDEX 1 (%) RELATIVE WEIGHTING Diversified A-REITs Retail A-REITs Industrial A-REITs Office A-REITs Social Infrastructure A-REITs Real Estate Developers & Managers Other Cash 1.1 TOTAL As at 30 June S&P/ASX 300 A-REIT Index 24

25 STOCK SELECTION EXAMPLES OVERWEIGHT HOLDING Rural Funds (RFF) NON-INDEX HOLDING Carindale Property (CDP) UNDERWEIGHT (NIL) HOLDING GrowthPoint Properties (GOZ) FACTORS RATIONALE RATIONALE RATIONALE Type Specialist REIT-Agriculture Retail Office and Industrial Sector View Management Assets Positive long-term view on agriculture commodities based on favourable supply and demand thematic Experienced management team 17 poultry farms, 3 almond orchards and 6 vineyards + water entitlements. Positive outlook for super regional centre (with their destination status more than just retail offerings) Experienced management team (Scentre group) Whilst a single asset entity it is one of the best centres in Australia and recently underwent a $300m redevelopment Operational risk with weak Brisbane office exposure Good management. However seem to be too influenced by South African shareholders 50% commercial and 50% industrial Capital Structure Gearing at 47% Within preferred target range. Trading at a large discount to NTA Gearing at 40% Other Positives/ Negatives RFF has a diversified portfolio of Australian agriculture assets with 75% of revenues being generated from leases to poultry, almond and winery and 25% from operational income from poultry farming. With the acute drought in California, RFF is in a great position to grow it s market share in Almond farming. CDP is now the only other listed entity which continues to have links on the Board with the Lowy Group. Given likely move of WFD offshore corporate activity considered likely Outlook on office fundamentals remain weak especially in Brisbane market. The stock also illiquid with 60% of the register is held by Growthpoint South Africa 25

26 FUND PERFORMANCE RETURNS 1 MONTH (%) 3 MONTHS (%) 6 MONTHS (%) 1 YEAR (%) 2 YEARS (%) 3 YEARS (%) 4 YEARS (%) 5 YEARS (%) SINCE INCEPTION 1 Maxim PSF Benchmark Value Added (After Fees Before Tax) 2 As at 30 June2015 Fund s management fee was reduced by 50bps on 16 May The Fund s after fees but before tax performance only reflects the new management fee from this date. 1 Fund inception date October Please note the Fund s management fee was reduced on 16 May 2014 from 1.45% p.a. to 0.95% p.a. <$50m and 0.85% >$50m. The Fund s after fees but before tax performance only reflects the new management fee from this date. 26

27 CONSISTENCY OF RETURNS SINCE INCEPTION Over rolling 3 year periods, outperformance has been achieved 95% of the time. In down markets, the Fund has outperformed 92.1% of the time. 27

28 Folkestone Maxim A-REIT Securities SMA 28

29 DIRECTORY Folkestone Limited ASX Code: FLK Website: ABN: Level 12, 15 William Street Melbourne Vic 3000 T: Level 10, 60 Carrington Street Sydney, NSW 2000 T: Board of Directors: Garry Sladden Non-Executive Chairman Mark Baillie Non-Executive Deputy Chairman Greg Paramor Managing Director Ross Strang Non-Executive Director Company Secretary: Scott Martin Investor Relations: Lula Liossi T: lliossi@folkestone.com.au DISCLAIMER: This paper has been published for information purposes only. The information contained in this paper is of a general nature only and does not constitute financial product advice. This presentation has been prepared without taking account of any person's objectives, financial situation or needs. Because of that, each person should, before acting on this presentation, consider its appropriateness, having regard to their own objectives, financial situation and needs. You should consult a professional investment adviser before making any decision regarding a financial product. In preparing this presentation the author has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which has otherwise been reviewed in preparation of the paper. The information contained in this paper is current as at the date of this paper and is subject to change without notice. Past performance is not an indicator of future performance. Neither Folkestone Limited, nor any of their associates, related entities or directors, give any warranty as to the accuracy, reliability or completeness of the information contained in this paper. Except insofar as liability under any statute cannot be excluded, Folkestone Limited and its associates, related entities, directors, employees and consultants do not accept any liability for any loss or damage (whether direct, indirect, consequential or otherwise) arising from the use of this paper. If a product managed by Folkestone Limited or its associates is acquired, Folkestone Limited or its associates and related entities may receive fees and other benefits. The author 29 of this paper does not receive commissions or remuneration from transactions involving the financial products mentioned in this paper. Registry: Boardroom Pty Limited PO Box R67, Royal Exchange NSW 1223 Telephone: or enquiries@boardroomlimited.com.au Website: