propertyinsights summer 2013-14

8/12/2019 PropertyInsights Summer 2013-14

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B Australian Unity Investments Property Insights

In this edition

03 Introduction

05 The hunt for sustainable income (with low volatility)

08 Direct property a great diversifier for SMSFs

10 The potential advantages of tax-deferred income from property funds

12 Property Sector 2014 Outlook Statements

14 Our property experience


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Australian Unity Investments Property Insights 3

Mark Lumby

Head of Property Funds Retail

Australian Unity Real Estate Investment

Real estate pushes a strong case for 2014

In 2013, unlisted property once again started turning investors heads. And for many

people it is presenting as a compelling investment for 2014.

After several years of consolidation, direct commercial property

is back on investors radars. The balance sheets of many property

managers have been strengthened; listed property appears to

have completed somewhat of a U-turn, with prices back to fair

value; property valuations have broadly stabilised; tenant demand

is subdued but vacancies are consistent with long-term averages;

business confidence is on the rise; interest rates remain at historic

lows; new commercial property supply continues to be low;and international investors continue to show strong interest in

purchasing quality Australian property assets.

Three things emerged as trends for direct property in 2013:

1. The increasing appeal of property as a yield investment.

In a low interest rate environment, direct property presents as

an attractive asset class, particularly for pensioners and self-

managed superannuation funds (SMSFs) who typically seek

long-term, consistently high-yielding, investments.

2. Solid underlying Australian economic fundamentals.

Australias economic growth predictions were trimmed during

the year, but interest rates hit historic lows, commercial property

supply was low, and consumer and business confidence surgedinto positive territory.

3. Strong institutional interest in Australian property.

Demand for good quality Australian property was hotly

contested by domestic superannuation funds, wholesale funds,

offshore sovereign funds and listed property trusts. This activity

provided broad support for property valuations.

Risks remain, as always, but our view is that 2014 and beyond is shaping

as positive for property.

In this issue we look specifically at the appeal of direct, unlisted

property as an investment for SMSFs and pensioners. Very few

investment options can offer the stability of long-term income and

the potential for capital growth that property can provide. We also

look at some of the potential tax advantages that investment in a

property fund can provide.

We were also pleased to announce in October 2013 that Australian

Unity Investments won the Professional Planner / Zenith Investment

Partners Direct Property Fund Manager of the Year award for 2013.

The award aims to recognise organisational strength, investment

philosophy and process, risk management and per formance.

Just one week after this award, the Australian Unity Healthcare

Property Trust won the API Commonwealth Bank of Australia

Property Trust Industry Award for 2013. This award recognised the

Trusts superior industry performance and its considerable attributes,

including innovation, financial performance and public accountability.

We hope you enjoy this edition ofProperty Insights.

Our Property Insights


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4 Australian Unity Investments Property Insights


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The benefits of investing in unlisted

property

Consistent income

Regular income distributions are generally sourced from

tenant rental payments.

Tax-effective income

Distributions can include a tax-deferred component,

typically as result of the unlisted fund claiming

depreciation on buildings and a deduction for interest

borrowing expenses. Not only can investors benefit from

deferring the payment of tax on this income to when

their investment is sold, the total tax treatment can result

in paying less tax.

Capital stability and potential capital growth

The capital values of commercial properties are

determined periodically by independent expert property

valuers. As a result, direct property has historically

exhibited lower volatility than other types of investments,

such as Australian or global shares.

Natural inflationary hedge

Rental agreements with commercial tenants often contain

provisions for increases in line with inflation or by a set

percentage each year. Further, because valuations are

influenced by the level of rent paid, over the longer termcommercial property values will also tend to r ise.

Low correlation to equities

Compared to other growth assets, such as Australian and

international shares and listed property securities (or REITs),

direct property has been historically less volatile and

demonstrates different return characteristics.

Since the global financial crisis (GFC), most of the worlds central banks have sought to

drive down official interest rates to reignite growth in their own economies. One of the

results of the subsequent low-yielding investment environment is that investors have

increasingly sought out income-producing investments that have returns greater than

cash and term deposits.

Globally, this has been referred to as the hunt for yield.

Locally, the focus on income-producing investment assets is

perhaps not surprising. As the Australian population graduallyages, the goal of paying everyday living expenses out of the

income produced from a pension fund is increasingly attractive.

As well, many of those who are planning for retirement by investing

through self-managed superannuation funds (SMSFs) are also

keen to invest in long-term, income-producing investments.

Stable income over the long term

Increasingly, Australian investors are seeking out investments in

unlisted property funds because of the sectors proven ability to

deliver stable and sustainable income distributions.

Chart 1 below highlights the annual rolling income, capital and

total returns for Australian unlisted property funds for eight years

to 30 June 2013. As demonstrated, the change in total return isprimarily driven by change in property capital values. Income

returns were impressively stable over the period, even during the

recession in the 1990s and during the GFC.

CHART 1: Returns for Unlisted Property Funds

(PCA/IPD Pooled Property Fund Index Unlisted Retail)

Income, Capital and Total Returns (June 2005 to June 2013)

Source: IPD, Septem ber 2013

The hunt for sustainable income (with low volatility)

LevelofReturn

Total Return (%p.a.) Capital Return (% p.a.) Distributed Income Return (% p.a.)

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

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Mar-11

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Sep-13


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An unlisted property perspective

Comparing different types of property investment is a difficult task.

Each investment will have its own unique attributes and each will

hold differing levels of appeal to different investors.

Many investors automatically think residential property when they

think of an investment in property. However, this may not be the

best option, particularly if the family home is a significant asset and

therefore already a substantial residential property exposure.

It is well known that residential property values have enjoyed

something of a renaissance over the past year. Auction rates, in

particular have been much higher in 2013 than in previous years, as

buyer demand increased substantially. RP Datas research on auctionclearance rates in major Australian capital cities during 2013 was

recorded at around 70 per cent, the highest level since May 2010.1

But one of the consequences of the run up in values for residential

property is that it has the effect of depressing rental yields.

Chart 2 below highlights the decline and plateau of gross residential

rental yields across Australian capital cities. Further, as a result of the

continued strength in the residential market through Spring 2013,

we expect this graph will again dip lower.

CHART 2: Capital City Rental Rates and Gross Yields

Jun-97 to Jun-13Source: RP Data

J un-97 J un-99 J un-01 J un-03 J un-05 J un-07 J un-09 J un-11 J un-133%

4%

6%

5%

7%

8%

Gross rental yield (RHS)

As shown in Chart 1, unlisted property over a similar period hasgenerally demonstrated an ability to provide consistent, low volatility

income. The PCA/IPD Pooled Property Fund Index Unlisted Retail

has returned an average of 7.04% income return from June 2004 to

June 2013. (Total return over the period was 9.98%.)

On a purely income basis, Chart 3 below compares the historical

income return over the eight-year period to June 2013 of Australian

shares, listed property and unlisted property funds.

Chart 3 highlights the effect of the GFC, particularly on the listed

property sector, which saw values decline dramatically. One of the

effects of the rapid slide in listed property stock prices was the bounce

in the percentage of income distributed to investors, relative to the

market value of the sector. The same effect can be seen across the

broader Australian share market, although to a lesser extent.

As previously demonstrated, the income from unlisted property

funds has been less volatile and, except for a brief period duringthe height of the GFC after the Australian share market had fallen

considerably, it has generally outperformed Australian shares on

an income distribution basis. This is noteworthy considering the

large numbers of share market investors who devote much of their

portfolio to investing in high dividend-paying companies.

CHART 3: Unlisted Property Funds v Australian Shares

v A-REITs

Source: Australian Unity Investments, IPD

0%

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

4%

2%

6%

8%

10%

14%

12%

16%

18%

12montr

o

ingdistriution

%

S&P ASX200 Index S&P ASX200 AREIT Index PCA/IPD Pooled Property Fund Index - Unlisted Retail

Because listed property prices have retraced over the past two years,unlisted property funds have effectively outperformed this sector on

an income basis since late 2011.

1 RP Data, Propert y capital markets report, Spring 2013


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Lower volatility and impressive growth

Widening the scope of the comparative analysis, Table 1 shows the annual performance for six broad asset classes over the eight years

to 30 June 2013 and their standard deviation, which is a typical measure of volatility.

TABLE 1: Annual performance for various investments(June 2005 to June 2013)

Date(Year ending)

Unlisted Property Australian Shares Global Shares Listed A-REITs Fixed Interest Cash

PCA/IPD PooledProperty Fund

Index UnlistedRetail

S&P/ASX 200Accumulation

Index

MSCI World exAustralia ($A)

Unhedged (Net)

S&P/ASX200 A-REIT

AccumulationIndex

UBS CompositeBond Index

Bank termdeposits ($10,000)

Source RBA

June 2005 19.2% 26.35% 0.06% 18.10% 7.79% 4.55%

June 2006 33.1% 23.93% 19.88% 18.05% 3.41% 5.40%

June 2007 27.8% 28.66% 7.77% 25.87% 3.99% 5.90%

June 2008 15.0% -13.40% -21.26% -36.35% 4.42% 7.60%

June 2009 -20.1% -20.14% -16.24% -42.27% 10.82% 3.55%

June 2010 2.8% 13.15% 5.22% 20.41% 7.86% 6.00%

June 2011 8.8% 11.73% 2.66% 5.84% 5.55% 6.00%

June 2012 7.4% -6.71% -0.50% 11.04% 12.41% 4.60%

June 2013 7.0% 22.75% 33.10% 24.22% 2.75% 3.85%

Average annual return 11.22% 9.59% 3.41% 4.99% 6.56% 5.27%

Standard deviation 15.50% 18.43% 16.57% 25.90% 3.40% 1.27%

Past performance is not a reliable indicator of future performance.

On average, over each of the past eight years, unlisted property funds have produced higher total returns with lower volatility than Australian

shares, international shares and listed property. As might be expected, the defensive asset classes of cash and fixed interest delivered returns

with much lower volatility, but with significant underperformance relative to the other growth sectors.

Unlisted property funds, then, as part of a diversified portfolio, can play a significant role in answering some of the challenges involved in

helping Australians to source consistent, low-volatility income.

How to invest in direct property

Australian Unity Investments offers investors a variety of diversified and sector-

specific unlisted property funds. These cover assets including healthcare, office,

retail and industrial property.

In October 2013, we were named Professional Planner/Zenith

Investment Partners Direct Property Fund Manager of the Year

for 2013.

For more information about our unlisted property investments,

refer to australianunityinvestments.com.au.


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More information about SMSFs and the benefits of investing in direct property

Australian Unity Investments offers investors a variety of unlisted property funds. These cover assets including healthcare,

office, retail and industrial property.

For more information about our unlisted property funds, refer to australianunityinvestments.com.au.

To find out whether an SMSF is right for your investment circumstances, please consult a professional financial adviser.

2 PFA Investment Report , Property Performance Research (Atchison Consultants), September 2012

3 Five-star super strategies, Ian Irvine and Graham OBrien, Australian Securities Exchange (ASX), www.asx.com.au

Direct property can lessen portfolio risk and enhance return

In todays investment environment, a direct property investment

can also work as part of a diverse SMSF portfolio to maintain

exposure to growth assets and simultaneously reduce the impact

of prospective negative returns.

A study by Property Funds Australia2found there was arelatively weak correlation between returns of Australian

shares and direct property.

One of the benefits of this low correlation for SMSF investors,

particularly those looking to extend their exposure to growth

assets into retirement, is that they can lower the probability of

negative annual returns by including and potentially increasing

their allocation to direct property as part of a diversified

investment portfolio (see Chart 2).

Support for the inclusion of greater allocations to direct property

over time in SMSFs is also found in the ASXs Five-star super

strategies,3which was rolled out as part of the exchanges major

SMSF roadshow in June 2011. As portfolio allocations evolvedover time from high growth to a more conservative investment

style, the allocation to direct Australian property increased while

the allocation to other growth assets such as Australian and

international shares declined.

CHART 2: Inclusion of direct property in a diversified

investment portfolioSource: RBA & IPD Research

Proportion of Direct Property in a Diversified Portfolio

ProbabiliotyofNegativeAnnualReturn

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%0%

5%

10%

15%

20%

25%


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Property funds typically make regular income distribution payments to investors. These

distributions are primarily the result of rental income received from tenants in properties

that are directly held by the funds. Part of these distribution payments may contain a

tax-deferred component.

The potential advantages of tax-deferred income from property funds

What are tax-deferred distributions?

Tax-deferred distributions arise as a result of differences

between the earnings of the fund and its taxable

income. These differences can arise because of tax

depreciation deductions available to the fund.

Income tax may not be payable on tax-deferred

amounts, however these amounts may operate to

reduce an investors cost base in their investment.

As a result, the tax liability is deferred until a capital

gain (if any) is realised.


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Important information: This article is general information only and should not be regarded as tax advice. Investors should seek

their own independent tax advice, taking into account their particular circumstances, before investing.


The potential advantages for SMSFs moving to pensionFor self-managed superannuation funds (SMSFs), the tax-deferred

component of the income distributions from property funds can

have additional potential benefits. This can be particularly evident

if a SMSF holds an investment into allocated pension phase.

Because capital gains in allocated pension phase can be tax-free, the

capital gains realised on investments held from the period prior to

the allocated pension phase may also be tax-free.


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Healthcare propertyin 2014

Our outlook for the healthcare property sector continues to be positive.

Demand for private health services continues to grow, primarily as a

result of Australias gradually ageing and increasing population.

Looking ahead, we anticipate leases will continue to be renewed

at or slightly above current rentals. Yields for healthcare properties

are likely to remain consistent. We also expect valuations to remainconsistent, with some upward pressure as a result of strong interest

from both domestic and overseas institutional investors.

In October, our flagship Australian Unity Healthcare Property Trust

was named the winner of the 2013 Australian Property Institute NSW

Excellence in Property Awards in the Property Trust Industry category.

The Trust is expected to further diversify and grow strongly in

2014. New property acquisitions and fur ther expansion projects for

existing assets are currently high priorities. We look forward to future

announcements over the next year aimed at growing investors

distributions and total returns over the long term.

2014 Outlook statements

Office propertyin 2014

Our view is that Australian office property valuations in 2014 will

be generally supported by ongoing economic expansion, renewed

business confidence and the lack of new supply across most office

property markets.

In what is presenting as a low interest rate environment for investors,

we believe office property will continue to be an attractive asset class.

Importantly, the outlook for the highly occupied office property

portfolios, such as the Australian Unity Office Property Fund,

continues to be positive. This is a result of limited new supply being

built and tenants appearing reluctant to incur moving costs. Our

view is that the situation will endure as subdued tenant demand

makes attracting pre-commitments for leasing difficult for property

developers. Ongoing limited supply should also assist in sustaining

current occupancy levels.

In addition, investment demand for office property has improved as

a result of low interest rates and stronger equity markets. For many

institutional investors, both locally and internationally, investing in

Australian office property is presenting as a compelling proposition. This

is helping to sustain current property values, and competition for quality

assets may lead to some valuation upside over the medium term.

Looking ahead to 2014, the Australian Unity Office Property Fund is well

positioned to provide investors with a healthy level of ongoing returns.


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Retail propertyin 2014

Despite some challenges that continue to confront the Australian

retail property sector, positive signs are emerging. As a result, we

maintain a cautiously optimistic outlook for the sector.

Our view is based on many factors, including the recent upswing in

business confidence and consumer sentiment, both of which serve

as very long-term leading indicators for the sector. Adding to ourpositive view is the renewed demand for residential property, which

has resulted in sharp property increases, particularly in major capital

cities. Sydney, for example, saw average residential house prices

increase by 13.4 percent in the first ten months of 2013.1

Further support is underlined by expected growth in the Australian

economy. This gradual expansion means large retail groups,

particularly those catering to non-discretionary spending, will likely

continue to grow and require expanding retail property assets.

Importantly, the retail property investment market has been very

active in 2013. Large transaction demand has come from unlisted

wholesale funds, superannuation funds and off-shore investors.

Adding to this, low levels of new retail development have had theeffect of constricting supply, helping to maintain tenant demand

and keeping vacancy rates relatively low for existing assets.

Looking ahead, we expect the Australian Unity Retail Property Fund

will be in a position to increase its level of distributions to investors

once the major expansion of the Waurn Ponds Shopping Centre is

completed. This major expansion kicked off in 2013 and Stage 1 is

due for completion in May 2014. The expansion is expected to be

fully complete by August 2014.

Industrial propertyin 2014

Pleasingly, 2013 produced stable conditions and steady performance

across the industrial property sector.

Industry data in the second half of 2013 indicated some

improvement in occupier demand for industrial property and other

indicators pointing to a positive 2014.2In particular, the supply of

new industrial property assets continues to broadly balance overalldemand, with the result that rents across the sector have generally

remained steady.

According to Jones Lang LaSalle, existing rents for prime-grade

industrial assets have remained stable across Australia. Also, it

appears incentives from property owners have not increased.

Adding to this broadly positive outlook, investor appetite for

industrial assets continues to remain strong, helping to support

current property valuations.

1 RP Data, November 2013 2 Real Estate Intelligence Service, Preliminary Market Overview, Q3/2013, Jones Lang LaSalle


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Over the past 10 years, Australian Unitys Real Estate Investment team has become

one of Australias premier unlisted property fund managers. It offers investors a unique

combination of experience and expertise in managing direct property assets across

the healthcare, retail, industrial and office sectors.

We believe we go further in our insights into Australias commercial property markets, and that we have a deeper perspective into its opportunities

and challenges. Importantly, our expertise is complemented by Australian Unitys influential community of investment and wellbeing experts.

Australian Unity Real Estate Investment manages property assets valued at approximately $1.6 billion (at 30 September 2013).

Our property experience

Our property executive team

Mark Pratt

General Manager Real Estate Investment

Mark joined Australian Unity Investments

in 2004.

He is responsible for the commercial

management and growth of our in-house

real estate investment businesses.

David Bryant

Chief Executive Officer

David joined Australian Unity Investments

in 2004 and is responsible for all the

investment management activities across

our financial and property assets.

David has more than 25 years of experience

in investment and financial services.

Chris Smith

Head of Healthcare &

Retirement Property Funds

Chris joined Australian Unity Investments in

2001 and has more than 20 years of experience

in portfolio and property management. Over

the past decade, he has played a vital role in

shaping our Healthcare Property Trust into

one of the largest and highest-rated propertyfunds in Australia.

Ryan Banting

Head of Portfolio Management

Ryan joined Australian Unity Investments

in 2011. He is responsible for managing and

monitoring cashflows, research, analytics,

debt and asset allocations to optimise

performance outcome and the risk profile

for our unlisted property funds.

Mark Lumby

Head of Property Funds Retail

Mark joined Australian Unity Investments

in 2011, following the acquisition of Investa

Funds Management Limited where Mark

worked for three years as General Manager

of Retail Funds.

Mark is responsible for unlisted property funds

in the office, retail and industrial sectors as well

as our diversified property funds.

Peter Lambden

Head of Property & Asset Management

Peter joined Australian Unity Investments

in 2001 and has more than 40 years of

experience in portfolio and property

management.

He is responsible for providing key input to

fund and property strategies, developing

consistent and effective asset and property

management processes, and overseeing the

operation of all property functions.


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propertyinsights summer 2013-14

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