One area that is not often contemplated when assessing the profitability of a property investment is the power of a partnership, writes Charter Hall’s Richard Stacker.
Commercial property investments often form a large chunk of investor portfolios, sometimes up to 15 per cent. What makes them attractive is that they offer a predictable and attractive return.
In the current yield-challenged environment where else can you receive around seven per cent running yield and 10 per cent total return for a relatively safe and secure investment?
Probably not in residential property, despite the headlines over the last 12 months or more. Perhaps a commercial property partnership could work?
For many individual investors any consideration of a landlord/tenant relationship is not one of collaboration but likely to invoke issues of relative power, occasional tension, the odd dispute and the belief that ultimate power rests with the landlord.
What is typical in residential lease situations is quite different for commercial property.
In the professional commercial property market such notions of power by one party are increasingly irrelevant and an inaccurate description of the landlord and tenant dynamic.
Of course there may be high-profile disputes and parting of the ways after failure to renew leases – and historically large corporations may even have exerted some power over property owners as they did deals.
The commercial property sector is changing rapidly in its basic form and here are some observations around this fundamental business dynamic.
The partnership paradigm has been developing for decades.
Commercial property is matured to a point whereby tenants are treated as business partners.
After all, once a lease is signed the two parties are literally committed to a hopefully mutually beneficial co-existence.
It is our experience this partnership concept is now being extended, based on the concept of specialisation and most effective use of capital.
This concept of specialisation is embedded in early economic theory on international trade with the notions of absolute advantage and comparative advantage.
The former is a relatively straightforward idea introduced by Adam Smith in his seminal 1776 work An Inquiry into the Nature and Causes of the Wealth of Nations, which observes that in a two-country world each country should specialise in what they have an absolute advantage in, and then trade.
The latter concept, introduced by English economist David Ricardo in 1817, dictates that even if Country A has a cost advantage in two products, it is still more efficient for Country A to focus its resources on its superior skill or cost set and import the second product from Country B, despite Country A’s theoretical advantages in the production of both.
This is not to say that we think some of our tenants are better property developers/managers than we are – we don’t.
But even if they are, we both recognise there are economies to be had in each specialising in their own main game.
In recent years there has been a movement by commercial property fund managers to team up with various leading Australian corporates to develop, own and manage large-scale distribution centres, big box retail outlets and more.
We focus on evolving our relationships with customers across four different sectors – office, industrial, retail and hospitality – as well as by location.
For example, Coles is a major tenant for us in both our retail (shopping centres) and industrial (distribution centres) properties.
We have also extended this relationship with Coles’ ultimate parent company Wesfarmers, through their ownership of the market leading Bunnings business and our ownership of Bunnings Warehouse stores.
As another example, we recently we established a direct (unlisted) property trust, the Charter Hall Direct Automotive Trust, with properties tenanted to ASX-listed company Automotive Holdings Group (AHG).
We acquired the assets from AHG, and became their landlord as they remained as the tenant.
This created a partnership between Charter Hall, as an institutional property manager who provides the scale and access to equity, and AHG who wanted to fund growth opportunities and focus on future opportunities across its automotive dealership and logistics businesses.
And as this trust soon closes to investment, we will look to partner with AHG on other similar syndications.
The advantage of such a partnership approach means both parties can craft a deal that suits them, more like a bespoke arrangement.
Given the premium businesses place on certainty, this will often lead to longer leases.
Investors also like certainty, and property trusts with long WALEs (Weighted Average Lease Expiries) to strong covenants are generally market leaders as adjudged by independent-rating houses.
These long leases create certainty of income for investors, as the lease terms can be up to 20 years long with fixed annual rent increases over that term.
Investors can gain access to commercial property assets via ASX-listed REITs or direct property trusts to take advantage of this evolving ‘partnership paradigm’.
Richard Stacker is the head of direct property at Charter Hall.