Funds play out diverse strategies

Specialist disability accommodation may not top the list for many seeking property investment opportunities, but it’s at the centre of Blackoak Capital Ventures’ new $40 million fund.

Blackoak launched its Lumenate SDA Investment Trust 1 last month, targeting opportunities in the specialist disability accommodation (SDA) sector, with the fund closing in November.

While the SDA sector was relatively new to Western Australia, Blackoak chief executive David Zimmermann said it was established on the east coast, and an area in which the company had been eyeing potential opportunities for some time.

“There’s a strong appetite from investors to understand opportunities where they can get diverse income streams,” Mr Zimmermann told Business News.

“We sat down a year and half ago and asked, ‘Where do we see the future? What can we be doing new?’

“The things they like about it [SDA] from an investment perspective is that you end up with a broad range of tenants paying rent when the portfolio is built out to have somewhere between 130 and 150 tenants.”

SDA is accessed through the National Disability Insurance Scheme (NDIS) and is a type of housing designed to support people living with extreme functional impairments or very high support needs.

Under the NDIS, which came into effect in WA in 2018, eligible individuals are funded directly for SDA, which was created to divert people under the age of 65 from entering aged-care facilities as their only option for specialist care.

Part of the SDA strategy was to include measures that would encourage the private sector to deliver SDA, including reasonable investment returns.

But that hadn’t necessarily prompted a wave of interested property players, with few groups in WA specialising in SDA.

Blackoak managing partner Tim Mack said that was likely due to the sector’s complexity, the nature of NDIS funding, regulatory approval, and changing technical specifications.

“It’s not simply a matter of understanding the accommodation sector or SDA component of it,” he said.

“You need to really understand all the stakeholders involved, the way the residents in your accommodation will receive those services, and how that will impact the economics of their support providers.

“So, it’s not an area you want to dip your toe into; you need to really get a full understanding before you start investing in it.”

Mr Mack said the team had spent time building its knowledge of the sector and was confident it would pay off in the long term.

That confidence was underpinned by the fact there was a clear shortfall of SDA housing in WA.

Mr Mack said there were an estimated 2,985 SDA participants in WA, but current levels of SDA housing available for just 200 eligible individuals.

Blackoak’s $40 million Lumenate SDA Investment Trust 1 fund aims to develop up to 50 new SDA residences in WA over a 10-year term, via Lumen Living, Blackoak’s new business focused on SDA delivery.

Mr Zimmermann said Lumen Living planned to partner with industry specialists to develop high-quality residences at the top end of the SDA market.

“We think we can get a great outcome for the people occupying our properties and our investors,” he said.

“There has been a very positive response to the fact that we’re not focused just entirely on those financial returns.”

Anecdotally, Mr Zimmermann said there had been increasing interest in the environmental, social, and corporate governance space, particularly from family offices.

The SDA market helped meet demand for specialised housing, with the additional benefit of being an ESG investment, he said, enabling investors to create positive outcomes for a historically disadvantaged community.

Mr Zimmermann said the group was also exploring opportunities in the childcare sector.

“People are looking for strong long-term returns, and in the past two to three months are becoming increasingly sceptical of the equities market and concerned about the longevity of the run that we’ve had since the end of COVID-19,” he said.

“People are looking at yields on traditional real estate and seeing that continuing to compress and wondering how long that’s got to run.

“Having said that, because of the lack of yield in fixed income and bond markets there’s an enormous appetite for anything that’s dividend or income producing for people that are looking for self-funded retirement or looking for growth of their investment portfolio.”

Unearthing returns

Baron Vanilla Management is another local property syndicate exploring alternative investment opportunities.

The newly-formed entity (a joint-venture between WA-based Baron Property Group and Vanilla Property Investments) settled its first acquisition last month with the $10 million purchase of a 60-bed aged care facility in Mosman, in Sydney.

Baron Vanilla Management co-director Miles Ashton said the trust for the investment had closed oversubscribed within days.

Mr Ashton said investors had been attracted to the strong cash return of 7 per cent per annum, underpinned by a 20-year lease to Hall & Prior.

“A lot of our investors are baby boomers and see aged care coming on the horizon, they see that structured demand for the market and the supply is not there to meet it,” Mr Ashton told Business News.

“So, to articulate our investment strategy, they understand that.

“They’re more looking at the security, the lease term, good convenience; they’re quite agnostic when it comes to particular asset classes.

“But you’ve got to throw your net pretty wide in this environment and have a look at all opportunities.”

Co-director Joseph Rapanaro said the flow of investment money into Australia was outpacing the availability of investments across the board.

“We’re not brining on property at the same rate that money is becoming available to investors,” Mr Rapanaro said.

“And that forces yields down.”

Baron Vanilla Management directors Joseph Rapanaro (left), Miles Ashton and Gianni Redolatti. Photo: David Henry

That was particularly apparent in the industrial property sector, where large institutional funds had started to buy one of WA’s most tightly held asset classes.

That includes recent news ASX-listed GPT Group is undertaking due diligence on WA-based Ascot Capital’s portfolio, which includes 26 logistics and industrial assets, as part of an $800 million deal.

Despite the competition, Mr Rapanaro said Baron Vanilla was still targeting opportunities in the market.

Last month, the group launched its BV Industrial Plus Fund, targeting cash return on equity of 7.5 per cent per annum.

The fund has already secured three WA industrial properties, in Malaga, Bassendean, and Welshpool.

Mr Rapanaro said industrial rents were yet to climb back to peak levels, which he said would provide some protection against a likely interest rate hike over the next five years.

“That’s why we’re comfortable buying industrial now, because the yields are very low and we know interest rates are going up, but our view is that the rents haven’t grown,” he said.

“We are actively looking to acquire more but the prices have been pushed out high and you’ve got to be careful of that.”

Likewise, WA-based MGroup is not shying away from the traditional property market just yet.

MGroup managing director Lloyd Clark said leveraging the mining boom with a stable property asset located in a strategic location provided the impetus behind the group’s Boulder Road Property Trust: a $6 million target capital raising.

The trust includes a 6,000 square metre fully leased asset in Kalgoorlie, comprising three major operators that service the automotive and work safety industry.

MGroup has forecast monthly wholesale investor distributions of 8 per cent for a period of seven years, which Mr Clark said was between 7.5 per cent and 8 per cent higher than the current cash rate and well above current equity market yields of between 3 per cent and 4 per cent.

“Property assets in areas of strong industrial activity like this present a unique investment opportunity that allows investors to ride the mining boom with two feet solidly grounded in bricks and mortar,” he said.

“The tenancies within our asset class are high-quality national retailers and essential to both locals and the resources sector.”

Mr Clark said the tenancies had a weighted average lease expiry (WALE) of 8.08 years.

Opportunities

Burtonwood Investment Partners has taken a different approach to tackling the competitive market.

Burtonwood managing partner Chris Weaver is WA-based, however, the group has a national mandate.

Its $20 million Convenience Retail-Essential Services fund is focused on develop-to-hold convenience retail properties in conjunction with delivery partner Isaac Property Group.

The fund’s seed asset is a 1.4-hecatre landholding near Penrith, west of Sydney, which will be 100 per cent pre-committed to seven or eight tenants before construction, targeting a WALE of 10 years on completion.

The Penrith asset comprises about $13 million in equity: a combination of 50 per cent from the Burtonwood/Isaac Fund and 50 per cent via a separate Burtonwood syndicate.

“[It] provides an ability for investors to access a product that is not otherwise available in this sector unless you buy the end product at low yields, which is fiercely competitive to find opportunities,” Mr Weaver told Business News.

“Investors benefit from a hybrid return profile over a five-year business plan; higher average return is attributed to the development phase and lower average return to the hold phase where stable income is generated.”

Mr Weaver acknowledged the increased risk attached to development as opposed to investing in an existing property.

“We’re just being priced out of it [existing stock],” he said.

“There’s too much money looking for that, so we feel we’ve come up with a solution of finding opportunities through a partnership model where we’re taking calculated risks and opportunities with enhanced returns.

“Risk is not a dirty word … it’s a barometer of things that can go right or wrong and returns that can be enhanced.

“[Our] investors generate returns via a combination of development profit, and higher yield return than buying the finished product.”

Mr Weaver said Burtonwood sought to mitigate risk by avoiding speculative development and requiring 100 per cent pre-lease commitment before commencement.

That also extended to its partnership model, forming relationships with best-in-class delivery partners experienced in the risks surrounding planning and development approvals, as well as construction price risk.

Mr Weaver said about 65 per cent of the $13 million equity for the Penrith asset had come from WA investors.

“They’re looking for opportunities to invest outside of the WA economic environment, places where they can get some diversification or shielding from effectively the mining cycle,” he said.

WA-based investors had also dominated Burtonwood’s apartments opportunity.

Burtonwood has partnered with developer WINIM for a 17-20 boutique apartment project in Cremorne, Sydney.

The Burtonwood Trust is providing 80 per cent of the equity alongside WINIM (20 per cent).

Mr Weaver said the trust was oversubscribed in less than 36 hours, with WA investors accounting for about 75 per cent.

The 2.5-year investment term, he said, had been appealing to investors not wanting to tie up capital for long periods, which increased uncertainty.

“There’s a large weight of capital looking at real estate as a fairly safe-haven type investment, so that’s probably fuelling a thirst for real estate investment opportunities across different sectors,” Mr Weaver said.

“There are also historically low interest rates, which is driving a continued thirst for yield.

“And commercial real estate traditionally has fairly long and stable yields, so that is driving cap rate compression.

“Certainly, there’s a real pent-up demand for opportunities.”

It was that strong investor demand and a growing desire to diversify that prompted MW Group’s Momentum Wealth to review the structure of its funds division.

Last week, the property developer launched Westbridge Funds Management, bringing together the company’s residential funds division and its commercial property funds management arm.

Momentum Wealth moved into syndicated development projects in 2014, before purchasing a majority stake in Mair Property Funds in 2015.

Since then, it has been running syndicated projects under the two separate brands with residential and commercial assets worth more than half a billion dollars.

That growth constitutes a four-fold increase in the past six years.

However, managing director Damian Collins said that, about a year ago, MW agreed the structure no longer made sense for the company’s clients, many who were seeking to diversify their portfolios.

Now, the company has launched a separate, combined property funds management brand, targeting more sophisticated, end-of-market investments.

“These are certainly more advanced investment opportunities,” Mr Collins told Business News.

“As our property investment services have evolved, we’ve seen a growing demand for sophisticated investment products that meet investor needs to diversify and strengthen their portfolio as they progress in their property investment journey.

“Rather than putting $500,000 or one million into one commercial building, people are taking advantage of the opportunity to spread their risk around; they might have that spread across four or five different funds.”