Our Chairman, Damian Collins, discusses how smart acquisition and management strategies can help to bolster the performance of commercial property funds through changing economic conditions.
The Reserve Bank of Australia has increased official cash rates by 2.75 basis points since May 2022.
While the pace of these increases has been faster than expected, the upward moves have come as little surprise to many, who anticipated a rise off the unsustainable lows maintained throughout the COVID-19 pandemic.
Despite the increase in rates, our Chairman at Westbridge Funds Management, Damian Collins, notes that a number of commercial sectors continue to present compelling opportunities for fund managers and investors.
“In the industrial sector, particularly in WA, we are seeing an exciting opportunity to leverage the combination of limited supply and strong demand from ecommerce and mining occupiers to capture growth in rents,” he explains.
A recent report from CBRE notes that the vacancy rate across Australia’s industrial property market is down to just 0.8%, with the squeeze even tighter in Perth at 0.2%.
According to Knight Frank, the western capital is currently experiencing the “fastest pace of rental growth nationally”, recording an 18.6% increase in prime rents year-on-year.
Opportunities to help protect against rising rates
Damian says this rental growth can have key implications in helping industrial-focused funds keep pace with economic movements.
“With supply on market being so tight and pressure on rents increasing due to rising demand, we see an opportunity at Westbridge to leverage these conditions through a value-add strategy,” he explains. “This allows us to target and reposition underperforming industrial properties through strategies such as refurbishment, leasing negotiations and rental price reviews to meet undersupply in the market.”
“A considerable benefit of this strategy is that we’re able to help protect against rising interest rates and inflation, in turn minimising the impact on investor distributions.”
This strategy underpins the Westbridge Industrial Total Return Fund and is one of the factors driving the acquisition of a new South Guildford industrial facility for the Westbridge Diversified Fund No.4, which offers potential for future redevelopment/expansion as well as strong initial income returns.
Damian adds that the potential to minimise the impact of rising rates stretches beyond acquisition strategies alone.
“From an ongoing management perspective, we have CPI-linked rent reviews built-in to several of our assets at Westbridge. This serves to protect income returns from rising inflation in real, after-inflation terms, and helps to offset the effects of rising interest rates,” he explains.
“As an example, our Westbridge Diversified Fund No.4 currently has approximately two-thirds of leases by income with rent reviews linked to CPI.”
Essential goods and services a key focus
Beyond the industrial market, Damian believes non-discretionary assets – such as neighbourhood shopping centres, large format retail and medical centres – will hold strong appeal for commercial investors in today’s economic environment.
“These are assets that focus on goods and services which are always in demand with consumers, regardless of market cycles, economic fluctuations and seasonal trends,” he explains.
As an example, Australia’s medical sector has experienced compounded annual spending growth of 5.3% since the 2010 fiscal year according to JLL Research, driven by favourable tailwinds including significant government investment in the sector and sustained demand from Australia’s ageing population.
Damian concludes, “By targeting the right mix of assets and combining this with management strategies that take into account economic conditions, it is possible for commercial funds managers to help protect fund performance from economic headwinds, and offset or at least reduce the impact of rate rises on investor distributions.”
“Needless to say, this requires strong expertise, knowledge of economic markets, and a forward-thinking management approach, so now more than ever, it’s important for investors to align themselves with fund managers they trust.”
To find out more about the latest investment opportunities with Westbridge Funds Management, visit our homepage at www.westbridgefunds.com.au to view our open funds, or register your interest to be notified of upcoming investments.
This information has been prepared by Westbridge Funds Management as a general guide only. It does not constitute an offer for sale, or solicitation for the purchase of securities, financial products or other investments. It should not be relied upon to determine or to make decisions about the investment objectives, financial situation or individual needs of any person. Westbridge Funds Management recommends investors seek professional advice before making a decision to invest. Westbridge Funds Management and its related entities do not make any representations or give any warranties that the information contained within is or will remain accurate or complete at all times and they disclaim all liability for harm, loss, costs, or damage which arises in connection with the use or reliance on the information. Manager, Responsible Entity and Product issuer: Westbridge Funds Pty Ltd ABN 33 652 852 214 AFSL 533936. Mair Property Funds Limited ABN 48 151 957 676 t/a Westbridge Asset Management. Mair Property Securities Limited ABN 28 091 623 862. AFS License 238386. Momentum Wealth Projects Pty Ltd ABN 29 090 792 439 t/a Westbridge Urban.