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Investing in Tomorrow's World: 101 Miller Street

101 Miller Street

Nick Evans (Head of Australia) provides some background into the rationale for the investment decisions surrounding mixed-use commercial/office properties, such as 101 Miller Street, highlighting TH Real Estate's Tomorrow's World approach.

With the 'global hunt for yield' showing no signs of abating, it seems no asset class has been untouched by a flood of global liquidity. The property sector is no exception. A seemingly endless supply of capital chasing a limited number of attractive property investment opportunities has driven yields down and pushed investors up the risk curve. As a result, current property investment yields in some markets may not adequately compensate for risk exposure. In this environment, careful investment selection is more important than ever.

TH Real Estate faces this issue every day. Despite current challenges, we are confident that in-depth research can uncover attractive opportunities for return in most major investment property markets across the globe. We advocatesan investment process that incorporates:

1.
Fundamentals to identify individual properties with the potential to deliver sustainable and growing income streams;
2. '
Micro-location' which looks at local market factors such as neighbourhood demographics and the local level property market cycle in the relevant city or region;
3.
National-level macro factors that can influence the viability of property investment;
4.
Long-term megatrends such as urbanisation, population growth and the rising wealth effect of the middle class.

Identifying attractive properties: Easier said than done
Applying this four-step analysis is easier said than done. A review of the factors that contributed to our investment decision surrounding a mixed-use commercial/office property investment in Sydney, Australia, represents a good case study.

1.
Fundamentals
When a potentially attractive property comes on the market, the first step is to 'kick the tires' to see if the building itself is a solid asset. In the case of 101 Miller Street in Sydney, we considered the design and construction of the building, and the security of the income stream. Our Investment team noted the building’s attractive design and harbour views, ample parking and large windows, which allowed lots of natural light and spectacular views of Sydney harbour. On the rental front, we noted that the building had solid anchor tenants with a durable income stream across office, retail and car park sectors. This was considered an attribute, the diversification of income streams enabled opportunities to enhance the tenant mix and grow rental income. These factors, combined with the building’s attractive rental cost profile and limited competition, projected an attractive base-case unleveraged IRR of 8% after expenses over the 10-year hold period.

2. '
Micro-location'
Once confident that the building represented a solid structure with a robust operating model and the potential for attractive returns, we turned to local market analysis. Positioned in North Sydney, the property is in a relatively affluent and influential community that represents an attractive client and employee base for retail and office renters, respectively – we noted that some 18 million commuters walk through the retail plaza, interconnected to the North Sydney rail station, every year. Despite these positives, it was also important to consider competition. Would stores and offices looking for space consider the building relative to other options? While the North Sydney location may have initially been considered less than optimal, this concern was quickly overcome when considering that the property offered rental rates 40% to 50% cheaper than comparable buildings in Sydney’s central business district, but is literally five minutes from the downtown core via strong transportation connections. Combined with a lack of existing supply in the North Sydney area and the absence of new supply in the pipeline, we had absolute conviction that the micro-location was supportive.

3.
National-level macro factors
Since a property is a long-term investment, it is important to be wary of longer-term national economic and social factors that could negatively affect the investment thesis. At this level, we evaluated factors which also supported the investment case. Australia’s economy, which the IMF forecast to grow by a relatively robust average of 2.8% per annum through 2021, is supported by accommodative monetary policy that enables investment financing at attractive and accretive financing rates. Similarly, though the nation’s mining and resource sector was undergoing a down cycle at the time, it was expected to have the fringe benefit of stronger GDP growth being directed towards the Eastern seaboard states, easing capital away from the mining sector and back to vibrant urban centres such as Sydney.

4.
Long-term megatrends
With everything looking good so far, we turned our attention to the longer-term structural megatrends, considering how the property may perform in Tomorrow’s World. These factors include:
    a.
The ongoing urbanisation trend that is expected to continue to favour cultural, economic and political centres such as Sydney. The city is currently enjoying population growth of about 1.3% per annum. 
    b.
The rise in wealth of the middle class and the shift of economic power from the west to the east, which will benefit Sydney due to its proximity to Asia and strong trading connections to major centres across the region.

Final decision: North Sydney investment is a go
Having painstakingly sifted through this multitude of data, we concluded that the balance was in favour of this premium grade mixed-use property in North Sydney, which is now a core holding in our global property portfolio. Amid challenging property investment conditions globally, this level of detailed analysis is more important than ever. The complexity of analysing these factors across potential markets, cities and neighbourhoods for every potential property investment globally cannot be overestimated. However, with investors hungry for sustainable income yield wherever it can be found, it is vital for property investors to have a tried and tested investment process to separate the wheat from the chaff.

Issued by Henderson Real Estate Asset Management Limited, 201 Bishopsgate, EC2M 3BN. Authorised and regulated by the Financial Conduct Authority. TH Real Estate is a name under which Henderson Real Estate Asset Management Limited provides investment products and services. COMP201700092