15 December 2021

Contents

News in brief
Property market commentary
Property acquisitions
Property fund updates
General investor matters
End of financial year reporting
Distribution timetable
Office closure

News in brief

Tom Davis, Chief Executive Officer


Welcome to the latest edition of KM Property Funds Investor Update.

It has been a significant period for KM Property Funds since our last update. At a meeting of unitholders in August, NewActon East Property Fund investors voted to extend the fund's term by two years until August 2023.

Laverton North Property Fund entered a conditional contract of sale with an international buyer for the Austco Polar cold storage building. Upon completion on 23 November, the sale represented more than 100% return on investment for investors (including distributions) net of all fees. The divestment of Laverton North reinforces KM Property Funds' desire to optimise value for investors.

At the same time, we had independent valuations conducted across the entire property portfolio, and all the properties performed in line with or above expectations for the year ended 30 June 2021.

In July, we partnered with KM Develop, KordaMentha’s residential development business, to offer a residential development project consisting of 24 apartments in the eastern suburb of Ashburton in Melbourne. Ashburton offers leafy streets and is centrally located to significant infrastructure and retail hubs. KM Develop has extensive experience in residential property development. The clients of two financial advisory firms have co-invested with KordaMentha on this exciting project. Called ‘Chapter’, the development offers all KM Property Funds’ clients an opportunity to acquire one of the apartments as a primary residence or an investment at a price that is discounted by the amount of the real estate agent’s sales commission that would otherwise be incurred. Chapter provides more information about the project. To qualify for the discount, please contact KM Property Funds on 1300 132 099.

KordaMentha also strengthened its real estate investments team with the appointment of Nick Crockett as Executive Director and Tom Korda as Director. Both appointments bring extensive experience and networks to enhance the group's product offering and investor base. 

 


Nick Crockett, Executive Director

Nick has over 20 years of real estate, finance, and management experience across various global markets. He established and managed multiple platforms within Asia-Pacific for the origination and management of real estate debt and equity capital. He also has a long track record of arranging and structuring debt and equity real estate capital for single assets, programmatic joint ventures and commingled funds across multiple countries. Nick has a deep global network of relationships across the real estate industry.

Nick has previously held several senior roles in Australia and Singapore, such as a Responsible Manager for a wholesale Australian Financial Services Licensee and similar positions with the Monetary Authority of Singapore and the Securities and Futures Commission of Hong Kong. 

Nick also brings extensive knowledge and experience with compliance frameworks across various jurisdictions.

 


Tom Korda, Director

Tom has a passion for real estate with an in-depth understanding of intrinsic value and a strong network of property professionals around Australia.

With ten years' experience in project management, asset management and capital transaction management, Tom uses his strong technical and strategic judgement to find property investments that show above-market returns whilst controlling the risk from the outset.

Having managed and transacted over $350 million of real estate nationwide, Tom has a wealth of knowledge and a solid network, enabling him to uncover investment opportunities in multiple locations and asset classes.
 



Property market commentary

Tom Korda, Director, Acquisitions

Office

In its latest office market review, JLL points to an economic recovery that's underway in Australia's major cities. While capital city tenant withdrawals are significant, fringe areas of the various cities drove the supply of office space during the period.

There is a substantial property supply in Brisbane in the pipeline, with the vacancy rate unchanged at 14.0%. However, there was a positive net absorption of space driven by smaller tenants. In contrast, there is a limited supply of new buildings in Canberra, with the overall stock declining and vacancy rates reducing from 8.2% to 7.6%.

On the other hand, Melbourne has a significant supply of new commercial property coming onto the market, and yet, it currently has a vacancy rate of 14.3%, its highest level since 1999. However, vacancy rates declined to 11.4% in outer Melbourne, with no new stock expected to come online. In Adelaide, vacancy rates increased marginally to 16.9% while the medium-term supply pipeline is growing.

Industrial

The industrial property sector continues to thrive in the wake of COVID-19, with the shift in consumption and logistics fuelling occupier and investor demand. Industrial property has seen new price records and yields tumbled quarter-upon-quarter in various Australian markets. Unlike some other asset classes, the price movements are somewhat justified given the fundamental drivers outlined below.

  1. Online sales (non-discretionary and discretionary, like groceries and medical supplies) are growing faster than pre-pandemic, meaning warehouse demand is growing. Floorspace absorption continued to break records in 2020 and 2021.
  2. CBRE Research expects the average vacancy across the eastern seaboard to be 1.5% by the end of 2021.
  3. Historically small consumers of industrial land, such as data centres, cold storage, and pharmaceutical suppliers, continue to grow and take up space.
  4. Land is becoming scarce, particularly on the east coast, where land values have more than doubled in some areas within the last 12 months.
  5. Institutional capital allocation towards industrial is at historic highs; the sheer competition and demand for stock are putting significant upward pressure on prices.

Some investors and market commentators believe these strong fundamentals justify the record low yields and high prices. For example, in Sydney’s and Melbourne’s core industrial markets, yields are in the low 3% range breaking all previous records. However, while some experts believe yields will plateau, they have confidence that further value growth is on the horizon through accelerated market rent growth because rents have been stagnant for some time.

Retail

The Australian retail property sector is experiencing a multi-speed economy highlighted by the strength of neighbourhood shopping centres (those anchored by a supermarket) and large format retail centres and the sluggish performance of those non-discretionary retail investments such as strip-retail and department stores.

Except for Melbourne non-discretionary, the retail property sector experienced a downturn at the peak of the national COVID-19 lockdowns. However, retail turnover has now returned to normal levels nationally.

According to JLL, the national average rent fell 5.9% for the year to June 2021, with CBD rents affected the most, falling more than 10% on average. The institutional market is still cautious and, according to JLL’s latest report, approximately 458,000 sq.m of new developments across 22 projects are currently on hold.

As with retail turnover, retail property investment has picked up to pre-pandemic levels, with JLL noting that transaction volume in the first half of 2021 was the strongest since the fourth quarter of 2019. Neighbourhood shopping centres experienced the most vigorous transaction activity at 39% of sales, followed by large format retail at 21%; both sub-sectors traded on around 4-5% yields depending on location.

JLL’s outlook for Australia remains positive, expecting an economic recovery path and gross domestic product forecasts to rebound through 2022. JLL continues to expect that policy measures will be supportive, with the Australian government outlining plans to assist employment growth and commit funding to a range of infrastructure initiatives, with monetary policy remaining at very accommodative levels.
 
Source: CBRE Research, JLL Research
 



Property acquisitions

Mario Papaleo, Chief Investment Officer


With a high level of buyer and seller activity, we continue to consider and assess several desirable acquisitions, including assets for a new fund, Community and Social Services Property Fund, which we will launch in February 2022.

Over the past year, we have successfully acquired three properties to add to the portfolio: two childcare centres in South Australia and Western Australia and a mixed-use commercial property in the Australian Capital Territory.

Located at 2-8 Botany Drive, Golden Grove North, SA, and purpose-built, Nido Early School has a nursery and separate facilities for toddlers to school-age children and caters for 122 children. The centre sits on 4,300 sq.m of land and is only three kilometres away from The Stables Shopping Centre, the sole asset of The Stables Property Fund.

The second childcare centre is at 56-58 Carrington Street, Palmyra, WA, near Freemantle and south of Perth CBD. This centre also operates as Nido Early School and opened in November 2021.

Both centres operate on the Reggio Emilia philosophy and offer a warm and loving environment. Named after its birthplace in Italy, the Reggio Emilia philosophy focuses on cultivating young minds and has gained worldwide recognition as best practice for its unique vision of early childhood education.

Flax House is a free-standing commercial property at 216-228 Cowlishaw Street, Greenway, ACT, and comprises 1,897 sq.m of net lettable space across two levels in the heart of the Tuggeranong Town Centre. A childcare centre occupies much of the building. Other tenancies include a medical (respiratory) clinic, office, and a café.

We also concluded a transaction on behalf of an overseas investor, who appointed KM Property Funds as the asset manager. The industrial property is at 10 Elliot Drive, Stapylton, Queensland and comprises a 9,950 sq.m warehouse with 1.5 ha of surplus land for potential future development.

Additionally, we have been conducting research and due diligence on several other investment opportunities, including office, industrial, highway transport and convenience retail properties, residential developments, and residential land lease communities.
 



Property fund updates

David Omond, Chief Operating Officer


NewActon East Property Fund



Fund performance

Since the fund's inception in 2014, the unit value increased by 9.20% from an initial NTA of $0.87 to $0.95 as of 30 June 2021, following the latest independent valuation by Knight Frank. The fund paid an income distribution of 8.0% p.a. up to and including the March 2021 quarter.

As previously announced, effective 1 April 2021, the fund's distribution is at the rate of 6.00% p.a. per unit.

KM Property Funds determined the new distribution rate following deliberation of several crucial considerations, including the primary tenant's proposed new lease, refurbishment costs, and rent reductions when tenancy areas are available for building works. Distribution guidance always remains subject to review and formal board approval.

Fund and tenant update

At a meeting of unitholders on 9 August, NewActon East Property Fund investors voted overwhelmingly to extend the fund's term by two years. The resolution passed with a vote of 97.15%; the fund's term will expire on 8 August 2023.

The two-year fund extension allows KM Property Funds time to:

  1. remove leasing uncertainties with the primary tenant, Australian Competition and Consumer Commission (ACCC),
  2. lease approximately 2,108 sq.m of space that the ACCC is vacating, and
  3. undertake building works to maintain the property in A-grade quality and optimise its value.

The ACCC has executed heads of agreement over its new tenancy; however, a new 10-year memorandum of lease is yet to be agreed and signed.

The building project works involve upgrading the foyer, building management, and security systems, modernising the end-of-trip facilities, new carpets, ceilings, lighting, and new ACCC bathrooms with touchless technology.

Following the appointment of the relevant project consultants, planning on these works has commenced and progressed to the design phase.

On 12 August 2021, Canberra went into a COVID-19 lockdown. The ACT government reinstated the requirement for landlords to provide COVID-19 relief to eligible tenants. Two tenants at NewActon East applied for and received the relief.

In September, we completed the replacement of the building's aluminium composite panels; the project formed part of our ongoing property improvement and maintenance program.

The fund's financier extended the loan facility to June 2022; in line with lease negotiations with the ACCC, discussions are ongoing about a new longer-term facility with an increased limit to help fund the project works.



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The Stables Property Fund




Fund performance

Since the fund's inception in 2016, the unit value increased by 27.37% from an initial NTA of $0.95 to $1.21 as of 30 June 2021. The fund is paying an income distribution of 7.75% p.a. per unit.

The fund term is due to expire on or around 30 June 2022; we will provide more information over the next few months with a recommendation about its future.

Tenant and financial update 

Woolworths, the primary tenant, continues to trade strongly and has nine years to run on its current lease. During the quarter, we renewed leases with All Star Barberz and Café Aroma.

We also completed several maintenance project works during the period, including repairs to the car park bitumen and the annual inspections of electrical switchboards and distribution boards.

We are currently planning a promotional strategy to launch ahead of the Christmas shopping season on behalf of the tenants.

During the financial year, the fund's debt was refinanced and extended on favourable terms.



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333 Exhibition Street Property Fund



Fund performance 

Since the fund's inception in 2018, the unit value increased by 12.90% from an initial NTA of $0.93 to $1.05 as of 30 June 2021. Distributions remained constant at 6.8% p.a. for the past year.

Tenant and financial update 

We work closely with the building's sole tenant, the University of Melbourne, to ensure the property meets its ongoing needs. Major lift maintenance, which was in the maintenance budget, is currently underway and expected to be completed soon.

While the most recent round of COVID-19 lockdowns has not impacted the fund, the property itself has not operated at total capacity. That has allowed KM Property Funds to find cost savings for the tenant and undertake maintenance projects, such as the previously mentioned lift works. We also continue to work with the tenant to help attract their internal and external partners to the building.


 

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Cambridge Bedford Property Fund



Fund performance and valuation 

Since the fund's inception in 2019, the unit value increased by 3.30% from an initial NTA of $0.91 to $0.94 as of 30 June 2021. The fund paid income distributions of 8.7% p.a.

The Cambridge property in Hobart was revalued to $23.1 million on 30 June 2021, a decrease of $1.9 million on the acquisition price of $25.0 million in 2019. The reduction in value primarily results from the heightened leasing risk due to the tenant's approaching lease expiry date. The Bedford property in Adelaide, on the other hand, was valued last year at $23.5 million and revalued on 30 June 2021 at {$25.4 million} an increase of 8.1%.

Leasing and tenant update

The sole tenant at Bedford Park, Westpac, continues to operate uninhibited. Westpac is currently working with us to review the building's electrical supply, as they have recently undertaken upgrade works to the backup system.

Meantime, while the sole tenant of the Cambridge property, Hydro-Electric Corporation, continues to occupy the property, KM Property Funds is actively negotiating with the tenant its ongoing space requirements as it approaches the lease expiry in 2024.
 



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Laverton North Property Fund



Fund performance 

As previously advised, Laverton North Property Fund sold the Austco Polar Cold Storage facility to Mapletree Logistics for $42.75 million. Settlement occurred on 23 November 2021. The sale has provided an exceptional result for investors, providing a capital and income return of 113% of funds invested. The before-tax investment internal rate of return was 40.7%, after fees and costs.

Investors received a final income distribution payment and a first capital distribution payment on 29 November 2021, with a final capital distribution payment around mid-2022 after the fund is wound up.
 



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Terrace Office Park Property Fund



Terrace Office Park Property Fund owns Terrace Office Park in Fortitude Valley, Brisbane, a compelling short to medium-term office repositioning opportunity with longer-term redevelopment potential.

KM Property Funds continues to undertake minor cosmetic work to the building and tenancies to assist with the leasing.

We recently completed upgrading the end-of-trip facilities to increase bicycle parking and storage. We also upgraded the foyers and suites in preparation for leasing, with works currently underway in the North Tower. And we purchased 98 works stations which we allocated to incoming tenants. We have also commenced upgrading the existing building management system to allow for the recovery of afterhours power.

In addition to the building works that we completed, a slight change in our leasing strategy from targeting whole floor tenants to smaller part floor tenants is yielding great results.

Over the past few months, we have had three fully executed leases with Aegis, FSG Geodynamics, and Multitech on lease terms of three, four, and five years respectively.

We have six other lease agreements signed, ready to be executed, and several offers to lease that we are following up.

We are continuing a leasing campaign on behalf of the fund and continue to be encouraged by improved engagement with prospective tenants.

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Thebarton Square Property Fund



Fund performance

Since the fund's inception in 2020, the unit value increased by 21.51% from an initial NTA of $0.93 to $1.13 as of 30 June 2021. The fund pays distributions at the rate of 6.00% p.a.

Thebarton Square is located on the fringe of the Adelaide CBD and comprises a complex of commercial and warehouse buildings in the north-eastern corner of the suburb. The fund acquired the property in early 2020 on behalf of a small number of investors.

With a change in property manager and leasing team and a range of cosmetic works completed, there has been an increase in interest from prospective tenants. Heads of agreement were recently signed on 26 Anderson Street, with the expectation of the lease commencing in March 2022.

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Thynne Street Property Fund



Fund performance and valuation

Launched in April 2020, Thynne Street Property Fund had its first property valuation conducted on 30 June 2021, resulting in a significant uplift in value from $39.3 million to $43.0 million. The NTA increased by 19.77% from $0.86 per unit to $1.03 per unit. Distributions remained constant at 7.20% p.a.

Leasing and tenant update

The Australian Institute of Health and Welfare (AIHW), a statutory authority of Australia's commonwealth government, is the property's sole tenant. The staff from AIHW have returned to the property and are fully operational. The property is in good condition, with the cladding works completed by replacing some aluminium cladding panels with non-combustible and compliant materials. 


 

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Ashburton Development Fund



Ashburton Development Fund (Fund) is a project in partnership with KM Property Funds’ sister company, KM Develop Pty Ltd. The Fund was fully subscribed within a few days of its launch in June 2021, with two external capital partners and their clients joining KordaMentha as investors in this exciting project.

KM Develop has a strong record of producing high quality boutique residential properties.

Known as Chapter, this development comprises 24 beautifully appointed executive apartment residences in the leafy eastern suburb of Ashburton, approximately 15 km east of Melbourne’s CBD in Victoria.

Situated at 363-367 High Street, Ashburton, Chapter is nestled beside a lively village hub. It is centrally located to major infrastructure and retail hubs, and adjoins the affluent inner eastern suburbs of Malvern, Glen Iris, and Camberwell.

Chapter presents a masterfully designed collection of contemporary residences. Combining a timeless façade, immaculate interiors, and serene open spaces, future residents will enjoy the same sense of freedom, luxury, and comfort as a single residence home.

Approximately 50% of the residences have pre-sold or are reserved, and Chapter continues to attract strong interest from potential purchasers.

KM Develop is offering KM Property Funds’ clients an exclusive opportunity to acquire a luxury appointed residence at Chapter at a discount to the current market list price for a limited period. The discount is equivalent to the amount of the real estate agent’s sales commission that would otherwise be incurred if you deal directly with the real estate agent. A private viewing of the Chapter’s display suite is by appointment only.

To qualify for the discount and arrange a private property inspection, please contact Simon Ondaatje at KM Property Funds on 1300 132 099.

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General investor matters

Bernadette Spiteri, Director, Investment Services


End of financial year reporting

Tax statements

The investor registry services provider, Boardroom Limited, retains copies of investor tax statements for all years. The tax statements for the financial year 2021 were sent in August this year. If you have not received your document, you can download it directly from InvestorServe or by calling KM Property Funds' on 1300 132 099, or by email at [email protected]

Periodic annual statements

As an investor in one of the following registered funds, you would have received a formal periodic annual statement in September 2021. If you have not received your statement, you can view and download it by logging into your InvestorServe account or requesting a copy from KM Property Funds on 1300 132 099 or [email protected].

333 Exhibition Street Property Fund

NewActon East Property Fund

The Stables Property Fund

Thynne Street Property Fund

Fund financial statements

The following funds' financial statements for the year ended 30 June 2021 are now available on InvestorServe and KM Property Funds. Clicking on the funds' names below will open the financial accounts on our website:

If you requested to receive a copy of the fund accounts, the registry company has sent them to you by your preferred communication method.

Fund RG-46 reports

ASIC disclosure guides, RG-46 reports for the following registered funds for the year ended 30 June 2021 are available on InvestorServe and KM Property Funds' website. Clicking on the funds' names below will open the RG-46 reports on our website:

 


Distribution timetable

Below is our indicative distribution timetable for the next four quarters.



 



Office closure

Our offices will be closing for the Christmas holidays on Wednesday, 22 December 2021 at 12.00 pm and reopen on Monday, 10 January 2022 from 9.00 am.

More information

If you have any questions or wish to discuss this Investor Update's contents, please speak with your financial adviser, or call KM Property Funds directly on 1300 132 099. We love talking with you!



Disclaimer

KM Property Funds Ltd (ACN 164 635 885, AFSL 442806) ('KM Property Funds') has prepared this document. The information in this document is general information only and has been prepared without taking into account individual investors' objectives, financial situation or needs. It does not constitute an offer for the issue, sale, or purchase of any units in a fund or any recommendation in relation to investing in a fund. In deciding whether to acquire units or retain units in a fund, investors should read the PDS or offer document for the relevant fund in full and consider consulting a financial, taxation or other professional adviser. Forecasts, opinions, and estimates provided in this document are based on assumptions, contingencies, and market conditions which are subject to change without notice and may involve significant elements of subjective judgement and assumptions as to future events which may or may not be correct and should not be relied upon as an indication of future performance. Past performance is not a reliable indicator of future performance. Distribution forecasts are subject to risks outlined in the PDS or offer document for the relevant fund and distributions may vary in the future. The information in this document is subject to change, and KM Property Funds may not be required to provide updated information to any person. To the maximum extent permitted by law KM Property Funds disclaims all liability for any loss or damage which may arise out of the provision to or are by any person of the information contained in this document. All figures stated herein are as of 30 June 2021 and in Australian dollars unless otherwise stated.

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Other insights
KM Property Funds launches the Community and Social Services Property Fund Community and Social Services Property Fund (Fund) is a multi-asset, open-end unlisted property fund that will focus on investing in assets that provide goods and services to the community.
Laverton North Property Fund Settles on Sale of Property for $42.795m Trustee of Laverton North Property Fund, KM Property Funds, announced today that the Fund successfully settled on the Laverton North property sale for $42.795 million.