Real Estate

The contrarian story in property right now

Tue 04 Apr 23, 9:31am (AEST)
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Source: Livewire Markets

Key Points

  • Realside Financial Group takes a counter-cyclical approach to property investment and is optimistic about the market even during challenging times
  • The investment group is selective in its approach and takes the time to find properties that meet their criteria, which include strong fundamentals and the right purchase price
  • The fund recently purchased 45 Pirie St Adelaide, with the goal of delivering strong high teens returns in the coming years

Falling property prices, inflation and rising interest rates might be putting off some investors, but not Realside Financial Group. In fact, the investment group is bullish on the market and takes a counter-cyclical approach to property investment.

"We are very much a counter-cyclical buyer. When others are participating, we’re sitting out but that also means when everyone’s sitting out, we participate,” says Linda Rudd, Partner at Realside. And what better time than now, Rudd argues.

Many of their competitors have had to bow out or even sell at a discount to free up liquidity for redemptions, or to fund development pipelines. Supply and demand dynamics also mean that buildings are often selling at a reasonable discount to the their replacement cost.

Having stayed their hands in more buoyant markets - and maintaining a highly selective approach, puts Realside in the position to buy the right opportunities when they come up.

“We often say that you make your money on your purchase price in these markets if you can stick to the fundamentals,” says Mark Vonic, Partner at Realside.

That’s not to say it’s all roses in the property market and when it comes to buying, sometimes it’s a long time between drinks.

I spoke to Vonic and Rudd to learn more about the market and what criteria a property needs to tick to get them excited.

The common thread challenges hitting property

Inflation and rising interest rates might feel like a tired trope but it really has created challenges across every form of life - and every style of investing.

For property, the main concerns are maintaining income and valuations.

“We’ve seen return to work more impacting Sydney and Melbourne than other markets, such as Perth and Adelaide. On top of that, you’re also seeing the impact of tech sector redundancies and headcount rationalisations in finance,” says Rudd.

The challenging financial market has pushed vendors to the market for liquidity, be this for redemptions, to fund an existing development pipeline or manage debt positions.

“Some of these buildings will trade well below the perceived book value and we are monitoring closely to see where discounting lands,” Rudd says.

As commercial properties are typically leveraged, increasing interest rates (the cost of debt) will soften returns and in turn, the overall value. But that’s not the complete story as to why these properties end up discounted.

“Liquidity comes at a cost. You’re going to need to incentivise someone who has access to capital to come into the market at this point in time. That generally means a discount. For those that need the liquidity right now, there’ll be some prices that will raise some eyebrows. If you think about where share prices are relative to their net tangible assets, the market is already signalling that discount. It probably shouldn’t be a surprise to many,” says Vonic.

He expects short-term swings in valuations, with normalisation to come down the track.

Illiquid is not the problem you think

The theme of liquidity can steer investors away from commercial property.

After all, in challenging times, you may need to access your money fast and commercial property is viewed as illiquid (and tying back to why vendors are forced to sell at a discount in challenging times).

Vonic recognises this, but points out commercial property can also be a valuable asset in challenging times - for the right investor.

“Direct property is actually a really good defensive place to be in an uncertain market. There’s the advantage of having stable income, and if you’re able to see through the cycle, then your asset values will hold up. For those with the capacity to act in these markets, these are the buying opportunities, the times when you create real value,” says Vonic.

It comes with a caveat though - The fundamentals are important as is the original purchase price. 

Realside is happy to be patient and wait for the right property at the right price rather than rush.

Holding out for the right property

The right property has to tick certain boxes for Realside.

In fact, their approach is so selective that they didn’t find the right opportunities for nearly two years during the covid pandemic, and chose to switch to industrial development opportunities instead.

Realside’s consistent approach to fundamentals is a key part of its selection process.

“Where does pricing sit relative to underlying land value and replacement cost? That’s a big indicator for us. Then we look at everything from rental growth prospects to data about tenant demand in certain markets. If we can’t make sense around where we think tenant demand is for a market or we think there’s a lot of supply coming to the market without the level of demand, we won’t entertain those markets,” Rudd says.

That’s not to say a prospect must be fully occupied at purchase. Rudd points to the purchase of 87 Collins St in Perth, which was vacant when Realside purchased it.

“We understood the metrics and the level of demand, particularly around tenants wanting a good quality product and were happy to back ourselves to pursue something that has been a success. It’s now 100% occupied,” she says.

Realside is now aiming to do the same with a recent purchase in Adelaide, 45 Pirie St.

Rudd also points to the physical characteristics of a building as being important, such as natural light, floor to ceiling windows, how we can change the worst parts of the building and location. Or even attractive features like views. For example, 108 St Georges Terrace, Perth, which was purchased in late 2022, has sweeping river views and is considered iconic in Perth.

Consistency in volatile markets

While you could view Realside’s counter-cyclical approach as contrarian, it all comes down to a consistent approach to fundamentals and what opportunities that generates in different points of the cycle. The cycle and market noise is secondary to the assets themselves.

“If you don’t understand the individual asset within the market, it doesn’t matter what the market does, it will still underperform. It really does come down to the individual asset because that’s what we can control. We can control how hard we work, how creative we are, how much capital we invest. We have levers we can pull. Active asset management is what we can control. We can't control the market, other than choosing the timing of when we participate” Vonic says.

Being brave for the right opportunity

The decision to buy 108 St Georges Terrace Perth was considered a once-in-a-generation opportunity for Realside.

“A number of things about this building intrinsically are very appealing. The opportunity to buy those buildings does not come up frequently. It’s not about waiting for the market to give you the green light,” Rudd says.

The financial metrics were also ideal.

“The previous owner had spent an inordinate amount of capital. Something like $110 million. When you spend $340 million for something the previous owner spent $110 million on, that’s a lot of capital you’re inheriting,” she says.

It’s also very unusual to purchase at a 7.5% cap rate on a premium-grade building so Realside thought it was an opportunity they needed to act on.

The next steps for Realside involve refurbishing and repositioning. For example, adding amenities like cafes and gyms, and upgrading the end-of-trip facilities.

The latest catch

Realside has recently purchased 45 Pirie St Adelaide, with the goal of delivering strong high teens returns in the coming years. Rudd notes the property has been purchased at a 50% discount to its replacement value and she anticipates that active asset management will see strong market demand for tenancy.

“As per the data we’ve reviewed, in 2023, there’s around 140,000 square metres of leases expiring and then effectively, 80,000 square metres for the two years following 2023. 45 Pirie St has 76% vacancy and there’s 15,000 square metres we need to lease. Of the leases expiring, we feel confident in capturing some of the market as those tenants are looking for a good quality product,” says Rudd.

Buying at a discount has allowed Realside to focus more funding on improving building amenities and tenant experience. Rental levels will be set to offer a value proposition for prospective tenants to get into the building.

There may be more in the pipeline to come given Rudd and Vonic’s enthusiasm for activity in the current market.

Realside is a bottom-up asset selector with properties predominantly located in Perth and Adelaide. The current market challenges have thrown up opportunities in places Realside has focused less on in the past.

“We are now focusing more on Melbourne and Sydney than we have in the last short period of time. We haven’t spent much time in the past in these markets because we’ve been priced out. Now is our opportunity for exposure,” says Vonic.

Property in challenging times

Challenging times are often a period where you need to hold your nerve. And that applies across asset classes. Property is no exception.

Vonic points out that cycles are a guarantee.

This is just another cycle. There’s been others. There’ll be more again. We know how these things play out.

For Realside, challenge brings opportunity and is where the big money can be made in direct property.

“It’s an exciting period where we can expand our business. We are aware of the noise. We’re not oblivious to it. But if groups like us aren’t buying now, then we’re never buying,” he says.

LEARN MORE: The Realside 45 Pirie Street Fund is currently open for investment, until 8 May 2023 for wholesale investors, with a minimum $100,000 investment. For more information or to contact Realside, please click here

This article was first published for Livewire Markets on Tuesday, 2 April.


Written By

Sara Allen

Content Editor

Sara is a Content Editor at Livewire Markets and Market Index. She is a passionate writer and reader with more than a decade of experience specific to finance and investments. Sara's background has included working at ETF Securities, BT Financial Group and Macquarie Group. She also holds a degree in psychology which drives a continued fascination with how human behaviour drives and is driven by investments and market activity.

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