Welcome back to The Rated Change with York Wealth
Management. As advisors to some of the wealthiest
families in the country, The Rated Change is
a podcast designed to help you in the pursuit
of building long -term wealth through the insights
of some of the brightest minds in asset management.
In today's podcast, Ryan Bass is joining us again
from Panjen Capital. People that listen to the
podcast regularly may be familiar with him. We
had him on last year. But I was just having a
conversation with him regarding, you know, how
the markets are going in this, you know, wartime
market scenario. And Ryan had a number of interesting
comments about the asset class that he's working
in and essentially the opportunities that he's
seeing in, which is, you know, increase the return.
you know, availability of returns for some of
the assets which he's managing. So really good
to have you on, Ryan. And why don't we begin
as we always do and tell everyone a little bit
about yourself, you know, for people that may
be joining us for the first time. Thanks, Murdoch,
and great to be on again. Just a quick background.
Prior to setting up PanGen Capital, I spent 16
years as a senior property investment professional
at Unisuper, where I was involved in over $8
billion of equity transactions, ranging from
some of the largest real estate assets in the
country, such as at Caranup Shopping Centre.
We bought a third of that, and then about 10
years ago, did a... eight nine hundred million
development we did uh uh the pacific fair and
macquarie center acquisition with sea bus which
was the largest australian retail property transaction
in in australian history probably about five
six years ago we we've done you know developments
across office towers and industrial sheds. And
this is across direct assets, unlisted property
funds. And also I was an active A -REIT manager
for the last 10 years at PanGen. But for many
years, I've been thinking about this incredibly
high quality asset class, which is institutional
grade real estate. That's in Australia, core
real estate. So that's established shopping centers,
office buildings, industrial sheds. And these
are held by in institutional funds that, you
know, the small investors like you and I typically
can't get access to. You need typically 10 million
or more just to get into one. You probably need
30 to 40 mil to build a portfolio. And these,
you know, these funds that are mature cycle tested
asset class, just within the index, there's about
70 bil of equity over 100 bil of property assets.
And we think the sector or the outlook for the
sector is providing some pretty compelling risk
-adjusted returns going forward. So before we
get into what we're discussing and the changes,
I think when we spoke, you were in the process
of just listing the fund. So what is the fund?
How does it work? And how did the listing go?
Yeah, great. So the fund is launched. We've now
got over seven months of track record, pushing
on, I think, the returns to the end of February.
Essentially, it's a monthly fund with monthly
applications, quarterly distributions and quarterly
liquidity, up to 5 % of the fund nerve. Returns
have been really healthy to date, a bit over
4 .5 % to the end of February. you know, that's,
I think, pretty attractive when compared to,
you know, what the markets have been doing sort
of generally. And we are looking at a pretty
sort of strong outlook. So we launched the fund
seven months ago. We're now... getting sort of
good traction. We've got a lot of high net worth
investors in it. We've got some family offices
and we've got increasingly financial advisors
using our product through directly and also through
platforms such as we're on Hub24, we're on Premium
and PowerUp and we'll be expanding to other major
platforms like NetWealth sort of going forward.
So that's sort of really where we're at. And
we're just, locked in our second cornerstone
investment, which we'll be finalising shortly.
And that's the GPT Wholesale Shopping Centre
Fund. So how much money has been raised for the
fund so far? Post this sort of second round,
we're getting north of 20 mil, probably more
like 25 mil. And we're sort of building it organically
going forward. Nice. So the early moving money
that came in, what assets have you purchased
with that $25 million? So our initial cornerstone
investment is essentially it's called the Texas
Wholesale Property Fund. This is probably one
of the best. if not the best diversified core
property portfolios in the country. It's got
13 billion of assets, around 10 billion of equity,
40 properties, over 2 ,500 tenants. And some
of the properties, many of your listeners will
know, Gateway, Key Quarter Tower, 33 Alfred Street,
Westfield Miranda, Ravenhall Logistics in Melbourne,
Waterfront Place. So it really is just an exceptional
portfolio. portfolio, which has outperformed
pretty much over all time periods. And importantly,
I guess this asset class, but this fund as well,
has delivered through the cycle, even in really
tough times like the GFC. These assets are really
strong. We've also got a number of REITs in the
portfolio. That's a small component of it for
additional liquidity. And that's focused on rent
collecting REITs and also a bit of portfolio
completion. Nice. So how's it faring in these
wartime markets? Yeah, so I've had quite a lot
of investors asking that question. And I think
this is... This is a period which really highlights
why this asset class, we're talking about high
-quality core real estate with low leverage,
why it's such an important part of the portfolio.
Firstly, you're not taking a lot of development
risk. You've got established assets in great
markets with a lot of blue -chip tenants. banks,
you've got government tenants, you've got Coles,
you've got Woolies, you've got all types of,
Amazon, one of the assets holds, one of the funds
holds an Amazon shed in Melbourne. So you've
got blue chip tenants, high quality assets, and
really there's almost no income sort of concerns
in this portfolio. So the performance of this
fund has been, you know, doing exactly what it
should. It's doing what is there on the tin.
Nice. So, yeah, so everyone's been seeing what's
happening with the Strait of Hamas. You kind
of can't look at it. I think the market's off
quite considerably today. And we are recording
on the 23rd of March. So I think, you know, Trump
and his government has given them 48 hours to
essentially let ships through. Hopefully that
gives a bit of reprieve for the diesel price.
But where I'm going with this, I was just curious,
just in the back of my head and maybe other listeners
are thinking the same, does things like diesel
prices, you know, potentially impact, you know,
these property assets? Because I understand,
because we're having a conversation, the reason
why it popped up, you said Amazon, right? And
we've been speaking to a number of other businesses,
obviously all the transport costs and it just...
They have to pass it on. It's hitting the airlines.
I think, you know, Qantas came out and said they
had to pass it on. Huge amount of backlash. I
was just wondering in the back of my head, does
this impact essentially any property assets potentially
like indirectly at all? Look, maybe indirectly
to some degree, but, you know, ultimately our
fund. invest in funds that own real estate that's
leased to the tenants. So these are big corporate
tenants that have to pay the rent. They're contractually
bound to pay the rent. Another point to mention
is that because these are institutional grade
real estate, the sustainability credentials of
these properties is second to none. You know,
we've got, you know, a lot of these managers
have a net zero policy. Their assets have been,
they've been sort of improving the sustainability
and energy efficiency of their assets for, you
know, sometimes decades and when they've built
new assets. So I don't see that as a concern
or an issue for... for our sector. Yes, it might
push up the costs to some tenants of their, you
know, operating. And I think when it comes to,
let's say, logistics, that reinforces the need
to be in really prime locations, close to population
centres and with good transport links, because,
you know, industrial... tenants or logistics
tenants want to make sure that their costs are
as as low as possible and how do you do that
you you you lease the best assets in the best
locations that makes a lot of sense so yeah when
we're chatting offline the whole reason when
we got uh asked you to come back on is you're
saying something very interesting about the uh
your new asset you're considering purchasing
like what is happening because You know, I remember
when we were discussing this, you know, the yields
were, the returns were potentially lower than
the private credit market, you know, the eights,
nines, tens. But then you were mentioning, you
know, some assets, return profiles, you know,
spitting out potentially double digits. Like
what's happening in your space now and what's
changed? You know, there's probably one word
to summarize why we're so excited about this
asset class and it's supply. So we're seeing
an increasingly constrained supply pipeline.
And as you know, with inflation and build costs,
it's just getting more and more expensive to
build. So if you're owning some of the best quality
assets and there's less supply going on and the
tenants want to, you know, real estate's a pretty
simple asset class in some ways. Tenants want
to gravitate. They want to occupy the best properties
in the best location. balance is shifting really
in the favour of the landlords. We're seeing,
you know, more than double digit growth in parts
of the office sector in Sydney and Brisbane,
for example, for those really sort of, you know,
key assets, actually. retail, particularly the
dominant malls like the High Points and the Westfield
Mirandas, you know, these shopping centres and
the Chermside Parks, these shopping centres are
basically full. There's tenants in there who
want to expand and there's tenants not in these
assets who want to get in. And I was actually
talking to a retailer a few weeks ago, I was
looking to lease some space and he's telling
me that in order to get space in some of these
highly productive malls, they have to pre -commit
two to three years ahead of the space becoming
vacant. Otherwise, they won't get it. And that's
really for the prime sort of asset. So what that
is translating to is much stronger rental growth
prospects. going forward. And then we've got
to also, as you know, the last few years since
the pandemic, interest rates have risen significantly.
So we've seen cap rates blow out significantly,
you know, yields, that's your incoming yield
on a property. So you've got, and to give you
an idea, office cap rates probably blew out 150
basis points to where they are now. Retail, probably
50 to 75 basis points. And that's an industrial,
probably 150 basis points. So as you know, cap
rate is kind of the inverse of a price earnings
sort of multiple. So it's, you know, so I guess
you could say there's been multiple, sorry, the
cap rates have expanded. So you've got a higher
incoming yield or yield you're paying on these
assets. But importantly, the rent growth prospects
are way higher. So that's why we are seeing in
the market now, a lot of our managers are predicting
based on pretty reasonable assumptions, double
-digit returns for their funds. And to put that
in context, these are funds that aren't taking
much, if any, development risk. They're existing
assets, already built, with good rent rolls and
growing income levels. So when you think about
that greater than 10 % plus on a risk -adjusted
basis, I would say... it stacks up really well
against probably private credit and a lot of
the higher returning, you know, let's say property
sectors like that require a lot of development
or have secondary assets or higher gearing. So
I think from a risk -adjusted return, you know,
I guess one analogy is let's say you're shopping
around for a term deposit and you're going to
the four big banks and they're all offering you
four and one of them, offering you you know five
and a half you know what do you take so it's
similar so it's the risk adjusted uh return prospects
i think are really attractive at this point in
the cycle what i'm trying to work out is is this
temporary or do you think this is ongoing and
why i'm asking the temporary we see it all the
time where essentially you know one particular
asset class you know has its day in the sun and
then all of a sudden you know two years from
now you know, pulls back again. And why would
it pull back? And some people may think, if you
think about logically, as you mentioned, supply,
demand and supply, there was the entire thing
pushing for years when essentially, you know,
we discussed Amazon and you got, you know, online
shopping, you know, people going less to the
shops. There may be, say, less foot traffic,
you know, hitting these particular shops. So
people theorized. That maybe essentially, you
know, the good old -fashioned retail shop may
not see the foot traffic in a whole lot of the
business online. Then the other side as well,
maybe that isn't the case and people actually
like to touch and feel and buy. Fair point. But,
you know, what are the also, what about the other
indirect, you know, implications of like we do
have a walk -on, right? You know, cost of fuel
is going through the roof. Are people going to
the shops as much? Or are the behaviors of how
people, you know, shop going to start being more?
you know, deliver it to me so they don't have
to pay for fuel and that have a natural impact
on essentially these rentals. I'm just trying
to wonder, you know, it's really cool that you're
finding asset classes that are in the double
digits and you're seeing private credit start
to, you know, pull back. A lot of great private
credit assets are out there, but I'm just trying
to ascertain, is this, you know, here for a long
period of time? Is this an actual change in a...
Is this happening because of the asset class
or is this a short -term type return for this
asset class? I think there's a few points to
make. Firstly, the cost of construction is really
high and that's a pretty hard issue to fix overnight.
That's going to take years, if not decades, to
really fix. We've got a structural undersupply
in housing and we've got... possibly a structural
undersupply in commercial real estate as well.
So I don't think that's going to change anytime
soon. Inflation is another interesting point
because rents tend to be... have a correlation
with inflation. Because if you think about the
cost to build, your rents, currently the cost
to build is higher than what you call the economic
rent. So rents have to rise a lot before it actually
justifies building new supply as well. So in
your rents, you've got sort of a structural,
I guess, correlation with inflation there. I
think, yeah, maybe in the short term as inflation
increases, that might impact some degree of consumer
spending. But remember that these, in the case
of, say, shopping centres, these shopping centres,
they actually don't have as much discretionary.
sort of sales as you think that you know take
for example you know a high point or chadston
or a bondi junction they've got supermarkets
uh they and they they've got a lot of you know
fresh food stores they've got a lot of non -discretionary
uses as well health and well -being services
medical services so the the resilience of income
of of shopping centers has actually been pretty
strong so okay so Just trying to get my head
around it. So you're saying that new shopping
centers or new assets are being built. The costs
are essentially higher in order for the shopping
centers in order to retain their profit margin.
And you're saying as well that a number of these
retailers are essentially so big like, you know.
grosses, coals were worse, et cetera, et cetera,
that when you stick in a new shopping center
like, you know, one being built in Ipswich or
Queensland or something equivalent, that, you
know, people are flocking there to live, et cetera,
et cetera, that they're naturally just going
to have to go to shop somewhere, right? So as
long as essentially the demand to purchase goods
is there and then the retailer… or the property
owner essentially controls the site, they have
to pass on the cost. So thus the rent is the
rent. And if you want to be in our shopping center,
that's just how it is. And you're saying that
a lot's changed from the COVID times and now
the demand there from an occupancy standpoint
is substantially higher unless like another COVID
thing kind of hits. And then hence, is that the,
in a nutshell, in terms of the logic on why?
You're seeing double digits on these assets now
when that may not have been the case the past
couple of years? Yeah, I mean, it comes down
to that supply side issue. You know, it's just
the good shopping centres are basically full
and in order to create new supply, rents have
to go a lot higher. to justify creating more
supply. And as a result, there's less supply.
So the retailers are kind of competing more for
the same space to occupy. Meanwhile, and this
is a really important point that I haven't mentioned,
Australia's population growth is still really
strong. So, for example, Australian population
growth is one of the highest in the OECD. It's
probably around 1 .3 % per annum over the next
five years. That's more than double the rate
expected in the US. UK and continental Europe
are sort of close to zero, slightly positive.
And in fact, countries like China, Japan, Korea
are actually going backwards in terms of population.
So population growth is a really important aspect.
As you add more population to a country, people
need to consume more space, whether it's in housing,
whether it's in retail, whether it's industrial
sheds. or office buildings as well. And that's
a very long -term, well, it's a super long -term
trend. Is this rise in, well, yields theoretically,
is this happening with legacy assets or is this
predominantly just new builds that they're essentially
passing on? Well, it's legacy assets. So let's
say High Point Shopping Center, you know, this
is an asset that's been around for decades or
be around for, you know, my lifetime and probably
longer. You've got, you know, it is, so to answer
your questions, particularly for existing assets
that have good... population growth prospects.
So you've got populations growing all around
them and they still need to access those sites
to do their shopping. Right. Okay. So the asset
which you've purchased, are you forecasting any
increase in returns from that particular asset
or is it just on the asset you're looking at
purchasing right now? So when you talk about
assets, remember we're investing in funds that
own real estate. So the Texas Wholesale Property
Fund, as I mentioned, owns about 40... properties
across office, industrial and retail. Our next
fund that we've lined up to invest in is the
GPT Wholesale Shopping Centre Fund. It's got
assets like High Point Shopping Centre, Rouse
Hill Town Centre, MacArthur Square. This is a
brilliant portfolio of assets. So that will be
our next sort of fund investment. And we believe
that both the existing and the new fund is likely
to do double digits. returns in the short to
medium term it's crazy how much everything can
change in just seven months in like a heartbeat
well yeah i i think i think one of these look
based on our i'm just saying like in context
right based in our conversation what you're looking
at everything out there like that's a sizable
jump anywhere between like two three some potentially
like four percent rise in less than a year i
think that sort of reflects I mean, I'm a pretty
conservative person. I like to, you know, when
we launched the fund, we were thinking it's going
to deliver 8 to 10 over the medium to long term,
which I think it will. And that's kind of what
this asset class delivers over the long term.
But I think what I didn't appreciate is the supply
side constraints that are coming through the
system. And I didn't quite appreciate. that the
rental growth is going to be as strong as it's
coming, you know, working out it's going to be,
as it actually is happening and likely to be.
So, for example, in that sort of 8 to 10, I was
talking about let's call it 2 .5 rental growth.
I reckon we're in a period where for the best
assets, you're going to have rental growth per
annum of let's call it 4 to 5 and with upside
risks there. 4 to 5%. per annum per annum so
if this trend what you've seen continues what
are you forecasting for you know say 2027 so
um that's what i'm trying to work out yeah is
this gonna stabilize essentially in the 11s and
12s you know for a number of years or are you
forking asking this you know kind of ticking
along and growing i would say this double digit
uh returns per annum are likely to continue in
the short to medium term how long that is you
know let's let's call it three plus years um
it could be longer uh but uh you know it's pretty
hard to forecast the future so as as you know
that's my job mate to get you on the market Well,
you know, I'd be a very wealthy person if I could
accurately do that. That would be crystal ball.
Yeah, exactly, yeah. I've got to polish it a
bit. So you said double -digit growth a couple
of times. I'm narrowing down on this a bit, right?
But what does that exactly mean? Because some
people hear double -digit growth, they're like,
hey, it's going to pay 18. You're like, no, no,
no. Like what do you mean by double -digit growth?
I'm talking about double -digit total returns,
okay? So that's income. Not growth, apologies,
double -digit income, yeah. So income plus capital
growth. let's say you start off with a property
delivering, let's call it about a, you know,
six and a half, what you call cap rate. If you,
if you, no, let's call it about five and a half
to six cap rate. If you adjust for CapEx and
things like that, that property, for example,
is delivering a free cash flow of let's call
it, you know, four and a half to 5%, right? Then
you've got, So if you've got and then you've
got income growth on top of that, let's call
it rental growth of four to five. So in theory,
you know, you're talking on an ungeared basis,
probably about, you know, what, nine to ten total
return on an ungeared basis. And that's not allowing
for some of these assets have developments underway
or, you know, extensions and refurbishments that
add returns. Like, for example, the. In the GPT
Shopping Center Fund, they're doing a $200 million
extension at Rouse Hill Town Center. And that's
going to generate really strong returns on an
ungeared basis for investors. Then you might
also get some cap rate compression. Whether that
happens in this environment is another factor,
but you should for the sort of better quality
assets. So you're talking an ungeared return
of let's call it nine to 10. When you add a bit
of leverage on top of that, that's when you get
to sort of the double digit returns after fees.
So when you say leverage, people might, you know,
maybe misunderstanding do you mean you're taking
leverage in your fund of funds or you mean the
assets you know which are held in the fund which
are acquiring hold leverage so currently uh our
funds there's no leverage at the fund level uh
we can sort of lever it a little bit for, I guess,
tactical type reasons, but ultimately for tactical
purposes, but ultimately the underlying leverage
of the underlying funds we're investing in are
very conservative. And I would say it's, you
know, 25 % or less. So on a look through basis.
So, you know, this compares to many other property
strategies we've seen, which has, you know, 50
% plus in leverage. And obviously that's going
to be pretty impactful. sort of on the upside,
but also the downside. If you've got, you know,
particularly secondary grade assets coming off
more than, you know, in this environment and
you've got interest expense going up, you know,
that would be very impactful for those strategies
with lower quality assets and higher gearing.
And this compares to, you know, our sector, which
is, you know, some of the best real estate in
the country in lowly levered structures. I love
this space. You know, if you're Australian, you
love property. It's so funny. I speak to clients,
right? And you're having a conversation about
stuff. Most of you would find this on the other
and everyone goes, I need to do it. As soon as
you mentioned property, there is just, you know,
start ringing and they just start asking questions
because all Australians love property. But what
I wouldn't mind unpacking and digging into since
we're here, do you want to explain to people
essentially the process of one of these funds
has an asset, right? And it's just happened at
Chatswood as well, Chatswood Shopping Center,
David Jones, if anyone lives around, right? It's
going through a massive process of a revamp,
which probably happens, what, every 10 or 15
years. How does that work from a business standpoint,
right? Because if we're investing into these
funds, and I don't know the number, like what
percentage do you reckon of these, you know,
assets inside of these funds kind of get a makeover,
you know? on a year? What are you looking at?
Maybe 1 in 40, 2 in 40? How many actually get
makeovers? So as a... Generally, these funds,
because they core assets, so they established
assets, established properties, there's a bit
of developments from time to time. So you can
expect a low level of development activities.
Let's call it 5 % to 10%. So, for example, in
the DEXA fund, they're currently developing Waterfront
Place in Brisbane. That's a really big sort of
development. They've got potential future plans
in the GPT fund. They're doing a $200 million
expansion. at Rouse Hill Town Centre. So that's
an expansion to existing asset. In the DEXIS
fund, which I mentioned, they've been developing
out the Raven Hall Logistics Precent, which there's
14 sites. They started off, I don't know, 10
years ago, you know, basically with a big block
of land and they subdivided that and built one
shed and then built another and built another.
So it depends on the site and what you can do.
If you're doing a new office building, obviously,
You know, you press the button and you're spending,
you know, you're committed to spend hundreds
of millions. But, you know, let's say industrial
is quite sort of risk adjusted from, it's good
from a risk adjusted perspective because, you
know, you build sheds as you need them. You don't
have to, you know, build this big office tower.
You just build a shed incrementally. And I think
that's similar for shopping centers. You know,
you can build a bit of extra space. You accommodate,
you know, you might pre -lease it to JB Hi -Fi.
or Kmart, et cetera, and fill it with a few specialties.
So, yeah, there's different development risk
profiles for each sector as well. Does that answer
your question? Kind of, yeah. But what I was
trying to work out is the cash drag, right? So,
you know, say out of the 10%, let's just assume
just for basic numbers, right? Let's just look
at two scenarios. This is the fun part. This
is what I love learning. So let's just say one
of the assets is like, I'm just saying Chatswood
grew up there, right? You know, seeing it happen,
right? So say Chatswood's in the process of getting
revamped, right? And let's just say, because
everyone knows essentially Olympics are coming.
They're not two assets in the portfolio I'm just
using because, you know, I've been discussing
it quite a bit. Let's say, you know, you're building
one out near, you know, Ipswich. It's a brand
new. huge shopping center, et cetera, the Queensland
way, sticking in a Woolworths, et cetera, et
cetera, a large block of land going to cost $200
million, right? So how does the numbers, I suppose,
and is there a cash drag or a drag on the profit
return investors will be expecting to receive
based on those two scenarios? I don't know. Maybe
let's tackle one before we tackle the other.
But it's just very interesting to understand
how that you know, works because this is going
to be continuously happening for the life of,
you know, holding this fund of funds. Yeah, no,
that's a really good point. So let's take an
existing shopping center like Chatswood. So,
you know, let's say it's worth, I don't know
what Chatswood is worth. Let's say it's worth
a billion dollars and they want to spend $200
million doing an additional, you know, renovation
or extending the asset. when the when so what
might happen is um there might also be some tenants
adjacent to that sort of development that you
know get some rent abatements and things like
that because obviously it's going to be pretty
hard to trade while that sort of part of the
shopping center is getting uh you know extended
or rebuilt and also the capital that the landlord
is is uh spending money to you know paying to
the the you know the the the construction company
and to the to the leasing they're paying out
capital that's not earning an income return straight
away but what they do is that incremental 200
million or whatever it is i mean a good example
is in in rouse hill town center because that's
in that's in the GPT Shopping Centre Fund, that
capital that they're spending is going to return,
give a better total return of the life of the
project than the existing asset because they're
taking more risk. So let's say the existing asset
is likely to do 7 % or 8 % on an ungeared sort
of basis, you know, and that's a pretty sort
of, I think, conservative at this time. You know,
that development might be... you know, low to
mid double digits on the capital they're spending
on that development. But then once it's done,
that asset, you know, that extension will then
become leased, it'll become income producing,
and it will actually provide benefits to the
whole shopping center. So it will actually lift
the trade of the whole shopping center and improve
returns for that owner. So you're right, there
is a bit of a cash drag for the owner for the
capital that they're outlaying. there so that's
that's an existing center then going to the example
of of a sort of a what you call a greenfield
shopping center you know there's been an owner
who's you know they've they've found the site
they've got a service they've got a zone for
retail you know it's basically a paddock not
producing any income. So they would build that
into their cash flows that they've got to spend
money doing all those, getting those pre -approvals
and the infrastructure, et cetera. And then they've
obviously got to spend money on the construction
and then on the leasing side. So eventually when
it's done, that asset will be an income producing
asset that they can either hold or sell. So in
that second example, the greenfield development,
that's a lot more risky. So you would want to
get a higher return for that project. So with
these two, thanks for that, with these two scenarios,
whilst these are happening in the fund of funds,
are these assets held and the costs being incurred
in these fund of funds whilst essentially the
development or essentially the refit out is occurring,
essentially incurring costs for that three or
five year period, right? So essentially those
two assets, maybe 10 % of the portfolio may be
a cash drag in the short term, but then essentially
it's forecasting to be a longer income producing
in the longer term. Correct. Right. So just trying
to get everyone's head around it. So when you're
going into this thing, assume potentially like
5 % or 10 % will be a continuous on the negative
side, but that's to build larger. Income flows
going forward. Yeah. Is that how that works?
So that's right. So let's say you don't develop
those assets. The existing portfolio will be
returning on an ungeared basis. Let's call it
8%, 8 % or 9 % on an ungeared basis. When you're
putting capital into those developments, you
need a premium. in terms of total return over
and above what you're earning on these stabilized
assets. So you're right. Like, there's going
to be a bit of cash drag in the short term because,
you know, you're spending capital that's not
income producing. But when it's all done, when
the project's complete, you're going to get that
really sort of good uplift and that's going to
boost your total returns. Now, remember that...
Institutional investors are more total return
focused. They're not worried about, you know,
are you going to get your five cents per unit
this quarter and 5 .1 cents per unit next year.
They're more focused on that total return, income
plus capital growth. So they're happy when it
makes sense, you know, to get the manager to
spend money on developments to earn that higher
return. That's very interesting. The longer term
picture of this, they say essentially these types
of assets are the ones you buy and hold for a
long period of time and just kind of don't worry
about it and just let it kind of tick over, right?
Absolutely. The properties that these funds hold,
these are trophy assets that you really want
to hold, I think, forever. I mean, High Point
is a forever asset gateway. It was built, I think,
you know, the DEXA's fund has owned it since
its inception in the mid -90s. I don't think
it ever wants to, you know, sell that asset.
It's just a, you know, brilliant asset in the
heart of the, you know, right on circular key.
And same with these shopping centers and great
logistics centers. These are assets. that, you
know, I believe you hold forever. When I was
at uni, super, you know, it had held. Carinup
Shopping Center, I think since the 90s, I think
Malvern Central, which is another shopping center
asset, same since the 90s, you know, unless they
get an absolute knockout offer, why would you
sell these assets that are just going to continually
generate nice growing cash flows, you know, into
the foreseeable future? And remember, as I said,
rents and ultimately the capital value of these
assets are linked to inflation, probably above
inflation. So you've got this nice, steady cash
flow that's growing and providing this fantastic
cash flow for its investors. The other thing
I was turning to a couple of the property guys
in private credit, what's happening with the
flow of capital into Australia? And I'm wondering,
is this also, as well as inflation, creating
a bit of this tailwind? And where I'm going with
this is... Over in the States, the Trump administration
essentially banned Blackstone, I think it was,
from purchasing blocks of family homes for 350
grand and selling them to one of their internal
companies for 700 grand and doubling the rent
overnight. Homes are for people to live in. I'm
wondering whether or not the money, which was
going to the States, has potentially turned its
gaze onto... And I'm wondering, you know, from
your perspective, are you seeing that? Because
I'm hearing quite a lot of it, you know, stuff
coming from, you know, Korea, Singapore, the
States, Charter Hall, a lot of the representatives
are coming across. Blackstone, I think, just
bought, what was it up in Cairns? They just bought
the entire island. Right, all got a lease for
like 100 years. Do you think a lot of the money
is actually turning its eyes towards Australia?
And, you know, if so, what's the impact of that?
Well, I mean, in terms of fundamentals, while,
you know, we may in Australia complain about
sort of our economy and what's going on, you
know, again, you think about Australia at a high
level. We've got one of the highest population
growths in any sort of developed country. you
know, live in a very desirable location. There's
a rule of law. We're commodities rich. We've
got a fairly young sort of population relative
to other populations and sort of an educated
tech savvy, you know, workforce. So I think Australia
does offer... you know, a lot of benefits when
you compare it against a lot of other countries.
And yeah, I think there'll be continuing interest
and capital flows into Australia from investors.
But I think it's also worth pointing out that
there's many institutional property... sorry,
institutional investors in Australia, like big
super funds, that some of them are still underweight
real estate as well. And particularly, actually,
I think retail in particular is a high quality
shopping center. So we're seeing a lot of these
institutions thinking about their exposure to
high quality core real estate and how likely
to be demand going forward as well. Are you seeing
any foreign interest, interested in the PanGen
fund of funds? Are you seeing money turning an
eye over here and then instead of going, okay,
do I buy direct or, you know, are they coming
through you or is your view predominantly for
the advisor and, you know, essentially, you know,
scalability? Because obviously the larger institutions,
they can cut the $10 million check to get access
to these things. So it's a really good question,
actually. Our fund currently is open. to Australian
wholesale clients. At some point we will look
to expand our remit to offshore. wholesale clients
and speaking to quite a few different people
and groups who they believe that you know places
like Hong Kong and Singapore for example could
be good markets for us for our product particularly
like Singapore there's a huge amount of you know
family office money and Australia screens sort
of very very well so yeah I think I think I think
our fund can potentially make itself available
to that sort of capital. And I'm hearing that
there should be good demand for our fund. I'm
hearing as well, because of the conflict, a lot
of money in Dubai is also starting to turn its
gaze towards Australia. Are you hearing that
as well? I haven't, but that's good to know.
Maybe something worth investigating in future.
Well, you've got to love their lack of tax over
in Dubai. That's always beneficial. But at the
end of the day, I think a couple of families
we were speaking to were like, look, we love
it over there, but I just don't like thinking
it's a shooting star in the sky when it's just
a missile. Yeah, exactly. Okay, so when will
you think potentially opening up to international
or is it just going to be domestic for now? I
think for the time being. It will be domestic,
but it's something on our radar for future as
we grow the fund. We want to continue to build
scale. I mean, there's plenty of potential scale
within Australia just in the wholesale market.
Maybe in future we might. to create some other
products that may enable, you know, retail investors
to come into our products in future. But for
the moment, you know, we're seeing good demand.
But I think we also got to be very... mindful
to ensure that we are compliant, I guess, with
investing in the funds that we invest in because
they have some pretty strict criteria to be able
to invest in their funds. They've got to, yeah,
and I guess one reason why it's important for
us to be structured correctly to go into these
unlisted institutional funds is that that it's
a very efficient asset class to access this property.
And what I mean by efficient is there's essentially
no stamp duty when you're buying into these incredibly
high -quality funds. you're buying in essentially
at the book price and that's without stamp duty.
So it's a bit like buying Gateway or Highpoint
without stamp duty. And it's because these funds
have owned the assets for decades and they've
already sort of incurred those transaction costs
as well. That's actually a very important point,
the stamp duty. We were chatting to a... a number
of families down at Balmoral Beach. I think one
of her brothers works for a major. I think it
was Charter Hall or something equivalent. And
a number of Americans, when they turned their
gaze to Australia, they couldn't get their head
around stamp duty because it kind of doesn't
exist over there. So are you finding that with
a number of investors, essentially avoiding the
stamp duty component is one of the most compelling
parts of this type of strategy in comparison
to going direct? Well, I suppose you can't, you
know, wholesale clients don't have the capital
to go direct to buy a shopping centre, but is
stamp duty, you know, a very big draw card on
having to pay that? Well, I actually think it's
underappreciated because, you know, if you're
pricing to buy a property, there's, you know,
you tend, you would normally. you know, price
in that 6 % stamp duty or whatever it is, plus
acquisition costs, and then you price in the
exit costs at the end. If let's say your acquisition
costs are 6 % over a 10 -year basis on an ungeared
sort of property return, so taking away any leverage,
you know, that's giving you about 60, 70 basis
points of higher sort of annual IRR. So I think
it's pretty much underappreciated, the efficiency
of getting into these type of funds. Well, let's
keep going with this because like say you're
in Military Road, right? A number of friends
essentially do acquisitions along there. Quite
expensive trying to buy essentially a mixed use
or do a development, right? You know, that can
cost anywhere from $18 million to like $40 million,
right? So if someone has, I know, let's just
use a number. Say you've got $10 million, right?
And they're looking at purchasing, you know,
something commercial. which also can potentially
produce income around about, you know, the 9s,
10s, 11s, right? Why would an individual, you
know, why wouldn't they essentially go direct
and essentially purchase, you know, the commercial
asset, right, over, say, you know, doing this?
Look, the people, in my understanding, the people
I've been speaking to, This is a real problem,
right? And this is what they're deciding, right?
I've got $3 million, which I can lever up and
go direct, you know, borrow from the bank. My
assets are great. Or they have the capital and
can go higher. Why would I do this? Why shouldn't
I just go buy a commercial property where I essentially
own it, you know, and get the uplift, et cetera,
et cetera? Like, why should I fund a fund's large
shopping centers, et cetera? Or why wouldn't
I go direct? That's the main question I'm currently
getting. So there's a couple reasons. One is
that investor with $3 million can't buy High
Point or Westfield Miranda or Gateway. They just
simply can't. And the cash flows and the growth
prospects, I believe, of the best quality assets
are just more attractive. There's more tenants.
There's more people wanting to occupy that space.
So you're going to have a much more... resilient
cash flow profile and growing cash flow profile.
And then when you think about the transaction
costs, so typically, let's say a property syndicate.
So an investor wants to, is looking at our fund
versus a property syndicate. Property syndicate,
they go off and they buy an office building,
let's say in Macquarie Park. They'll pay stamps
on that. There'll be... manager fees on top of
that that syndicate will tend to be 50 plus geared
and then from day one your nta is essentially
around 85 cents in the dollar so it's a bit like
you know you buy a new car as soon as you drive
it out the car out of the dealership you know
you've lost essentially 15 % of the value of
that asset on day one with a property syndicate
where you have incurred stamp duty. And this
is why, you know, I talk about the efficiency
of our fund. That dollar you put into our fund,
you're getting a dollar of... asset backed real
estate you're getting a dollar of nta you're
not uh you know you're not losing 15 15 cents
uh straight off the bat and that would apply
to that investor who's got three million they
want to buy a five or six million dollar you
know property they they and they want to they
gear it up and they they pay a stamp so it's
it's it's i i think it's a it's a um it just
shows how attractive it is uh entering into our
fund into this asset class. Say someone owned
this for 10 years and they just went direct.
Because the only issue with platforms, I love
platforms, got net wealth. The only issue with
the platform we have to go direct is the platforms
haven't allowed or figured out fund managers
to offer essentially like a dividend reinvestment.
You know what I mean? Like an income dividend
reinvestment. It's kind of incredibly frustrating.
So anyone listening that can fix that problem
with platforms, that'd be fantastic. What health
fund offers that? No, but yeah, if we go direct
and then we have to kind of house it, you know,
via another custodial service, you can't just
essentially buy it online because it gives you
the income and then you get a delay based on
the time to go back into the fund. And depending
if it's monthly or quarterly, the delays can
be quite, you know, from 15 days through a day.
If it's half yearly, it could be nearly like
six or nine months. It's actually really quite
frustrating. So, mate, let's just look at the
math. So say you held a commercial asset. right
i'm not too sure what they're paying an income
you're probably a better idea of that right than
me or they use the fun um with the ability to
compound like direct and keep on going if over
say a 10 -year period on both those assets you
know which one would you be better off with and
i'm not asking you i'm not this is this isn't
like it's more like a you know academic exercise
like you know The power of – sorry, actually,
first of all, let's do this properly. When does
yours fund pay distributions? Quarterly. Quarterly.
Okay. And money goes in monthly or quarterly?
So applications are monthly, distributions are
quarterly, and people, investors can choose to
receive cash or reinvest for new units. And I
think that you're actually hit the nail on the
head. If you own or buy yourself a property directly
or you buy into a property syndicate, you can't
really reinvest that income if you don't need
it into the same asset. You have to take the
cash and then, you know. use it for another purpose
or find another investment. Because our fund
is essentially investing in... The units or property
securities of the underlying funds, it's a bit
like, I guess, shares. If you own BHP, you can
just buy a few more shares of BHP with your dividend.
So I think that's a key difference with our fund
versus owning a property directly or investing
in a property. You can truly reinvest. And we've
got a lot of investors who have just basically
ticked the bell. DRP box because they just don't
need the cash and they can just keep reinvesting.
And I think their total return will be stronger
than in the other example, assuming that people
are receiving the cash can't reinvest at the
same rate, if that makes sense. Have you run
the numbers? So what's the fund? this is the
fun part right so you allocate your capital in
um you get your first distribution and then you
yeah so say over a 12 -month period but let's
exclude the first three months right just to
make it a bit simpler over a four periods you
receive four distributions and then essentially
um you dip and then a compounded What would the
overall percentage return be over a 12 -month
period? Well, I mean, let's say the total return
for that year is 10%. 10 % because you're getting,
let's call it 4 % of income and 6 % capital growth
to get that 10 % return. So that dollar you put
in and let's say you redeem it after one year
and the total return was 10%, that's income plus
capital, that dollar's worth $1 .10 after one
year. It's worth more because you're compounding
2 .5 % every quarter. No, well... I've assumed
a total return of 4%. So let's call it, you know,
sorry, a total return of 4 plus 6. If we pick
up the new asset and assuming that, you know,
as you said, looking at double digits, let's
assume that this is what we're discussing, right?
If I've missed something, that it does 10 % by
itself. Yeah. But then you take that, you know,
income. What's income and capital growth? But
if you take the income distribution, which you're
going to receive in that 12 -month period. and
then you do DIP every four times a year and then
that compounds, it's more than 10 % total with
compounding on the asset. I think it's still
10 % assuming that's a total return number. I
think what you're thinking about is let's say
- If you stuck a million dollars in at the end
of that 12 -month period, it's not worth 100
grand. The income's not 100 grand. The total
value of those units at the end of the cycle
will be 1 .1 and a bit. Yeah, that's right. Mathematically,
that's right. Yeah. Yeah, very, very interesting.
So what was the name of the new fund which you're
picking up again? It's called the GPT Wholesale
Shopping Center Fund. So that's, you know, current...
Cornerstone Investment is the Texas Wholesale
Property Fund. Then there's the GPT Wholesale
Shopping Center Fund. But after that... That
was my next question. You know, after you filled
the $25 million for this fund, what are you looking
at next? Okay. There's a really great opportunity
set going forward. We'd like to keep building
the fund to expand into sector -specific funds.
There's a few industrial funds that we really
like. There's a land lease fund and a charter
hall fund. These are the institutional -grade
industrial funds. So we'd like to pick up. you
know, one of the industrial funds. And then there's
a number of really good office funds that we're
going to look at. And then we're going to just
keep sort of expanding and building the portfolio.
But the benefit is we've started from like a
blank sheet of paper where within the index,
the unlisted, there's about 16 or 17 funds. We
really like about six or seven of those funds.
So we've sort of picked the eyes out of the funds
we like, and we think not only is the sector
beta really attractive from a risk -adjusted
return, I believe that our strategy will deliver
alpha above that beta because we're investing
in some of the best funds that have got the best
real estate and the best managers. Yeah, right.
So these funds you're looking at, are they also
spitting out double digits? Because obviously
they're different asset classes. Industrials
theoretically should be less over the resi side
and then office space is an interesting one because
office space did phenomenally well, then COVID
happened, then you have the whole work from home
culture. So the occupancy rate in Sydney and
Melbourne isn't as high as it used to be pre
-COVID. So I think industrial, most of the funds
we're looking at, expecting double -digit returns.
I think with industrial, you've got to be a little
bit selective. You've got to own... You know,
I think going back to sort of what we talked
about before, I think you've got to focus on
the really high quality sheds that are close
to population centres with really good transport
links because, you know, the tenants, you know,
the big logistics tenants, they want to be in
these great locations because they want to, you
know, minimise their costs, fuel costs and transport
costs. So I do, so infill Sydney, for example,
I believe is a really good place to be. And also...
sort of Melbourne and Brisbane where you're on
really sort of good – in sort of established
precincts with really good sort of transport
linkages. So, yeah, I'm pretty comfortable about
double -digit returns in the right industrial.
When it comes to office, I'm a bit more selective.
I really want to be in the heart of the Sydney
round gateway or key quarter tower, those type
of assets, heart of the financial district. I
want to be in waterfront. place. In Melbourne,
I really want to be at the Paris end of Melbourne,
the 120 Collins, the 101 Collins, 80 Collins,
because there is a bit of competition for space
there. But there's large parts of Melbourne office
that I'm a bit more cautious about. So you really
want to be selective. But what I also didn't
mention is within the institutional grade space,
there's other sectors that we'd like to look
at down the track. There's healthcare, you know,
hospitals and healthcare, that's a great sort
of asset class longer term. There's build to
rent, land lease, which is another sector of
the living sector. There's student accommodations
sectors as well. So there are a number of, you
know, other sectors that we will look at in future.
Again, though, when you focused on the institutional
side, these instos tend to offer, you know, own
the best assets and really high quality governance
and low gearing. What's the main question you
kind of get asked, you know, when you're speaking
with investors that we kind of haven't covered?
So with rising rates, there is sort of a concern
around cap rates expansion or cap rate what you
call softening now that that is a concern more
for i would say secondary grade assets you know
the lower quality office buildings or sheds because
that they've got higher levels of income risk
and also the owners of these assets tend to have
higher leverage so you know interest rates can
uh you know can be a greater concern for strategies,
what you call non -core strategies. That's got
secondary assets, higher gearing, and more operating
risks. So let's say more development activity
for these lower quality assets. So that said,
I think the prospects for the sector that we
are focused on, because of the really great quality...
real estate and the lower, you know, supply outlook,
I think the rent growth is going to, is just
going to be so strong. And there's going to be
continued strong demand for these high quality
assets. So I think people have a legitimate concern
about certain parts of the property sectors.
But I think we're at Pangean, we're very well
placed within this environment. So I think that
that's probably a key area of, I guess, risk.
And I think we've mitigated the risk. And in
fact, I think there's more opportunity than risk
in our space. If anyone else wants to learn about
the fund or the new raise which you're doing
for the new asset, what's the best way for them
to find you and get in contact with you and hit
you with a bunch of questions? Absolutely. We
love questions and great questions that you've
asked Murdoch. So best is to jump on our website
at pangencapital .com. That's P -A -N -G -E -N.
capital .com uh jump on there's a lot of materials
there uh but also you can uh you you can contact
us uh our phone numbers uh on our website or
our email address yeah please please reach out
we'd love to we'd love to hear from you fantastic
ryan thanks for coming on again um i love chatting
you you're pretty much my guy to go to when it
comes to large property infrastructure, shopping
centers, all that type of stuff. I love hearing
what's happening in the markets. Thank you very
much for coming on and I look forward to getting
you on again in the distant future. Thanks, Murdoch.
I really enjoyed our chat. Take it easy. The
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