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Conviction, discipline…and the opportunity of a lifetime

Livewire Exclusive

Livewire Markets

When you’re involved in a deal to buy a single asset for north of $300 million, and asking investors to come along for the ride, you better have done your homework and know your stuff.

The team at Realside Financial Group fit the bill.

Livewire recently sat down with Mark Vonic, Partner, and Linda Rudd, Partner, at Realside, to talk about an exciting new opportunity they are pursuing, which is available to wholesale investors.

Before we dive into the opportunity in greater detail, here are some of the key stats:

  • The property is 108 St Georges Terrace (108SGT) in Perth, WA – right in the heart of the Perth CBD
  • Limited capital expenditure is required with $110m already expended over the last 10 years
  • Key tenants include: South32, KPMG, UBS, Mirvac, Norton Rose, Savills, The Executive Centre, Woods Bagot
  • Realside will acquire 25-50% of the building, partnering with Lendlease for the remainder
  • Potential investors are being told to expect an 11.7% internal rate of return and 7.9% average cash yield over five years

What those stats fail to convey, however, is just how unique this opportunity is. There are perhaps a dozen buildings in the Perth CBD of such quality, boasting the location and amenity of 108SGT. Put simply, opportunities to acquire these buildings arise rarely.

With more than 20 years of experience in the industry, Vonic highlights that it is even rarer that the stars align, in terms of availability and capacity, to pursue such an opportunity. When the opportunity came up, Realside simply had to be involved.

They're just so tightly held. So when the opportunity comes up and the capacity is there, that's the time to buy it when you see it.

It's the opportunities that Realside reject...

It is worth noting that Realside are very selective, which stems from the company’s investment philosophy. For those unfamiliar, Realside is a specialist boutique focused on providing access to high-quality private market investment opportunities across direct commercial property and private debt.

More than that, Vonic and Rudd's focus is on creating value, rather than simply paying for it. In explaining this further, Rudd says;

There's usually something unique about the assets that we look at, at any given point in time, that provides us the opportunity to create value for our investors.

It’s something Vonic is fiercely passionate about. When he set up Realside, he took the view that if someone was going to pay the business a fee, it is going to be earnt. “We want to demonstrate a strategy around why we are doing something", he adds. 

So, how active have Realside been in the market recently? The team haven’t bought an investment-grade asset since June 2020, once again speaking to the rarity of this opportunity, and the highly selective process that Realside adheres to. 

"There's a story around what we say 'no' to because across the sectors, whether it's retail, office or industrial, we're always looking at opportunities. And there's a lot that we say 'no' to. So when we say 'yes' to something like 108 St. Georges Terrace, it's because we really believe in it and we're excited to buy it", says Rudd.

So, what's the story?

First and foremost, why Perth? 

Perth is Mark’s hometown and he knows it well, understanding that it is still a mining town at heart, somewhat subject to the boom and bust cycle of the industry that sustains it.

"We understand the cyclical nature of it. That creates the opportunity. And so, if you're not alive to those opportunities at this point in the cycle, then you're never going to be," says Vonic.  

Going even further, Vonic firmly believes that investors shouldn't be looking at a market like Perth when all the lights are flashing green, because that's precisely the wrong time to be coming into the market. The primary way to insulate from cyclicality is timing. One needs to enter the Perth market at the right time, because rents fluctuate relatively wildly. If you buy at the wrong part of the cycle, you could really get burnt. 

There is nothing like local knowledge and expertise when it comes to identifying opportunities. 

What about work from home?

Whilst the work-from-home theme has been something that has heavily impacted Melbourne and Sydney, that same cannot be said for Perth. Rudd points out that while Melbourne is tracking below 40% return-to-work occupancy, Perth is tracking north of 70%. And there are a few fundamental reasons for this.

1. Perth didn’t endure the same lengthy lockdowns as Melbourne and Sydney, so the workforce didn’t grow accustomed to working from home in the same way.

2. The commute into the Perth CBD is not as onerous as it is for east coast counterparts.

3. Given there are a lot of mining companies that occupy office space in the Perth CBD that have teams on-site at projects, there is solidarity amongst workers – they all turn up to the site or office each day.

4. And finally, when you have a building like 108 SGT, with great location, good transport links, fantastic amenities: end-of-trip facilities, conference facilities, a café and a restaurant, the question begs… why on earth would you want to sit at home on your pyjamas on a zoom call?

The nuts and bolts

As noted above, the investment in 108SGT is expected to return 7.9% per annum over the modelled five-year hold, with a target IRR of 11.7%. But what goes into those numbers?

Rudd points out that with any acquisition Realside make, they are “extremely conservative.”

“It's all about protecting the downside. At 108, we've underwritten a higher probability of key tenants in the building vacating with significant capital put aside to manage that risk. Whereas if you look at historical performance of the building, it has a retention history of c.90%.”

This is one of many strong buffers for investors and it also means that if Realside is able to secure the tenants and retain them, that will equate to further upside for investors.

Rudd goes on to point out that the team have also been conservative around forecasts on rental growth, and assumptions around incentives.

“Given where incentives are in Perth at the moment, we actually feel that we've been probably quite generous and having budgeted incentives in the high forties (per cent), when actually the building's paying closer to low forties at the moment," says Rudd. 

It is also worth noting that in Perth, the industry works on net incentives, whilst on the east coast, it works on gross incentives. So it's more attractive to offer incentives in the Perth market than on the east coast.

Ultimately, if Realside can execute its strategy of retaining tenants as well as attracting new tenants to the vacant space available, paying competitive rents and fair market incentives, then there is potential for further upside for investors.

It’s not what you know, it’s who you know

Vonic and Rudd have been in the industry for around 20 years each. They know their stuff, they have built relationships and formed valuable connections. 

And it is through those connections that they’ve been able to partner with Lendlease on this deal, who will take up between 50-75% of the offer.

This is a huge vote of confidence for both parties and a tipping of the cap from Lendlease, acknowledging that Realside is an expert in their field and more than capable of managing such an iconic property.

“We appreciate that Lendlease - Real Estate Partners 4 (REP 4) approached us to provide the asset management function. Whilst it’s not something we would ordinarily do for third parties, the fact that we can bring our investor capital along for the journey is a great outcome for all parties”.

It speaks to Realside’s proven track record that Lendlease selected them and wants to have someone on the ground that understands the market, driving the asset management outcomes. With a team of 15 in Sydney and another five in Perth, Realside is more than capable of executing its strategy of creating value, by focusing firmly on quality over quantity.

“We're very specific and particular about the things we do and, more importantly, the things we don't do. We're not a sausage factory where we're just creating product every six to eight weeks and pumping it out there and everyone's blindly busy. We tend to keep our powder drying, hence not buying something for two years in that investment grade space", says Vonic. 

Realside has people with institutional backgrounds, and experts that know their stuff inside and out. They also have a very clear strategy.

"I appreciate that commercial property is complicated to manage, but with a clear strategy as to how you're going to deliver and drive value, it makes it that little bit easier", says Rudd. 

Rudd goes on to acknowledge that Realside is always mindful of the responsibility of looking after and being stewards of investors' capital. As such, every decision is workshopped thoroughly, so that it can be executed efficiently and effectively for investors

Mispriced at $340m… wait, what?

In the prospectus, available upon request, the opportunity at 108SGT has been characterised as a mispricing. With a circa $340 million price tag, we were keen to understand the characterisation.

Vonic highlights that the building has a 7.5% cap rate – for those unfamiliar, the cap (or capitalisation) rate is the ratio of net operating income to property asset value. This is something that he hasn’t seen for years, once again speaking to the rarity of the opportunity. He further points out that on a rate per metre, it’s sub $9000/sq – which sits nicely at the very lower end of comparables in the Perth market.

So, whilst the $340 million price tag is eye-watering, the mispricing is characterised in terms of the value of the opportunity, and the value which will be generated by the Realside team. Remember... create value, don’t just pay for it.  

A unique opportunity to get access to an iconic A+ Grade office tower in the heart of the Perth CBD

The Realside 108 St Georges Terrace Fund is open for investment to wholesale investors until October 20 2022. 

For more information or to contact Realside, please click here. Alternatively if you'd like Realside to reach out to you directly, please click the CONTACT button below. 

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