Fund managers going bush for 8pc returns in property
Boutique property syndicators and fund managers are investing into commercial properties across Australia’s regional city markets where, in some cases, their bargain buying makes possible income yields of up to 8 per cent.
Those investments can range from small retail and hospitality properties held in single-asset syndicates – a pub or small mall in a regional hub – up to the large stakes in major shopping centres that have been acquired by the big private funds management platforms such as those run by Haben or Fawkner Property.
Among the single-asset syndicators is Sydney-based Blackfox Property Group, which has accumulated a 13-asset portfolio, worth about $150 million. This month it added to that with its purchase of a large retail centre in Shepparton, in northern Victoria, for more than $27 million.
The Blackfox fund set up to hold its latest acquisition is forecast to deliver an 8 per cent yield annually and has targeted an internal rate of return of 13 per cent to 14 per cent over a six-year term for its wholesale investors. Backing that income in the Shepparton centre are major national retailers such as Provincial Home Living, Nick Scali and Fantastic Furniture.
For executive director Marc Schwartz, the latest purchase is typical of a strategy that aims to acquire retail assets with big brand tenants in growing regional towns. Such investments can deliver stronger yields despite their lower rents compared to capital cities, the BlackFox founder said.
“There are compelling secular growth drivers in regional hubs like Shepparton, where population and infrastructure investment continue to support retail demand,” Schwartz said.
“This acquisition aligns with our strategy of acquiring defensive assets that offer stable cash flows and long-term tenant relevance.
“Shepparton Home is another step in our program of securing assets with real scope for value creation in growth corridors. We’re backing the fundamentals – growing regional cities, strong tenants, and irreplaceable locations.”
“As active managers, we look for assets where improvements … drive returns for everyone.”
Marc Schwartz, Blackfox
The purchase of the Shepparton property for below its replacement cost, also creates scope for potential, he said.
Other recent acquisitions by Blackfox include the nearby Shepparton Retail Hub for $11.61 million from Melbourne property development firm Orbach Group of Companies, as well as two assets in Toowoomba – 181 Bridge St and Centrepoint Toowoomba. It also owns pubs such as the Australian Hotel in Ballina on the NSW north coast.
Schwartz said the company’s investors – a mix of rich individuals and wealth managers – were looking for more of the same types of investments.
”As active managers, we look for assets where improvements – be it releasing, upgrades, or helping tenants better serve their customers – drive returns for everyone,” he said.
“That collaborative approach is core to our success and a big part of why tenants and investors back us.
Other syndicators are piling into the regional market, including DCW Partners, a company directed by Central Equity’s Karl Kutner and Dennis Wilson, which acquired Woolworths Drouin Central mall in West Gippsland for $20.4 million last year on a yield of 5.6 per cent.
The regional story is also running strong for much larger transactions, including for fund manager Haben. At the end of 2023 it bought the remaining half stake in Stockland Townsville shopping centre to take full control of the mall, confident it could generate an 8.5 per cent income return as the surrounding population expands. Melbourne-based Fawkner Property has also invested heavily in large regional malls, including them in its multi-asset funds.
Dugald Higgins, head of responsible investment and real assets at Zenith Investment Partners, said the regional markets could be a source of higher volumes of deal flow for fund managers although in much smaller-sized transactions, especially for the retail real estate in typically tightly held markets.
“Depending on the regions that you are looking at, they can often have quite attractive growth opportunities,” Higgins said.
“[However], unlike in the cities, where you tend to have multiple drivers, if the main driver of your local economy falls off cliff for whatever reason, then you can be in real trouble.
“If you get a vacancy in a building in a small area, it can take a very long time to find a replacement tenant. As long as the tenants remain in place, that actually can be helpful. But like with all these things, it’s a double-edged sword.”
It wasn’t uncommon for fund managers to generate higher yields from investments in the regions, so long as they understood the local economy when investing there, according to Higgins.
“Good managers will always do their homework, but sometimes I think the level of due diligence in regional areas can be a little bit superficial. You’ve really got to understand that regions have different levels of complexity to the CBD,” he said.
