Charter Hall Offloads Central Coast Asset: What’s Driving the NSW Sale?

Charter Hall, an Australian property fund manager, has divested a Bunnings-tenanted property on the NSW Central Coast for $28.15 million. The sale offers insights into current market dynamics, investor appetite for regional assets, and the perceived strength of ‘covenant’ assets like those leased to Bunnings. The transaction prompts questions about whether it signals a broader shift in investment strategies amongst major fund managers.

The Property and the Transaction

The asset, a 9,537 square metre warehouse facility situated on a substantial 38,210 square metre site, was held within Charter Hall’s Direct BW Trust. The sale price reflects a reported yield of 5%, which, according to Charter Hall Direct’s CEO Steve Bennett, demonstrates the robust demand for properties leased to strong national brands like Bunnings, particularly in regional locations.

Charter Hall’s Perspective

Bennett stated that the sale was achieved through collaborative engagement with Bunnings and a competitive on-market sales process, ultimately maximising returns for investors within the BW Trust. He highlighted the **“very strong equity internal rate of return of 13.9% per annum over 10 years”** achieved for initial investors. This statement underscores the potential for strong returns from core Australian real estate investments over a longer investment horizon.

Market Context and Analysis

The sale occurs within the context of fluctuating interest rates and evolving investor sentiment regarding commercial property. While Charter Hall touts the ‘competitive’ yield, the 5% figure warrants closer examination. While seemingly robust in isolation, it’s crucial to consider the prevailing risk-free rate (Australian Government bond yields) and the perceived risk premium associated with regional assets compared to prime metropolitan locations. Furthermore, some analysts suggest that cap rates (which are inversely related to yields) are generally softening across the board, particularly for secondary assets. This sale price may be indicative of this trend.

Alternative Viewpoints on Regional Assets

While demand for assets leased to national brands remains generally strong even in regional areas, some experts suggest that there are specific risks associated to these assets. A report from commercial real estate firm Cushman & Wakefield indicates a growing wariness around smaller regional locations as businesses re-evaluate their location strategies amidst increased remote work for office workers (Cushman & Wakefield, *Australian Commercial Property Brief*, Q3 2023). This can lead to a decrease in support of smaller businesses in surrounding communities, which can impact property valuations.

Conversely, others maintain that certain regional areas are experiencing population growth and increased investment, making them attractive to investors seeking higher yields than those available in capital cities.

The Bunnings Covenant

The strength of the “Bunnings covenant” – the security provided by a lease to a major national retailer like Bunnings – is a significant factor driving investor interest. Bunnings, owned by Wesfarmers (ASX: WES), is generally considered a stable and reliable tenant due to its market dominance and strong financial performance. However, even strong covenants don’t eliminate all risk. Investors must still consider lease terms, rental growth provisions, and the overall suitability of the property for Bunnings’ long-term operational requirements.

Implications for the Australian Property Market

This sale provides a data point for valuers and potential investors considering similar assets. It will be interesting to observe if this sale sets a further precedent for future commercial property valuations. The sale may:

• Offer insight into the ongoing appetite of investors for regional commercial property.
• Help set market expectations for yields attainable on assets with strong tenant covenants.
• Reflect broader trends influencing the decisions made by major fund managers, such as capital allocation strategies, risk management concerns, and the outlook for interest rates.

The transaction warrants continued monitoring to determine whether it reflects a one-off strategic move by Charter Hall or a more widespread trend in the Australian commercial property market.

Source: Industry research and analysis.

This article is based on a report from realassets.ipe.com titled “Australian manager Charter Hall sells NSW Central Coast property | News”. You can find the original article here: https://realassets.ipe.com/australian-manager-charter-hall-sells-nsw-central-coast-property/10130032.article