Value Add Industrial Fund

4 Year Closed End Fund

Active strategy to add value to a national portfolio of smaller, B grade industrial assets

15% IRR target after fees

Active value add approach

Exit to be in single line in 4 years

3-4% forecast distribution

Wholesale Investors Only
Open for commitments / Cash Required
20 June 2022

Fund Strategy

The Fund will acquire B grade industrial assets within 30km from a CBD, these assets are usually 15yrs+ old and lacking newly built prime level facilities. However, after value adding initiatives and proper asset management strategies, these secondary buildings are still very functional and ideal for last mile logistic centres. We believe mispricing opportunities exist for these secondary assets within infill locations. With our exhaustive deal sourcing approach, assets with strong upside potential can be discovered and acquired at a discount.
While industrial warehouse assets have generally seen rising prices in recent years, these smaller B grade, short WALE assets fall outside the focus of larger institutional investors and also owner occupiers. The key aspect of this strategy is the rental growth which is now coming through in the market, driven by historically low vacancy rates.
By combining these assets into a diversified pool we can access superior banking terms than on a stand alone asset basis which enables the Fund to work with some vacancy as assets are refurbished. We believe we can acquire up to $200m of these type of assets nationally per year. Recent transactions have proven that large institutions are prepared to pay a premium for a large portfolio of smaller industrial assets where the heavy lifting has already been done. Our exit will be via a portfolio sale in 4-5yrs to achieve this premium.

Investment Return

Initial passing yield

Rent review in leases, typically 3% or CPI

Rental revision through value add strategy

Development upside

Portfolio cap rate arbitrage

Outlook for Industrial Assets

Australian industrial rents have experienced very limited real rental growth over the past decade. With so much positive momentum, rents have now started to show strong growth. Such growth is expected across all major markets. In our current industrial portfolio we are seeing very strong rental growth on maturing leases.

Based on our market observation, the gap between the prime cap rate and the secondary caprate is mainly due to stronger tenant covenants of prime assets. For secondary assets at last mile locations, we believe mispricing opportunities exist, as historically this market is dominated by owner occupiers and the assets are often under rented and often poorly managed. The average rent of secondary stocks is approximately 15% - 27% less than prime in most Australian major cities markets, which is largely contributing to the lower capital value of secondary assets. The value of an asset can be lifted if rental revision can be achieved.

Industry tailwinds for the industrial sector are forecast to continue with strong demand for space and historically low vacancy rates. The growth of ecommerce and falling delivery times for packages will add weight to demand, particularly for last mile logistics assets.

Asset Management Plan

Real rental growth

The increasing demand and limited supply of industrial spaces within infill locations will intensify the competition among occupiers and continue to push up the market rent, further enhancing capital values.

Portfolio yield arbitrage

Recent sales evidence indicates that large institutional investors are prepared to pay a premium for large portfolios of industrial assets compared to standalone sales.

Future rezoning potential

Large parcels of land around last mile logistics areas can potentially be rezoned for higher uses.

Development upside

Development risks have reduced significantly due to strong demand for pre commitment and pre sales, we can capture a development margin by targeting assets with low site coverage and identifying opportunities for acquiring vacant land at discount.

Portfolio Yield Arbitrage

Recent sales evidence indicates that the cap rate of large portfolios over $500 million consisting of assets in different markets is trading closer to 4%. For assets located outside Sydney and Melbourne, attractive yield arbitrage can be realised.

Seed Asset

The initial asset in Thomastown was purchased below replacement cost with substantial rental revision potential. This is a prime example of the types of asset the Fund will seek, it is well located 15km from Melbourne CBD and 1k to Metropolitan Ring Road and M80 Freeway. The rent is currently 40% lower than market and there is potential to re-developinto large format retail, providing multiple exit strategies.

Investment Analysis

Address 68 Keon Pde, Thomastown
Site Area 14,344 sqm
Occupancy 87.99%
WALE 2yr by income
Price $8,800,000
Rent (psm) $48 vs $90 (market)
$/GLA $1,124
Opportunity 40% Rental revision

Asset Management Strategies

Strategy 1: Increase rents at lease expiry

Both leases of the two main buildings of the site will expire by mid of 2024. Based on current market conditions and high leasing demand for industrial spaces, our asset management strategy at this stage is to hold the property and achieve market rent at lease expiry, realising strong value uplift. The current average rent is $42.90 psm, while many tenants in the area are paying over $100 psm we have assumed $68 psm after lease expiry, which would push the asset value to $15.7m at a 4% cap rate. To get the asset to market standard, small roof repairs and fire services are required which can be completed by our in-house team.

Strategy 2: Re-develop into modern warehouse/large format retail

The asset is located on a highly exposed main road with several residential development sites nearby, hence the opportunity for service-related use, such as a local distribution centre, large format retail, recreational use, etc. Based on our feasibility study, the marginal increase in the realisation under the current market rent level cannot cover the construction costs. Thus, our current asset management strategy is to keep the existing building. Should the market conditions change or if strong leasing interest is received, the property can potentially be redeveloped to capture the market trend, realising development upside.

Use of funds

The initial raising will be up to $50m, to be deployed over 12 months. Investors will commit to a specific investment amount which can either be invested proportionally as each asset is secured via Capital Call or invest the entire amount upfront with the unused funds will be invested in the AVARI Private Loan Income Fund until assets are secured.

The Private Loan Fund is a diversified pool of loans backed by mortgages originated and managed by Avari over Australian real estate.

Acquisition Strategy

The team are currently assessing 30 assets nationally with total value over $100, we believe we can acquire up to $200m of similar assets per annum. Avari have extensive relationships with industrial agents and asset owners, built over the past 7 years of operation. Many of the assets under consideration are off market or sold through smaller local agents where existing relationships are crucial.

Distributions & Capital Return

Due to the value add investment style, the majority of the return will be capital in nature as assets are repositioned. Distributions will be paid quarterly and are forecast to be 3-4%pa. Some vacancy is to be expected as assets are refurbished to bring them to market standard and achieve rental growth. While the aim is to sell the portfolio in one line, if any single assets are sold during the term, capital will be returned to investors at the next quarterly distribution date.

Investment analysis

IRR Target 15% after fees
Gearing Up to 60%
Investment Term 4-5 years
Minimum Investment $100,000
Initial Equity Raise Up to $50m
Manager Co-investment Yes
Allowable Investors Wholesale only
Acquisition Fee 2%
MER 0.7%pa
Performance Fee 20% above 8% IRR

About AVARI

AVARI Capital Partners is a value-add real estate investment specialist, managing over $1bn AUM. We have a fully integrated property team including architects, project managers, tenant managers, interior designers and development managers. This allows us to move quickly and capitalise on projects when others can’t. We invest our own capital alongside our clients in every deal. Supported by local advisers, offshore clients, international hedge funds and investment banks.

Disclaimer
This document has been prepared by Avari Capital Partners Pty Ltd (ABN 86 626 245 172) [an affiliate of Avari Holdings Pty Ltd (ABN 88 603 200 648, AFSL 472222), formerly known as Acer Capital] for information purposes only. The information is only directed at investors who are wholesale investors or professional investors pursuant to the Corporations Act 2001 (Cth). This is not an offer to sell or a solicitation or an offer to subscribe or purchase or a recommendation of any securities referred to herein and the information has not taken into account any potential investors’ personal objectives, financial situation or needs. Before investing, you should consider your own objectives, financial situation and needs or you should obtain financial, legal and/or taxation advice. The financial forecast and forward-looking statements contained in this document are not guarantees or predictions of future performance and involve known and unknown risks and uncertainties and other factors, many of which are beyond the control of Avari. Avari does not give any assurances that the results, performance or achievements expressed or implied will actually occur.