Welcome to CoreLogic’s housing market update for December 2023.
Property issuance in the US Private Placement market is back in favour with investors across North America.
Geoff Schmidt, General Manager – Corporate Finance, North America, and Rachel McGregor, Director, USPPs, discuss which Australian property segments are in vogue with US investors.
Property issuance in the US Private Placement market has taken many twists and turns over the last decade. What have you seen over that time?
Schmidt: One of the first transactions NAB completed after we started the US Private Placement team in December of 2006 came from the property sector. We learned a lot from this one transaction, but most importantly it served as a data point from which future issuances were benchmarked. Over the past decade NAB has completed dozens of property transactions from the region and has developed incredible insight into this segment of the market. NAB now has a commanding presence in property issuance out of Australasia, capturing 57% of all property transactions over the last three years alone.
Australia and New Zealand are both island nations and because of the vast distances between cities and no connecting land mass, the main mode of transportation is aircraft. This creates both business opportunities and challenges for regional property companies. This becomes particularly noticeable when comparing these issuers against those coming from countries with highly utilized interstate highway and rail networks. A good example is the retail property segment.
What does the retail property sector look like for investors?
McGregor: The success that online retailers such as Amazon, eBay, and Etsy enjoy versus “brick and mortar” stores in the US is nearly impossible to replicate in countries like Australia. The reasons are manifold, but the main three are low population concentration, reduced transportation efficiency and managed new store placement through effective zoning laws. Developing and utilizing a cost-effective warehousing and distribution system is the key to the success of these online retail super giants.
Online success is much easier to achieve in countries like the United States with a population of 325 million and effective air, land and sea transport than countries like Australia, with a population of 25 million, but with a land mass almost the same size as the United States. Overlay differences in zoning planning, where Australia has placed more stringent restrictions on “similar store” geographic placement, and Australian retail property owners offer a better investment proposition for US Private Placement investors.
Are any other sectors besides retail attractive at present?
Schmidt: Australasian office property is also in high demand. Office tower multiples are at (or near) record highs, and shortages of office space in most of Australia’s capital cities have created higher asset prices for equity investors. Importantly, high office space utilization also offers better credit prospects for US private placement investors. We are seeing terrific performance out of our clients’ property portfolios.
McGregor: The knock on effect of the supply/demand imbalance is that many of our clients are able to manage out higher risk tenants for those of lower risk as leases come due. Weighted average lease expiries are extending and because of this, our property clients’ need longer term funding to match assets and liabilities.
The Industrial property segment is also doing well. Our clients have some of the highest occupancy levels and well spread lease expiries of any country globally. Add to that a customer base that is generally highly rated, diversified across numerous sectors and low in single-name tenant concentration, and Australia and New Zealand offer some of the most “investable” industrial property issuers in the US private placement market.
What sort of tenants do investors prefer to see?
Schmidt: Tenants come from many segments, chief among these are transportation, warehousing, manufacturing, commercial services and supply companies. These five areas yield some of the most stable income streams in the market to our property clients and lessees are often investment grade and even “high investment grade” in profile.
McGregor: Diversified property companies are also big issuers in the US Private Placement market. This segment has become a reasonably frequent contributor to deal-flow. Diversified property companies utilize economies of scale and core management skills across multiple segments. This in turn yields lower overall expenses and higher margins if done well. Diversified Property also adds an element of risk reduction that debt investors value.
Stepping back for a moment, what are some of the fundamentals that investors want to see from an issuer?
Schmidt: The single most important element in each of these segments is the management team. Our issuers are some of the most experienced operators in the market globally. Importantly most have worked through the different business cycles and have navigated through both good and challenging times. Along the way they’ve made successful decisions on assets and segments in which to increase exposure and also those to which to reduce or exit.
Private placement investors are attracted to (and invest in) each of these segments, particularly for issuers from Australia and New Zealand where the interplay between lower population concentration, stringent zoning, investment grade tenants and longer weighted average lease expiry dates exist across each group. Importantly, the performance of these segments has continued to improve over the last decade and looks promising for the foreseeable future.
NAB is holding a conference for new-to-market issuers and USPP investors in Sydney from 30 October-1 November called First Look. If you would like to find out more, please feel free to contact the NAB US Private Placement Team.
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