Quintessential Equity has continued to be patient in a market that we believe will provide opportunities to buy well whilst sticking to our fundamentals.
In 2017, we predicted a number of scenarios which have now transpired. One of these was the tightening of debt markets with bank-debt becoming harder to procure. Property owners and developers who find themselves in unfavourable positions are unlikely to find relief anytime soon with the banks likely to exert even more pressure over the next two years. The banks are dropping loan-to-value ratios on assets and often requiring vendors to do equity top-ups. This difficulty is further amplified by the banks’ more cautious and risk-adverse approach when it comes to asset locations, capex programs and vacancies.
While there has been a lag in opportunities presenting themselves, the cracks are now clearly starting to appear resulting in more properties on the market for Quintessential Equity to buy well and extract value for our investors.
Another major component of the current market is the decline of Chinese equity flow to Australia. This has created a number of issues, particularly in the residential market, for investors who have purchased off the plan. Further, some of the big Chinese developers who came into Australia are facing the tough local banking conditions and also can’t get Chinese finance to complete projects and fund existing development and land purchases.
We see this as something that is going to play out significantly over the next couple of years and we are already seeing even large China-state owned groups looking to potentially joint-venture with Australian equity providers. These tougher conditions will result in assets eventually being put to market at discounts to purchase prices.
There is also some pressure on Chinese and local residential developers who have large off-shore pre-sales as many purchasers can’t complete due to the tight lending criteria. We are already seeing finished residential apartments in Sydney and Melbourne being sold in large chunks at discounts of 30-50% off their original price.
This demonstrates that the market can move quickly when things decline and we are very cognisant that what has happened in the residential market could also happen in the commercial office and industrial markets if one gets carried away in a boom and does not stick to core property fundamentals.
At Quintessential Equity, we have always said that we will be patient for the right opportunity and we will always stick to our fundamentals. We expect that in the coming years stressed properties will begin to translate into true opportunity. Our track record is a testament to our patience in buying and our expertise in repositioning the asset so as to provide long-term secure income.
We have recently invested heavily internally in the business to have the resources to look more closely and identify micro-issues within property markets and locations around the country. This has always been a strength of ours but we now have additional resources to look at these dynamics even more extensively to take advantage of blind spots that others might not see.
By way of past example, we purchased 14 Moore St in Canberra in June 2014, an 11,200sqm building, at a time when everyone said Canberra was going into decline due to the Federal Government laying off significant numbers of staff, with the majority of those in the ACT. We looked at the market and identified that when the Federal Government lays off employees in Canberra, it has then re-contracted private sector businesses to replace the void created by the retrenchment. We therefore focussed on the heart of the private sector location within Canberra where 14 Moore St was situated.
Even though 14 Moore Street was less than 20% occupied at the time of purchase, we achieved 85% occupancy within the first 12 months. The asset was purchased for $23m and sold in March 2019 for $59m, resulting in a solid net total return for our investors of over 160%. We were able to take advantage of this opportunity by understanding the true fundamentals of what happens in the Canberra market.
We strongly believe that this is the time to be ‘capital-ready’ for the opportunities that are going to present themselves. We will continue to identify these underlying micro-issues within markets around the country and stick to our core fundamentals of buying well below replacement value, extracting value through strategic and hands-on management and delivering successful outcomes for our investors.