Chullora Investment Strategy
The following statement was made to potential investors in the Information Memorandum dated 12 September 2014
The Investment Manager believes that Chullora is an excellent industrial precinct with better than average prospects for capital appreciation. The site’s land value has grown 5.6% p.a over the last 18 years; CPI over the same period has averaged 2.6%. The site was last valued at $13.4 million as at 1 June 2008 immediately prior to the GFC. Land value growth typically occurs in spurts. Pipeclay will continually review land values and endeavour to maximise average rent over the period of the lease. Whilst it is difficult to predict when these growth spurts will occur Pipeclay believes there will be scope to increase the Property’s assessed land value in the near term.
This Property also offers Investors the opportunity to incrementally benefit from the improvements made to the site by McWilliam’s, which revert to the landowner on expiry of the lease. The Investment Manager estimates these improvements to be currently worth circa $6 million. The negotiated purchase price is $15.75 million. Pipeclay believes that the current value of the Property, unencumbered by the ground lease, is in excess of $19 million. This value gap together with any underlying growth in land value will be realised by Investors as the ground lease matures.
This unique characteristic means that the Property’s capital value should appreciate at an above average growth rate. It is the current intention of the Investment Manager to refinance the initial bank debt of the Trust after three years and to regear the Trust to between 62.5% and 65% of the prevailing Property value at that time. Any additional funding will be used to provide Investors with an interim capital return.
The current intention is to hold the Property until expiry of the lease, 31 May 2024. As the ground lease approaches maturity the Investment Manager will explore two alternate realisation strategies. First, it will look to lease the existing facility to either or both of the existing tenants or an alternate tenant. In each case the Manager believes some refurbishment of the existing facility will be required. These improvements could be undertaken by the Trust at or near lease expiry or alternatively the Property could be sold leaving the Purchaser to complete the works.
The second strategy would be to sell the Property as a redevelopment site for an alternate and higher use, subject to obtaining any required planning approvals. The existing site is bordered by bulky goods retail including Masters Hardware and Fantastic Furniture on one side, a mixed use office, warehouse and showroom for Volvo trucks on the other and a delivery centre for Australia Post.
The Investment Manager has identified a number of potential improvements that can be made to improve access to the site and therefore the utility of the existing Property to potential tenants. These opportunities will benefit both realization strategies but require negotiation with and the approval of local and State authorities and as a result should only be viewed as possible additional upside.
Source: Information Memorandum dated 12 September 2014