Ingleburn Investment Strategy

The following statement was made to potential investors in the Information Memorandum dated 21 November 2019

Pipeclay believes that the Property represents an attractive risk return investment. The Property has several characteristics which are expected to suit a variety of potential users:

  • The Property is less than 5 minutes from on / off ramps to the M31 Motorway network which heading south is the main arterial route to Melbourne and heading north connects to the junction of the M7 and M5 Motorways. As such the Property is ideal for break bulk shippers operating between Melbourne, Sydney and Brisbane.

  • The Property has a relatively low site coverage (circa 50%). The building is centrally located on the site facilitating drive around access for B-doubles and semi-trailers. There are 8 roller doors and a loading dock under large all-weather awnings. The majority of the warehouse has an internal clearance of 7 to 11 metres. All features which will suit major shipping companies and logistics users.

  • The Property has two sub-stations which deliver a total of 10.4 thousand amps and two gas connections which can each deliver 50 cubic metres of gas per hour. Enough power and gas for most manufacturing activities.

 

The Property however requires work and expenditure.

  • A large part of the warehouse was climate controlled. The associated equipment is obsolete and requires removal at an estimated cost of $325,000.

  • The office areas require repainting, recarpeting and new ceiling tiles, at an expected total cost of $220,000. The office ventilation and air-conditioning units are likely to progressively require replacement. The total replacement cost of these units is currently estimated to be $110,000.

  • 980 sqm of the southern warehouse has been partitioned off as a plant room. This area needs to be reintegrated into the warehouse at an expected cost of$182,000.

  • Electrical works are likely to be required ($252,000) and the sprinkler system may need to be upgraded ($1.46 million) to facilitate the future use of the premises by a prospective tenant.

  • There are substantial mezzanine floors in the warehouse. Some tenants may find these floors useful, however it is more likely that they will require them to be removed at a total estimated cost of $760,000.

  • There are minor defects to remedy at a cost of $99,000

  • Additional capital expenditure of approximately $190,000 will be required to divide the premises into two separate tenancies (North and South)

 

Most of these works ($3 million) will only be undertaken to meet the requirements of a prospective Tenant. The balance of the works ($600,000) including the removal of obsolete plant and rectification of certain identified defects will commence immediately after settlement.

 

Once the works are completed the Investment Manager believes that the Property will be substantially refurbished and perceived as such by the market. It will then have competitive advantages over most alternate industrial offerings in Sydney.

 

The actual amount required to be spent on capital works could differ significantly from the amounts set out above. Investors should read carefully the information contained in the building condition report from Napier and Blakely Pty Ltd (in Annexure C) for further information

 

The Property’s layout allows the building to be let to a single user or split into two independent tenancies. The current market rent for the Property if all 18,572 sqm were to be leased to a single user would becirca $105 per sqm. The Investment Manager believes that currently there is more demand for properties with circa 9,000 sqm of GLA and consequently if the Property is let in two tenancies the expected rent would be higher. Furthermore, if the Property attracted a user who needed the power and or gas supply a rental premium could also result. Presently, Sydney is undersupplied with properties which offer significant power or gas supply which is needed by fabricators, manufacturers or processors (although it should be noted that the business disruption associated with relocation can be a significant issue for such tenants). Depending on the tenant(s) attracted the rental range for the Property is $100 to $125 per sqm. The prospective annual rent for the Property is therefore $1,857,200 to $2,321,500. The Trustee will commence its leasing campaign on exchange of contracts.

 

Once the Property is fully leased the Trustee expects that its value will increase. In the current market a 5-year lease to an acceptable tenant would attract a market yield of circa 5.5% and circa 5% for a 10-year lease. It follows that there would be an appreciable increase in the value of the Property if it is leased in accordance with the Indicative Base Case Cash Flow assumptions set out in Section 5. Based on current market conditions and feedback from industrial leasing agents, the Trustee currently expects to find acceptable tenants for the Property within 6 to 12 months of acquisition.

 

The principal attraction of the Property however is its medium-term rental prospects. The Investment Manager believes that rents in Ingleburn will enjoy above market growth once the West Connex project is complete. The material increase in the traffic capacity of the M5 and its direct link to the Port of Botany and the M4 will significantly improve the attraction of Ingleburn to both logistics companies and manufacturers. The Investment Manager will endeavour to negotiate lease terms that provide for a market review of rent by the fifth anniversary of the lease. This may not be achieved; most tenants will resist midterm open market rent reviews.

 

If the Investment Manager is unable to find a tenant within 12 months of acquisition, then investors may need to contribute significant additional capital to the Trust to avoid a forced sale of the Property.

Source: Information Memorandum dated 21 November 2019