Let me take this opportunity to wish you a happy 2023, whatever the year brings for us all.
After a huge 2022, we sat down to consider what 2023 was likely to bring for Natgen, our investors and the world at large.
The world in 2023
When discerning the strategic direction for Natgen and our investment offers, we believe it vital to investigate the broad trends shaping the world and the economies in which we operate. ‘Strategic foresight’ seems to be the best way to make sense of our ever changing environment, and thus how ‘we the people’ will respond to the changes.
We have identified a number of these trends, which are outlined at the end of this letter. Whether these trends please us or otherwise, we think it useful to catalogue them for consideration in our future strategic decision-making.
The Australian economic environment and Natgen’s response
Overlaid upon these trends, we have the Australian economic environment, which directly impacts commercial property value and performance.
Asset price movements
With the impacts of the 2022 interest rate rises still washing through the economy, the process of repricing some of the top-priced assets has begun, with prices moderating to more understandable levels. I hasten to add that we at Natgen have always resisted the temptation to join the race to the top of asset prices, preferring to acquire assets at values which we consider to be more durable over time. For example, when many convenience shopping centres were trading at yields between 4.75% and 5.75%, our acquisitions averaged yields of 7% or higher. Thus, the margin above the prevailing interest rates (the spread) is much higher.
Whilst we expect some price moderation, there remain a number of factors which lead us to the expectation that price drops will be contained. One of these factors which I mentioned in my last letter is the sharply rising replacement value of commercial property assets due to the major increases in building costs which have been experienced across the Australian markets.
Natgen acquisition themes in 2023
Over the course of 2023, Natgen will be concentrating acquisitions activity on the following:
- Demonstrably high population growth areas, such as South-East Queensland. We have shied away from our ‘home patch’ in the past, due to a period of unrealistic pricing for assets within our preferred categories. We expect pricing to adjust during 2023 to a point where we feel that long term value has been restored.
- Strong regional locations, with strong economic growth credentials. We prefer regional areas with industrial/business growth expectations, rather than simply expecting population growth, as this measure can be more variable over time.
- Non-CBD Offices. This market segment is more specialised and requires understanding of the economic drivers of particular locations and businesses, but the long-term value propositions can be compelling.
- Convenience Retailing. A long term Natgen favourite. Since we entered this market some years ago, market activity increased dramatically and value option in this space reduced. However we see 2023 as potentially providing a return to value.
- Property types which address the long term trends outlined above. This is a deliberately broad category, but long term trends will be an important consideration within our decision-making framework. Of course, short to medium term economics will also be critical in these decisions.
A pause in acquisitions activity
We believe that asset prices are still undergoing a normalisation process, so we have taken the decision to delay our next acquisition until we have a better understanding of where the economy and the market will equalise. We believe that this is in the best interests of our investors, both existing and future.
We are keeping a very close eye on the market and will move as soon as we see value, in accordance with acquisition themes for the year.
An increase in development focus
This pause has allowed us to increase our focus on one area of the commercial property where we see current opportunity – development of industrial assets in high growth areas, such the South East Queensland.
With precipitous rises in building costs now generally behind us, projects can now again be costed with reasonable certainty and the economics of the demand side of the market are also reasonably stable. On these bases, we are currently undertaking due diligence on a number of sites for Natgen development trusts and hope to have at least one development trust offer available within a month.
We are further strengthening our development credentials with the formation of a separate company to seek out and assess development projects for inclusion in a Natgen development trust. This company will undertake the preliminary work and incur the costs of the original ‘work-up’ of a project, eventually providing the project to Natgen if and when it is proven as a viable project. This company will be a subsidiary of the Natgen Group.
Another Natgen asset offer
We have also seeing demand within our investor base for a highly liquid cash and cash securities trust, where our investors can earn competitive cash interest rates whilst having their money available for withdrawal at short notice.
Natgen Liquidity Trust CF22 has been structured to provide this style of investment and will be launched for investment in the coming months.
The year ahead
2023 has kicked off as a year of general uncertainty, given recent stock market movements and copious forecasts of downturn and possibly recession.
It is in this environment that we see the value of commercial property investment being particularly important, with attributes including:
- An inflation hedge;
- Income generation;
- Growth options; and
We at Natgen will continue to focus on long term value across all your properties and will continue to manage these assets with a single-minded focus on their value to the investor.
Brett and I, and the whole Natgen team, wish you well for 2023 and beyond.