The 2024/25 financial year is shaping up to be a very busy one for Natgen, both in relation to existing Natgen Trusts and also for future initiatives.

In relation to Natgen Investment Trusts, we see ongoing value in various property categories based on the replacement cost of assets and the medium term impact this will inevitably have on rental rates and occupancy costs for tenants.

Well-located regional retail assets will maintain value and income generation potential. As always, we prefer retail categories which demonstrate low elasticity of demand, namely food retailing, household items retailing, and service delivery to regional consumers. These are our bread-and-butter tenants within our existing shopping centres and will continue to be vital in the future of the various Natgen portfolios.

Our sociological observations regarding non-capital city CBD office assets are playing out across the regional markets which we follow. As such, our focus remains on this style of asset as time progresses. Whilst eventually CBD office assets will reset, the short/medium term opportunities exist in our areas of focus.

Whilst premium industrial assets remain fully-priced, there remain opportunities in the industrial space where income return can be enhanced either during the latter parts of lease terms or upon the re-leasing of assets at the end of long reversionary lease terms. Natgen will seek to leverage our growing development expertise to isolate and consider these opportunities.

Development management is an important skillset within the Natgen business offering. With personnel growth in the past year, our development skills have continued to broaden. We envision future development offers during the 2024-25 year, as existing development projects mature and head toward practical completion.

Another addition to our list of value opportunities in commercial real estate is Specialty Assets. In my parlance, this includes properties which house specialty services, such as carwashes, medical centres and any other locationally-relevant businesses.

Tax Advantaged Income

One of the main differentiating factors with various investment asset classes is the impact of tax and the treatment of income for taxation purposes.

A comparison of a Natgen Investment Trust with a bank term deposit can be useful, given that bank deposits have no taxation allowances beyond standard taxation law.

A Natgen Investment Trust allows the pass-through of asset-level taxation allowances to the individual taxation returns of the unitholders in the trust – this is known as a pass-through trust. Up to 100% of the income from the units can be offset against the taxation allowances for commercial property ownership, and if the allowance for the year is greater than 100% of the income, the excess allowance can be carried forward to future years.

The taxation allowances which qualify for this treatment are:

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As we proceed through 2023, and I look back at my last communication to you in January this year, it is clear that our expectations from the beginning of the year, are in general, coming to fruition.

At the beginning of 2023, I wrote to you about 2023 being a time to rethink our assumptions in changing times.   I think most would agree this year has constituted changing times, and also a good time to rethink assumptions.

It is fair to say that from a domestic economic perspective, 2023 has largely been about higher interest rates designed for curb demand and thus inflation.  Sitting here in December 2023, we are seeing some signs that perhaps the interest rate tightening cycle is achieving these aims, albeit with a reduced expectation of major interest rate drops in the coming 12 months.

Internationally, the turmoil of 2023 has been augmented by other conflicts further destabilising international markets.  However, the major western economies appear to be gaining on the inflationary pressures they are battling and generally economic growth has not fallen off any cliffs.

The Natgen response to 2023 has been to indeed rethink assumptions and respond in real time to the challenges and opportunities presented.

In response to the realisation that higher rates will be more persistent than anticipated at the beginning of the year, we took the difficult decision to revise our return rates on two of our investment trusts to 7% per annum representing a reduction of 1.5% and 2% respectively.  This was entirely due to interest rate impacts on sustainable return rates.

Also, as a response to a specific challenge, Natgen (in its personal capacity) bought the Kingsthorpe Medical Centre (a tenant in our Natgen Investment Trust KT21), specifically to maintain the tenancy mix at that property.  We have significantly improved the services provided by the medical centre and, whilst the business is yet to be profitable, we expect to address this further during 2024.

Our assumptions about the impact of rising interest rates on the price of future acquisitions needed to be re-thought during the year.  After withdrawing fromacquisitions activity early in the year, we found that prices remained at an unsustainable level, given market fundamentals, for much of the year.  Whilst we found it difficult to find value in the standing assets market, we were able to demonstrate value in developments, with 3 new development trusts being presented for investment during the year.   All of our four current development trusts address the demand for industrial space and storage in the high growth areas of the Gold Coast and the Brisbane / Gold Coast corridor.

Through Natgen Development Trusts, we have been able to provide our investors with a valuable alternative whilst we were struggling to ascertain value in the broader market.  It is a matter of pride to us that we don’t offer investments when we cannot see value. 

Another response to the circumstances of 2023 was to postpone the introduction of Natgen Liquidity Trust CF22 until the interest rate markets settle and we can be certain of our forecasting.

I hope that the theme that you ascertain for the above is caution.  As I have said in the past, we take the stewardship of your investment funds very seriously and seek always to balance opportunity with caution.