Category: article

The End of an Epic Financial Year

Post author By Brett Nelson
Post date 2 July 2021

As the end of the financial year approached, I spent some time looking back at the position of the world and this country at the beginning of the financial year. On 1 July 2020, the following was happening:

The first wave COVID-19 disasters had swamped the UK, USA, Italy and many other countries;
Fortress Australia was in place and our first wave had been controlled;
A COVID-19 vaccine seemed a distant hope – perhaps for 2022 or 2023;
The ASX was stuttering back after a March rout;
Close to 3.5 million Australians were being supported by Jobkeeper, following the loss of somewhere between 1 and 2 million jobs;
Property markets were flat;
All Australian governments were putting on a united front (remember that!); and
There was significant pessimism about near-term economic performance of the economy.

We were yet to face devastating second and third waves of the pandemic globally and the scary spectre of the removal of Jobkeeper support after September.

As astonishing as the pandemic was in its impact and consequences, the ‘snap back’ has been equally astonishing, with significant winners and losers along the way.

My hope for this coming year is that short-term survival behaviour gives way to long-term strategy and vision, both for individuals, corporations and countries. Whilst they may appear at times to have been suspended, the fundamentals of economics, politics and the social contract have not gone away. We best recognise this sooner rather than later.

2021-2022 Financial Year: What’s next?

Since completing our latest investment trust Natgen Investment Trust KT21 at the beginning of May this year (only 2 months ago), we have been fielding constant queries about when and what is next for Natgen and it’s investors.

The constant (and truthful) response is that we are diligently seeking new opportunities for our investors which accord to the immutable principles of the Natgen Investment Philosophy.

Markets are hot right now – some might say behaving irrationally. Experience tells us that value remains available in these times, but one must seek it out in a careful, sober and meticulous manner. It is a time where we get to demonstrate our values, for whilst it would be better for us (as a company) to take on as many new transactions as possible, this would not be in the best interests of our investors, who rely on us to provide thought leadership in terms of where value and growth can be found. Our long term survival and prosperity will come from demonstrating that we live our values and continue to put investor’s interests first. After all, this is the fundamental tenet of a fiduciary relationship – always has been, always will be.

Don’t worry – when we find value passing a transaction through our due diligence processes, you will be informed and be invited to participate. In every case, we ask you to challenge us to explain to you our underlying value proposition for the transaction. Our philosophy and processes ensure that we will have a good answer to that question.

Interest rates and their future impacts

The low interest rate environment that we currently enjoy has presented threats and opportunities across the economy. In particular, it has impacted prices of residential property substantially and commercial property also, but to a lesser extent.

But interest rates will not stay stagnant forever, and logic suggests that the next movements will be up. Thus, we are constantly focussing on interest rate risk management in all transactions we are considering. It is not sufficient to predict that rates will remain where they are for term of a trust. We at Natgen are seeking regular (at least monthly and often weekly) briefings from our preferred debt providers and adjusting our interest rate considerations accordingly.

Ultimately, no-one actually knows where or when rate movements will occur. What we can do, however, is take a well-informed, risk-managed position on interest rates and manage our portfolio and future transactions accordingly.

I wish you well for the year ahead.

Regards

Steven Goakes

Natgen provides clients with well-considered, carefully measured commercial investment opportunities, accompanied by professional advice from our experienced leaders.

If you’d like to be notified of future investment opportunities, request an Investor Information Pack or contact us directly at invest@natgen.com.au

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The top 8 benefits of commercial property investment vs residential property investment

Post author By Brett Nelson
Post date 22 June 2021

When most people think of property investment, they tend to think of ‘negative gearing’ a residential home or apartment.

The “negative gearing industry” has been relentlessly promoting this for many years, and their messages are well known.

Of course, negative gearing involves losing money on your investment property (ie. negative annual profit) in order to minimise tax on other income. Then, the investor hopes that the asset’s value grows to eventually give an overall positive return.

As an alternative, commercial property investment exhibits some fundamental differences. To begin with, commercial property investments are generally structured to be positively geared – you make an income return on your investment funds.

What defines a ‘commercial property’?

A commercial property includes:

office buildings
warehouses
industrial buildings
mixed use buildings (retail/apartments etc.)
retail buildings.

Potential advantages of commercial property investment include:

Higher income yields – commercial properties generally show a greater level of income for a given property value, when compared to residential property.
Capital growth potential is based on income growth potential and other measurable factors – commercial properties are often valued on the basis of the potential (and actual) rental return being achieved. Other relevant factors include economic activity, interest rates, and the commercial success of the area surrounding the property.
Stability and consistency of income – longer leases. Whilst residential properties are typically held on short leases (often 12 months), commercial properties typically attract longer lease terms between three and 10 years, providing consistent and predictable income streams over time.
Income growth – the longer leases of commercial properties usually allow for the rent to increase in every year of the lease, thus increasing the return on investment as the lease progresses.
Maintenance – unlike residential investors, commercial investors have the potential to earn enhanced profit, with the lessee responsible for paying the cost of maintenance, rates and repairs on the property when the ongoing expenses are written into the commercial lease agreement.
Reliable tenants – we have all heard stories of “horror tenants” in houses and apartments. Tenants of commercial properties, on the other hand, are earning their income from the property. Therefore, it is in their interests to keep the property in good order and to maintain good relations with the landlord.
Diversification – commercial property investment can provide diversification across different asset classes and geographic locations, allowing the investor to add further elements of diversification into their portfolio. By diversifying their portfolio and investing in a variety of commercial assets, from retail to industrial, investors are also protecting their income and managing risk in the event of an economic downturn.
Ability to collectively invest – the ability to own commercial property within investment structures, such as property managed investment trusts, allows investors to hold part of a larger asset and to benefit from professional management of both the asset and the investment vehicle, which will also be subject to annual audit.

As with all investments, commercial property investment is also subject to investment risks which must be managed. For example, the managers of the property must ensure that the property remains relevant to the leasing market which it serves. From a financial perspective, gearing must be monitored and maintained at appropriate levels.

Natgen provides clients with well-considered, carefully measured commercial investment opportunities, accompanied by professional advice from our experienced leaders.

If you’d like to be notified of future investment opportunities, request an Investor Information Pack or contact us directly at invest@natgen.com.au

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Why you need acquisition criteria to steer your investment strategy

Post author By Brett Nelson
Post date 8 June 2021

Can my SMSF invest in a Natgen Trust?

Yes!

Many of our investors invest in Natgen Trusts via their self-managed super funds (SMSF).

Natgen Trusts acquire commercial property assets, and investors (including SMSFs) participate in our trusts to access commercial real estate assets for enhanced diversification and returns in their investment portfolios. This allows them to benefit from commercial property assets without the burden of managing them directly.Being able to invest in commercial property in your SMSF is of course dependent on a number of factors, and it is always best to check with your accountant or adviser as to your own personal situation.

How much should my SMSF invest?

Typically, SMSF’s will have an investment strategy which will act like a road map for the fund’s trustees when they decide on investments. It is there to help the fund meet its sole purpose of providing members with a retirement benefit or to their dependents should a member die before retirement.

The investment strategy may be as simple as having a certain percentage of the fund’s investment allocated to each asset class, or be more complicated and prescriptive. Ultimately, the strategy is as individual as the members of the fund and set out why and how to invest these funds to meet these goals.

The Australian Tax Office (ATO) is the regulator for SMSFs and therefore have incredible oversight over how funds are run, and what assets they own. They published data[1] which shows that most SMSFs on average have anywhere between 20-32% allocation to property investments. This can be direct investment in residential real property, commercial real estate, limited recourse borrowing arrangements (LRBAs are specifically a structure to borrow to invest in property), or investment via unlisted trusts like the Natgen Investment Trusts.

[1] as at 30 June 2021

Commercial property assets help bring diversification to investment portfolios, and it is through diversification of asset classes and investments that help reduce risks and achieve more stable returns in the long run.

More about SMSFs

Self Managed Superannuation Fund (SMSF) Origins

Did you know that the Australian pension system is the 5^th largest in the world (behind the USA, UK, Japan, & Canada), and mandated to grow by more than 11.5% p.a? Not bad for a country with a population (just under the size of the city of Shanghai) of ~26.7million and with around ~$3.8 trillion in savings.

Australians have been providing for one another since 1909 with the introduction of the publicly funded Aged Pension in 1909. But it wasn’t until Prime Minister Paul Keating enacted the Superannuation Guarantee on July 1^st, 1992 which saw employers[1] contribute 4% of their employees’ wage to their superannuation account.

Since then, Australia’s retirement income system has been viewed as a model for other nations with its 3 pillar approach of;

Publicly provided means tested age pension
Mandatory private superannuation savings; and
Voluntary saving (including voluntary superannuation saving)[2].

As our pension system evolved, it wasn’t until the Wallis Inquiry in 1999 which allowed small businesses and the self employed to establish and manage their own superannuation accounts – creating the very first SMSFs[3].

What is an SMSF?

A self-managed superannuation fund (SMSF) is a private fund that you can manage yourself, as distinct from an industry or retail fund where those funds choose investment and insurance options for you. But having that level of control over your own fund also comes with a number of rules and responsibilities[4] to ensure your fund meets the sole purpose test of providing retirement benefits for members.

Investment Restrictions

The Superannuation Industry (Supervision) Act 1993 (SIS Act) is the legislation outlining the various rules trustees must follow when managing an SMSF.

SMSF investments must be made on an arm’s length basis; meaning that the purchase and sale price of fund assets should always reflect the true market value, as should income from the fund assets.

There are a number of rules outlined in the SIS Act to ensure a fund meets the sole purpose test. They affect how and what your fund can investment in such as;

Related Parties and Relatives	No one associated with your fund should get a present-day benefit from its investments.
Loans and Early Access	You can’t lend money or provide direct or indirect financial assistance from your fund to a member, or a member’s relative.
Acquiring Assets from Related Parties	SMSF trustee is prohibited from acquiring assets from trustees of the SMSF, their relatives or related entities (except for securities listed on a prescribed exchange and business real property).
In-House Assets	An in-house asset is a loan to, an investment in, or a lease of an asset to, a related party or entity of the SMSF.
Business and real property	Trustees need to ensure the level of investment in business real property still meets the investment strategy of the fund, including diversification of assets, liquidity and maximisation of member returns in the fund.
Collectible & Personal use assets	Investments in such items must be made for genuine retirement purposes, not to provide any present-day benefit. The ATO outlined how this works for jewellery, artwork and other assets.
Borrowing	Subject to specific exception, an SMSF trustee is prohibited from borrowing or maintaining an existing borrowing of money.

Source ATO[5]

The table above highlights some of the concepts, but of course Trustees should consult with the ATO website and their professional advisers with how this relates to their situation.

[1] Employers with an annual payroll above $1m

[2] https://treasury.gov.au/sites/default/files/2019-03/round4.pdf

[3] https://www.apra.gov.au/superannuation-australia-a-timeline#:~:text=1999,manage%20their%20own%20superannuation%20accounts.

[4] Further details on the risks and responsibilities of an SMSF are here https://moneysmart.gov.au/how-super-works/self-managed-super-fund-smsf

[5] https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/investing/restrictions-on-investments

Natgen provides clients with well-considered, carefully measured commercial investment opportunities, accompanied by professional advice from our experienced leaders.

If you’d like to be notified of future investment opportunities, request an Investor Information Pack or contact us directly at invest@natgen.com.au

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Six tips for commercial property success

Post author By Brett Nelson
Post date 6 January 2021

For investors of all sizes and levels of sophistication, commercial property provides a very attractive investment option

Negative correlation with returns in other asset classes and high levels of transparency are attributes which can hold investors’ long-term interest in commercial property.

However, as with any investment asset class, there are pitfalls to be avoided. The following six tips will assist in successfully navigating the pitfalls to leverage the best attributes of commercial property.

1. THINK LONG-TERM

The benefits of commercial property investment typically manifest themselves over time. For example, income growth through annual review mechanisms in leases build over time, especially for long-term leases.

In addition, transaction costs associated with purchases (stamp duty, due diligence costs, etc.) are amortised over time, becoming less significant in a capital sense the longer the property is held. Whilst short-term gains are possible through opportunistic purchasing and good management, these gains can also be accretive over the long term.

2. SECURITY OF INCOME IS KEY

In commercial property, the value of the income stream is the most important aspect in determining investment value.

Thus, the quality and security of the income stream must be assessed, maintained, managed and grown over time. This is fundamental to achieving value growth.

3. BE PREPARED TO ACTIVELY MANAGE

Commercial property is an investment asset class where effective, active management of the asset can reap long-term rewards. Strategic management and capex plans ensure that reinvestment in the asset is rewarded with income consistency and growth.

4. BE COGNISANT OF PROPERTY CYCLES AND THE EXTERNAL ENVIRONMENT

Like most investments, commercial property returns can be impacted by general economic cycles and external economic factors.

Commercial property owners should be vigilant about cycles and external factors when making decisions about purchase, major capex, and property sales.

It is particularly important not to be in the position of having to sell an asset at the wrong time in the cycle, such circumstances can substantially impact overall returns.

5. BORROW, BUT DON’T OVER-LEVERAGE

Well considered and well managed debt can substantially enhance returns from commercial property investment. The level of appropriate debt will depend on many factors relating to the consistency of property income (with which to pay interest and redeem the debt).

Whilst debt in excess of the assessed appropriate level may increase returns further, it comes with an increased level of risk that should be taken into account.

6. INVEST WITH OTHERS

Commercial property investment can require very substantial equity capital, typically extending to several million dollars.

However, collective investment vehicles such as property syndicates, property investment funds and listed real estate investment trusts (REITs) make the commercial property investment market more accessible to those with less capital to invest.

“Commercial property investment can require very substantial equity capital, typically extending to several million dollars”

CONCLUSION

In order to assess and manage commercial property investment factors, a strategic approach to decision-making is vital.

Prior to acquisition, a defined acquisition process should be strictly observed. This will lead to better risk-managed purchase decisions.

Once acquired, commercial property assets should be the subject of a comprehensive business planning exercise, with strategic consideration of long-term capex requirements, lease reviews and expiries, and divestment options.

When diversity is considered, economic cycles and external factors must be considered to maximise the realised value of the property.

Steven Goakes
Managing Director

Natgen provides clients with well-considered, carefully measured commercial investment opportunities, accompanied by professional advice from our experienced leaders.

If you’d like to be notified of future investment opportunities, request an Investor Information Pack or contact us directly at invest@natgen.com.au

2021-2022 Financial Year: What’s next?

Interest rates and their future impacts

Can my SMSF invest in a Natgen Trust?

More about SMSFs

For investors of all sizes and levels of sophistication, commercial property provides a very attractive investment option

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