Abacus Property Group – Annual Financial Report 2018

DIRECTORS’ REPORT
30 June 2018
ABACUS PROPERTY GROUP
OPERATING AND FINANCIAL REVIEW (continued)
GROUP RESULTS SUMMARY (continued)
The office markets across the eastern seaboard, in particular Sydney and Melbourne have remained very strong
delivering exceptional growth in net effective rents and strong valuation growth. The strong markets in Sydney are
anticipated to continue as supply continues to remain limited for the next few years. The Melbourne office market
is expected to see an elevated level of supply over this same time period however absorption is also expected to
remain strong keeping vacancy rates low and provide upward pressure of rents. The Abacus office portfolio is
approximately 64% located within these markets.
The self-storage markets across Australia and New Zealand continue to experience the impacts from several
attempts to consolidate the sector. Following the recent institutionalisation of the market as investors increased
their awareness of self-storage as a viable asset class resulted in several participants investing heavily into the
sector looking to increase their market share of the self-storage sector. This increased transactional activity and
heightened interest has continued to deliver strong capitalisation rate compression across the sector. It is
anticipated this strong market will continue as this alternative asset class benefits from higher passing yields than
high quality assets in more traditional sectors.
Australian retail sales grew modestly during the year with the eastern states leading the way as employment
growth continues to be stimulated by government and infrastructure investment across these states. A bifurcation
in the retail environment is occurring with high quality assets continuing to be well bid for by the investment
market keeping valuations strong in these classes. Super regional assets providing a full experiential shopping
offer that dominate their region remain sought after by domestic and international listed and unlisted institutions.
Neighbourhood and select sub-regional assets that offer a strong food and service-based tenant offering with
limited exposure to tenants exposed to discretionary spending remain in favour with high net worth and listed
investors.
The investment market for institutional grade industrial product has been strong over the past few years, with
landmark assets and portfolios transacting at yields firmer than at previous market peaks. Despite a modest
growth outlook and increasing supply side issues, assets with strong covenants and long weighted lease expiries
have been well sought after. The medium-term outlook is for a stabilisation of yields as this investment activity
tapers off, while rents are likely to remain stable.
During FY18 Abacus continued to focus our investment capital on acquisitions across the self-storage and office
sectors in line with our capital allocation strategy as we believed they represented the best risk adjusted returns
over the investment period. This activity was and will continue to be funded via reduction in retail investment and
the realisation of our residential developments over the coming years. This strategy is focussed on growing the
contribution to recurring earnings to fund the Group’s targeted distribution growth of 2-3% pa.
Abacus had an active year in FY18 adding assets to the office portfolio, largely on the back of our city fringe
investment thematic that focuses on assets in the fringes of the CBD. As a result, we acquired a number of
assets including 187 Todd Road in Port Melbourne for $43.5m, 452 Johnston Street in Abbotsford for $93.5m, a
50% interest in 464 St Kilda Road in St Kilda for $47.7m all within the Melbourne city fringe. We also acquired two
CBD fringe assets in Sydney - 11 Bowden Street in Alexandria for $48.9m and 63 Ann Street in Surry Hills for
$27.5m. All these assets illustrate strong long-term growth prospects, providing access to stable and growing
cash flows from high quality tenants and improving rental rate outlook as inner suburban areas continue to
undergo gentrification and elevated levels of infrastructure spend.
Abacus continued to utilise our third party capital platform with the introduction of a new investment partner, Wing
Tai on the 464 St Kilda Road acquisition (50/50 respective ownership percentages as tenants in common).
Abacus also acquired two self-storage and industrial assets for $10 million which we intend to convert into selfstorage
facilities.
The residential markets in Australia also encountered strong bifurcation of markets with Melbourne and Sydney
markets weathering some of the impacts that have slowed other residential markets around Australia. Pockets of
oversupply in Brisbane combined with a reduction in the availability of financing for investors, particularly offshore
investors, has slowed settlement and sales rates, increased settlement timeframes and in some cases increased
the number of defaults. During the 12 months to 30 June 2018, even in spite of Abacus’ experiences matching
those of the general market, the Group has managed to deliver several good results across its residential
developments business. The decrease in the Group’s statutory net profit excluding non-controlling interests was
principally due to lower net change in fair value of investment properties and lower fair value derecognised from
divestments in the commercial property investment portfolio.
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