Adapting to commercial’s new normal

Economic headwinds may be threatening the commercial property sector but one property fund manager is opening a new offer on the back of a year that has been successful, despite Covid-19.

Tuesday, September 29th 2020

PMG Funds chief executive Scott McKenzie

PMG Funds has just launched an offer for the public to invest in its Direct Childcare Fund, which is offering a gross cash distribution return of 6.50% 1 per annum, paid monthly.

Funds raised by this offer, together with bank debt, will see the fund acquire three more premium childcare centres by January 2021.

This will take the fund’s holdings to nine quality, early learning properties and the total value of the portfolio to $45.66 million.

Since the fund’s inception it has provided consistent monthly returns of 6.5% per annum to investors, while PMG’s other four funds have delivered between 5.5% and 7% returns over the last six years.

PMG Funds chief executive Scott McKenzie says continuing to achieve these returns is a direct result of their long-term strategy to achieve income resilience through growing scale and diversification of properties and tenants.

This strategy, along with a conservative approach to debt, means they could support their tenants through the alert level four lockdown while still providing reliable returns to their investors, he says.

That means PMG has overseen eight commercial property transactions valued at over $150 million this year across its five funds.

It has also completed two successful capital raise offers in March and then June, which has allowed it to raise $37.76 million from investors.

McKenzie says that despite the economic conditions, they have continued to grow resilience across their funds this year through strategic divestment, recycling of capital and the acquisition of quality commercial properties, geared to prevail through economic cycles.

“As long-term investors in property, we do not try to pick the highs and lows of economic cycles. We look for the right properties, in the right locations, with the right tenants for the right prices always.”

While PMG’s strategy has stood the fund in good stead, McKenzie says they have also been fortunate that all of their tenants have managed to weather the Covid storm.

“We took a shared pain approach and agreed on rent relief packages with our tenants as we would much rather have a tenant still in our building than lose them.

“Will more support be needed? That’s the million-dollar question. More support will be needed for certain industries – eg: tourism, hospitality, and retail. But we have a very small exposure to hospitality and retail, less than 6%.”

For that reason, McKenzie is optimistic about the outlook for PMG’s funds. But his outlook for the broader commercial property sector is also not bleak.

He says it’s important to note that the sector has gone into this downturn in a far better position than it was before the GFC.

“Going into the Covid-19 downturn, residual low vacancy rates across most sectors were at the lowest level they have been for quite some time.

“For example: Pre-GFC Auckland prime office vacancy rates were running at 14%. This time round they were 6%. In Christchurch, they were 10% pre-GFC, but before Covid they were 5%.”

This has left the sector much better placed to absorb capacity, which means the impact of the market on landlords and investors is less. Additionally, there’s the low interest rates environment at play.

Despite this, there are economic headwinds, particularly for sectors like hospitality, tourism, and small format retail which will bear the brunt of the Covid slowdown, McKenzie says.

“We will see increasing vacancies in some areas. In the office market there are question marks to where trends, like working from home, are going – although we believe there will always be a need for physical space for businesses to use.

“It’s just that the way people use that space will change to meet the new normal. We’ll probably see some vacancies as the sector realigns itself. But it’s a lower vacancy environment, despite the increase, and this will create opportunities for some investors, with resilience being the key.”

To date, PMG’s new Direct Childcare Fund offer is attracting a large amount of interest. Applications are open until 29 October, but McKenzie says it looks like it could be fully subscribed early.

*To find out more information about the offer it is possible to download a Product Disclosure Statement here


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