Uncertainty creates opportunity at CBC

It’s a tough property development market, roiled by uncertainty, but persistent undersupply of housing means there are still high quality credit investment opportunities as developers look for capital certainty and lenders pull back, reducing market liquidity.

Centuria Bass Credit (CBC) CEO David Giffin told investors at functions in Sydney and Melbourne that CBC preferred the affordable end of the housing market, where demand is deepest, and is seeing good value in construction and residual stock funding.

“It’s a difficult, volatile market but there are lots of great opportunities out there,” said Giffin.

“We have a strong pipeline of transactions that we’re looking to close before the end of the financial year.

“In terms of where we’re seeing real value it’s probably in construction where we think there’s outsize returns for the risk we can take.”

Giffin said deal flow is strong despite the uncertainty created by the Federal Government’s May Budget and that many financiers are stepping back.

“We’re certainly taking a cautious approach but that liquidity being pulled out of the market means that you can come across opportunities which are very strong in terms of risk adjusted returns.”

Interest rate peak?

In some good news for developers and home-owners, Stephen Halmarick, Chief Economist, Economics Unchained, told attendees he believes interest rates have probably peaked after three increases by the Reserve Bank of Australia this year.

“The good news is that it looks like the data between the May Reserve Bank board meeting and the next one strongly suggests they will leave interest rates on hold meet they meet on June 16,” Halmarick said.

He said the RBA is still concerned about headline inflation, which has eased marginally and is now at 4.2%.

However, consumer spending is weak and there are few signs of improvement, which Halmarick said should be enough for the RBA to keep rates where they are. “That will help settle things.”

Undersupply for the next decade

As for the contentious Budget, he said it could be a blessing in disguise for developers by doing very little for supply.

“By the Treasury’s own modelling, the impact of the tax changes on the housing market are going to be very modest in terms of new supply,” Halmarick said.

“They’ve basically said supply will go up by 65,000 new homes over the next 10 years. We need to be building 240,000 new homes per year, so 6500 per year doesn’t change much.

“The economy’s going to weaken under the weight of the rate hikes, and higher fuel prices, consumer spending is going to be softer and we’re still left with this big gap between demand and supply with residential property.”

Regulatory overlay welcomed

Another major talking point was increased scrutiny from the Australian Securities and Investments Commission (ASIC) on Australia’s $200 billion private credit market, half of which is invested in real estate aligned assets.

CEO David Giffin welcomed the extra attention and predicted industry attrition after explosive growth since COVID.

“It’s very positive for the industry,” says Giffin. “Private credit has exploded in the past 10 years, spurred by post-GFC regulations when capital allocation rules meant that many banks withdrew from commercial real estate lending.

Giffin says ASIC oversight brings transparency and will hold operators to account.

“Without a doubt there’s been questionable practices throughout the industry from smaller players who don’t have a lot of value to protect in terms of a business and I think you’ll see a lot of those players fall away over time,” says Giffin.

Risk management key

He said Centuria Bass is well placed with a rigorous risk management culture and oversight from parent company ASX-listed Centuria Capital Group.

“To sit within the broader Centuria business and have that support from a risk and compliance team, ASX reporting requirements, is very positive.”

Jason Huljich, Joint CEO of Centuria Capital Group, concurred. “The ASIC review is very good for the larger managers that have those frameworks in place,” he said.

Sydney office lifts

In terms of the broader commercial property market, Huljich said Centuria is bullish on Sydney office as a countercyclical play and is raising $268 million to buy a 50% share in World Square, which is located in the midtown precinct of the CBD, for $454 million.

World Square occupies an entire mid-city block and mixes retail, office, hotel and residential.

“We are bullish on office rents in Sydney. We’ve had really good net absorption in Sydney office over the past two years and there is minimal new supply being constructed” Huljich said.

“Tenants have right sized and most are now growing.”

Fund raising for the Centuria Sydney CBD Prime Office Funds is due to close in June with settlement scheduled for July.