Funds Management partner Elliott Stumm chats with Paul Weightman, managing director of Stara Real Estate Capital & Advisory (Stara) and founding executive chairman of Cromwell Property Group, about the new corporate collective investment vehicle (CCIV) regime, where we are at in the current property cycle, and the sectors with significant investment potential.
ES In an industry milestone, Stara secured the first AFS licence in Australia authorising a person to operate a CCIV. How do you expect the funds management industry will respond to the new CCIV regime?
PW As with many innovations, I think the initial response will be guarded—there is a natural push back against change and a general attitude of ‘don’t fix it if it’s not broken’. Managers are familiar with managed investment scheme (MIS) structures and will be concerned anything perceived by the market as ‘novel’ will be more difficult to promote. Once there are a few live examples in the market and the structure is better understood, I believe it will be more widely utilised.
Over time, I expect the CCIV regime will become the preferred investment structure for both managers and investors.
ES What do you see as the major benefits and drawbacks of the new CCIV regime?
PW CCIVs are very similar to umbrella and multiclass fund structures used in other major investment markets and should be more readily accepted by international investors than traditional Australian MIS trust structures. The major benefits of CCIVs are simplicity, cost, and time to market. The use of CCIVs will significantly reduce the administrative burden on a manager and facilitate the issue of products quickly. Investors will hold shares in CCIVs, but investors will benefit from tax transparency in the same way they would if they held units in AMIT qualifying trust structures. Also, wholesale CCIVs don’t have a net tangible assets requirement for a manager.
The drawbacks are that the structure will take a little time to gain widespread acceptance and tax and stamp duty legislation and policies need to be updated to recognise the new regime, particularly in areas such as capital gains tax rollover relief, reconstruction relief, and land rich duty and related exemptions.
ES You have a track record of successful investment through multiple market cycles. In your view, where are we at in the current property cycle and how is it likely to play out in the next one to two years?
PW Quantitative easing and cheap money have driven asset price inflation which has led to risk being widely mispriced. It will take some time for asset pricing to stabilise and for risk to be repriced. There are a lot of real estate portfolios that have legacy issues as a result of the acquisition binges we saw leading up to the COVID pandemic. I expect there will be a much greater focus in the near term on underlying cash flow and cash on cash returns.
At some point, the commercial office sector will have to come to terms with valuation methodologies—investors will question how appropriate it is to capitalise face rents that have limited correlation with underlying cash flows and how realistic is it to invest on the premise of capital gain from tightening cap rates when underlying demand is weak and interest rates are rising. This will be exacerbated by the structural shift of increased ‘working from home’ or remote working policies that will further disrupt occupancy rates and act as an additional headwind to the sector.
As we have seen in previous cycles, there will be a widening gap in pricing of primary and secondary assets in all sectors.
At present, political instability, energy costs, and inflation are forcing investors to the sidelines. History has shown you can’t just sit on the sidelines in periods of inflation.
ES Are there any particular sectors where you see significant investment potential?
PW I am attracted to opportunities to invest in sectors that give exposure to underlying cash flow—themes such as population growth and aging populations, sectors that can take advantage of technological change and which provide some protection against inflation. Our areas of immediate focus are renewable energy, the hospitality sector in Queensland, convenience or everyday needs retail, particularly into centres that are dominant in their catchment, and modular accommodation.