AUSTRALIAN PROPERTY OPPORTUNITIES FUND QUARTERLY UPDATE 31 MARCH 2017 The Australian Property Opportunities Fund (APOF I or the Fund) is pleased to provide this update for the March quarter 2017 (Q1 2017) KEY HIGHLIGHTS Announced a distribution of $0.0249 per Unit. Portfolio occupancy steady at 96%. The Fund s weighted average lease expiry (WALE) remained strong at 4.6 years. PORTFOLIO UPDATE ASSET MANAGEMENT At Oxford Village, occupancy remains very strong at 97%, although the rate decreased marginally over the period. Leasing the remaining vacancies is a key priority for management. At quarter-end, the leasing team were in advanced discussions with a number of parties and expect to announce new leases in the next quarterly update. Tenants along the western side of the centre continued to progress refurbishment designs, incorporating contemporary retail design principles to help enliven this area. The central plant project, which consisted of the installation of two new chillers and a building management system, began to achieve a significant reduction in energy consumption and running costs a pleasing result. At 390 St Kilda Road, the leasing team continue to achieve strong results with both renewals and new tenants. In Q1 2017, four lease renewals were completed and one lease was executed with a new tenant. We expect further leasing deals to be executed in Q2 2017, with the team in advanced discussions with a number of parties. Progress was made on the lobby upgrade with designs approved and works tendered. Although the occupancy dipped slightly at quarter-end due to the timing of the leasing discussions, mentioned above, and lease expiries, it is expected to bounce back next quarter. At Lake Innes Village Shopping Centre, Coles completed an extensive refurbishment. It increased the size and range of the bakery, relocated the trolley bay, and updated both internal and external signage. Coles strong sales growth continued this quarter. Sales for February rose, despite the extra day of trade due to last year s leap year. Occupancy at Lynbrook Village Shopping Centre decreased slightly in Q1 2017 due to a tenant vacating on lease expiry. Management focus continued on renewing leases to tenants approaching expiry, and consequently, two leases were executed during the quarter and positive discussions were held with a number of existing tenants. During the quarter, leasing strategies were refined for current vacancies. One such strategy aims to improve exposure and interest at the main entrance to the car park. AUSTRALIAN PROPERTY OPPORTUNITIES FUND QUARTERLY UPDATE MARCH 2017 1
Lake Innes Village Shopping Centre - Recently completed refurbishment of the bakery. At Windsor Riverview Shopping Centre a new lease was agreed with a fashion retailer which saw the occupancy rate increase to 96%. The new tenant, a national brand, was scheduled to begin fit-out in early April. Another pleasing result was the finalisation of a lease renewal agreement with the centre s butcher. This agreement secures a well-patronised business, which has been a strong performer for the centre. There was further progress on the medical centre expansion. This expansion will provide more consultation rooms and utilise the mezzanine level of the tenancy. Improvements were also underway in the mall and food court as we continue to refine the centre s aesthetics and increase foot traffic throughout the mall. Noosa Village occupancy remained at 100% during the quarter. A lease renewal was finalised with an existing food tenant, a good outcome for the centre and reflects its solid sales results. A minor refurbishment project continued through the design stage. In recent years, the centre has been well maintained however, a full-centre design refresh has not occurred in some time. The current project will update elements of the centre, to maximise impact and increase cohesion across the centre. The works will include new signage, re-painting of the external walls with a refreshed colour palette in keeping with the local area, removing redundant structures, and adding entry features. CAPITAL MANAGEMENT The Fund announced a distribution of $0.0249 per Unit during the quarter, representing a 6.2% annualised distribution yield. AUSTRALIAN PROPERTY OPPORTUNITIES FUND QUARTERLY UPDATE MARCH 2017 2
REAL ESTATE MARKET UPDATE RETAIL On a national level, retail turnover growth was trending down, at 3.4% year over year (yoy) as at January 2017. A slowdown in household goods spending (3%) and department store spending (-0.1%) in recent months strongly influenced the growth rates. Growth in food spending stabilised, but remained below the long-term average. Clothing continued to record solid and stable growth at 5.8%. Competition for market share between existing domestic and new international retails remained vigorous. Growth accelerated in cafes, restaurants and in the take-away food category, which supported demand for space in this segment. At a state level, New South Wales continued as one of Australia s strongest performing retail markets, recording a 4% turnover increase in February 2017. Retail turnover growth in Victoria was also higher than the national average at 3.8% yoy. In Queensland, retail turnover growth improved to 2.6% yoy, although it continued to remain below the national average. Rents on new leases began to rise in Q1 2017 with small, positive growth recorded in Sydney and Melbourne. Conditions are broadly unchanged in the investment market and demand remains firm across the category. Likewise, yields for neighbourhood centres compressed in most markets. OFFICE Lead indicators for the office sector were mixed in Q1 2017. The rate of growth in job advertisements slowed to 6.9% yoy as at February 2017, yet 45% of companies exceeded earnings expectations. Competition for space and a reduction in the number of contiguous options extended upward pressure on Sydney CBD rents. In all Melbourne CBD markets, growth in prime net effective rents over Q1 2017 was observed. Rental growth was highest in the Melbourne fringe office market at 3.9% in Q1 2017. This sector has recorded rental growth of 15.7% over the past year. Office transaction volumes were low in Q1 2017, which is typical for the time of year. In both Sydney and Melbourne, many sales campaigns are expected to commence in Q2 2017. Yield compression continued at the start of 2017 with tightening recorded across most Sydney and Melbourne office markets. The Melbourne CBD compressed by 25 basis points (5.00% to 6.00%) at the softer end of the yield range. The Sydney CBD tightened by 18.5 basis points, from 4.75% to 5.50%. INDUSTRIAL Leasing activity was steady in Q1 2017, led by the Melbourne, Sydney and Brisbane markets. In Sydney, preliminary data indicated approximately 160,000 square metres of take-up occurred. Activity in Brisbane was concentrated in the Southern precinct and gross take-up was approximately 54,000 square metres. A lack of prime assets available for sale, led to investor attention in the secondary market. The Prime and Secondary yield spread continued to narrow in Sydney and Melbourne. Brisbane saw the yield spread narrow for the first time since 2012. AUSTRALIAN PROPERTY OPPORTUNITIES FUND QUARTERLY UPDATE MARCH 2017 3
FUND STATISTICS PORTFOLIO SUMMARY OCCUPANCY (%) VALUE ($M) 1 Oxford Village, Darlinghurst NSW 97 82.9 390 St Kilda Road, Melbourne VIC 95 81.0 Windsor Riverview Shopping Centre NSW 96 54.7 Lynbrook Village, Lynbrook VIC 94 37.0 Noosa Village, Noosaville QLD 100 29.5 Lake Innes Village, Port Macquarie NSW 99 27.5 Total 96 312.6 1. At 31 December 2016. GEOGRAPHIC DIVERSIFICATION (by current value) SECTOR DIVERSIFICATION (by current value) 9% 38% 53% NSW VIC QLD 35% 65% Retail Office TOP TENANTS (BY GROSS INCOME) Wesfarmers (from Coles and Liquorland) 15% Study Group Australia 11% Fitness First Australia 4% Toll Transport 4% Woolworths (including BWS) 3% AUSTRALIAN PROPERTY OPPORTUNITIES FUND QUARTERLY UPDATE MARCH 2017 4
WEIGHTED AVERAGE LEASE EXPIRY (BY GROSS INCOME) 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Vacant 2017 2018 2019 2020 2021 2022 2023+ Source: Fort Street Real Estate Capital, JLL For more information, visit apof.com.au or email info@australianpropertyopportunitiesfund.com.au. This document relies on actual property data from JLL Research (unless otherwise stated), current as at Q1 2017. This commentary has been produced solely as a general guide and does not constitute advice. JLL, its officers, and employees shall not be liable for any loss, liability, damage or expense arising directly or indirectly from any use or disclosure of or reliance on such information. DISCLAIMER This Quarterly Update (Update) has been prepared by Fort Street Real Estate Capital as Investment Manager of Australian Property Opportunities Fund (Fund). An investment in the Fund is subject to various risks, many of which are beyond the control of the Investment Manager and the Fund. The past performance of the Fund is not a guarantee of the future performance of the Fund. This Update contains statements, opinions, projections, forecasts and other material (forward looking statements), based on various assumptions. Those assumptions may or may not prove to be correct. None of the Investment Manager and the Fund, their officers, employees, agents, analysts nor any other person named in this Update makes any representation as to the accuracy or likelihood of fulfilment of the forward looking statements or any of the assumptions upon which they are based. This Update may contain general advice. Any general advice provided has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider the appropriateness of the advice with regard to your objectives, financial situation and needs, and consider obtaining advice from a financial advisor. You should obtain a copy of the relevant PDS or offer document before making any decisions to purchase the product. AUSTRALIAN PROPERTY OPPORTUNITIES FUND QUARTERLY UPDATE MARCH 2017 5