Q3 2023 / Portfolio Q&A / Marquette Properties
Portfolio Performance and Commercial Office Investment Value and Risk
Q&A with Toby Lewis, Founder & Managing Director of Marquette Properties
Introduction
We first had exposure to Toby Lewis and Marquette Property in about 2014 via a property transaction that netted a c. 20% investment return (IRR). MP Funds Management was involved in the funding capital stack of Post Office Square at 270 Queen Street Brisbane, a 1,756 sqm retail stratum and multi-level car park, which was acquired for $67 million and sold for $95.5 million in 2016 after a 2-year hold. Our involvement was via another capital partner in the deal and Toby Lewis and his partners at Marquette Property were responsible for finding and originating the deal and managing the value-add to the transaction.
Marquette Property currently has $1.24 billion in real estate assets under management with a particular focus on the commercial office sector. As specialists in the commercial office and high-quality retail sectors, I have Toby on speed dial for both data-driven updates to the market and co-investment opportunity for MP Funds Management. I also have some of my SMSF invested with Marquette in a commercial office tower in 189 Grey Street, Brisbane which in the June 2023 Quarter had a $5million improvement to initial purchase price of $104.5million with occupancy rate of 81%. A distribution of 6.0% was paid as of September 2023 consistent with the information memorandum.
I share with you here Toby’s current take on investment risk and value in the investment-grade property sector, with specific focus on the commercial office sector in Brisbane and Sydney:
Question & Answer
Question 1
MP: What is the total value of your property assets under management and how are you seeing interest rates affect the values of the portfolio?
Toby: $1.22b and approximately 120,000 sqm of net lettable land (NLA) (as at June 2023)
Current split is as follows:
Office: $785,000,000 & 79,000 NLA
Retail: $183,000,000 & 5,200 NLA
Mixed (Office & Retail) $188,000,000 & 24,100 NLA
Automotive: $60,000,000 &10,400 NLA
Higher interest rates mean softer asset pricing, and this is our major concern at present. As a result, we continue to work overtime to add value to our assets to mitigate this detrimental impact on asset values that we cannot control.
We continually assess and estimate the actual and likely impacts of market dynamics on the assets based on various sources of data including market intelligence, data based on our investments, interest rate analysis and forecasts from banks etc
Question 2
MP: If 12 is the peak of the market on the property clock where do you believe we are now?
Toby: There are strong indications that we are at the bottom. It is likely to extend for 9 more months with a possible strong rebound. It will depend on a few market factors including interest rates. We believe when interest rates have been held for a long period, and more so when they come down, much of the domestic and global capital that has been on the sidelines since either covid or the start of the war in Ukraine commenced, will start to buy. This is where we anticipate momentum will build, and values rise again.
Question 3
MP: How are you expecting interest rates to play out over the next 12-24 month period?
Toby: Potentially one more increase, before 12-18 months of stability at the ‘new’ heightened levels. With interest rates dropping before the October 2024 election.
Question 4
MP: How are you seeing the work from home phenomena effect your commercial office portfolio and what is the current physical occupancy rate?
Toby: Enquiry for office product, particularly smaller fitted spaces within high quality markets, continues to remain strong
Our two largest office assets are almost entirely ‘multi-let’ in nature i.e. smaller non-full floor tenancies and we continue to see high levels of demand for this offering.
Furthermore, vacancies in the Premium market in Brisbane continue to constrict which has resulted in an increase in demand and enquiry for larger and full floor tenancies within our buildings.
Brisbane is also leading most national markets in terms of demand at present which has been evident within the leasing results within Gold and Blue Tower’s this year
Gold Tower, a 32 level A-grade commercial office asset, with a 2-storey annex that we acquired last year in Brisbane CBD has completed 38 leases in 30 months.
We think WFH is to office what online shopping was to retail, a threat that dissipates and compliments, rather than kills the sector. Good retail assets and good retailers have performed well. We believe good office assets with good tenants will perform too.
As at the end of August 2023, our portfolio occupancy is sitting at approximately 90%.
Question 5
MP: In your retail and restaurant portfolio are you seeing any slowdown to trade during this softer economic period?
Toby: Our assets at Barangaroo in Sydney and on the Queen Street Mall in Brisbane are…