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One of the more common questions posed to me by individual investors and industry operatives alike relates to the Charter Hall decision making process around our property investments.
In essence the enquiry amounts to: “How do you decide which commercial properties to buy?”
We usually point out the process involves two levels.
First is publicly marketed/advertised sales, or ‘on market’ deals, for short.
We monitor and assess most properties of potential interest from this public source.
A second category, and it’s a substantial one, is via our formal and informal networks, trade contacts or relationships across the industry. These are generally referred to as ‘off market’ deals.
Charter Hall as an industry leader in terms of size, performance and reputation, has an extensive network of professional relationships amongst potential sellers, commercial agents and tenants who may wish to do a “sale and leaseback”. These generate a flow of opportunities including some which other property managers would not have access to.
Our ability to execute transactions, from modest to very large in size, is a significant factor. Charter Hall has a strong reputation for its ability to complete acquisitions and this is a source of competitive advantage when bidding for assets – on multiple occasions this has been a key reason why a seller has decided to sell to Charter Hall and not to others. We also think outside the square – we can sometimes see opportunities others may not.
A third way we acquire assets is through our development capabilities. For example, in 2016 we developed the prime office tower at 1 Parramatta Square that is now home to over 10,000 students from Western Sydney University. The development forms part of Charter Hall Direct Office Fund and provides investors with access to a prime quality brand new commercial property.
Charter Hall benefits from a large number of senior property professionals in our transactions team. They specialise and focus on sourcing properties on behalf of our investors, then oversee the second level of the acquisitions process, and finally manage the divestment process when an asset needs to be sold.
That second level of the acquisition process is the detailed analysis of those properties which meet our first filter or test. This is the ‘micro’, due diligence or so called deep dive.
An initial evaluation by our transactions team and the relevant fund managers considers fundamental factors, namely:
If a property passes this first filter and meets our criteria in these four areas, the transactions team will then draw on expertise of other areas of the Charter Hall business to make a deeper assessment of the property – industry and sector research, asset management, technical services, tax, finance and legal.
If after this evaluation, a Charter Hall fund is interested in pursuing the asset we will bid for the property.
If successful in bidding, the fund is placed into exclusivity on the acquisition for a usual period of up to four weeks. This means the seller has agreed not to deal with any other bidder, and the fund will have a period of time to undertake further detailed due diligence and seek required internal approvals to proceed.
The due diligence process, both initial and deeper dive, is very thorough and we use external specialists (e.g. engineers, surveyors, builders, lawyers) to assess key areas of the property to ensure the fund is fully informed of the property prior to the purchase.
This deeper due diligence includes a review of the following:
The Responsible Entity Board approval is then required before any acquisition is made and before the property is added to any fund portfolio.
A final point to note is that at Charter Hall we never buy a property without having an exit strategy. It’s one of the reasons we often prefer to purchase properties with very long leases. It provides the possibility of marketing the property years down the track with a high quality tenant and a lease long enough to be attractive to the next owner.