MPF leasing leads 2019 performance
Mair Property Funds enjoyed a successful leasing year in 2019, actively negotiating approximately 22 leasing transactions throughout the year to generate $2.7 million in rental income while maintaining a strong occupancy rate of 98% across our portfolio.
Today’s leasing environment – how has MPF adapted?
For several years, many tenants in the commercial market have been subject to fixed 3-5% rental increases on leases that in some instances extend to 10 years or more. With the Australian Consumer Price Index averaging 2.1% over the past five years (1.7% in the year to September 2019), this has resulted in some rents increasing at a faster rate than the growth of tenants’ businesses, with these unsustainable rental models in turn placing commercial assets at greater risk of vacancy.
In this market, Mair Property Funds has maintained the view that it is better to retain and attract strong tenants through realistic and high-quality leasing deals while minimising the risk of vacancies by ensuring our rental models (and therefore our tenants’ businesses) remain sustainable. By coupling this with a proactive approach to lease renewals, regular market rent reviews and a deliberate focus on enhancing the tenancy mix of our funds’ portfolios, we have successfully maintained strong occupancy rates and maximised the rental potential of our asset base to continue delivering stable returns to our investors. Below are a selection of some of our recent leasing transactions:
21 William Street, Beckenham
Acquired by MPF in 2009, the property at 21 William Street is a multi-tenanted large format retail centre with two strong tenants in national retailers, Forty Winks and Beacon Lighting.
Held in MPS Unit Trust No. 1, the asset was facing moderate leasing risk due to the upcoming expiry of both leases, which were due to terminate fifteen months apart. While this posed a potential risk to two significant income streams, due to relatively soft market conditions in Western Australia, the tenancies were also facing competition from comparable large format retail premises in both Beckenham and Cannington, which were available for lease and offering attractive terms.
How did MPF respond?
Early engagement with each tenant regarding their upcoming lease expiry was critical in ensuring a positive result while mitigating associated risks for our investors. We were realistic with current market conditions and offered competitive rents and incentives to ensure both tenants renewed their leases and no vacancy was incurred, with the resulting renewals extending the weighted average lease expiry of the trust to seven years.
Even with our competitive approach, we are confident that we achieved strong market terms, with the resulting extension maximising the income security of the trust for a further term of seven years and enhancing the asset’s investment value should the trust decide to sell beforehand. The new leasing terms also featured fixed income growth provisions to facilitate the asset’s future rental growth and enhance the trust’s overall performance.
Broadway Medical Centre, Ellenbrook WA
Mair Property Funds purchased Broadway Medical Centre in June 2017 with a relatively short weighted average lease expiry of 2.9 years by income.
The single biggest risk this property presented was the fact that seven out of the asset’s eight tenants had leases that expired in 2019. Through the acquisition process, we analysed each tenant’s rent and determined that they accurately reflected current market values and offered sustainable models moving forward. As a result, we were confident that each tenant would renew their lease and we would be able to maintain (and increase) rents at the centre.
Over the past 12 months, our Commercial Funds Manager negotiated six lease renewals and one new lease at the centre, totalling $798,437 in rental income. The new lease was particularly important to the asset as the existing café tenant was not trading well and the space was too large for their needs. We were able to negotiate a deal for an existing tenant who had been trading strongly to expand into the space, adding a new holistic exercise and health consulting business to the centre. The original tenant is now subleasing space back to reduce their lettable area, in turn benefiting both of the businesses.
As at January 2020, the centre is 100% leased with a WALE of 4.3 years, marking a 1.4 year extension from the original situation at purchase, with the net rental income having increased by 5.5%. This rental improvement has in turn helped us to raise investor distributions for the trust from 8% to 8.5%.
Castle Hill Village, Murrumba Downs QLD
The neighbourhood shopping centre in Murrumba Downs was purchased by Mair Property Funds in late 2016 as part of MPF Retail Fund.
Perhaps our most active management over the past 12 months, we successfully negotiated four strategic lease renewals during this period, leased four vacant shops, and are currently in the process of finalising four further renewals with existing tenants.
Our leasing campaign placed a deliberate focus on targeting service-based tenants who, due to the physical nature of their services, would help to drive increased footfall to the centre, with the non-discretionary nature of their offerings also presenting a more resilient model during softer economic conditions. The new tenancies include an Indian restaurant, hairdresser, barber/café shop, and dance studio to complement the existing tenants within the centre and further enhance the asset’s tenancy mix.
In line with our leasing strategy, our focus in negotiating these deals was on retaining strong tenants and maintaining a high occupancy rate at the centre. As a result, we strategically adjusted the rent for two of the lease renewals in exchange for a longer lease term, which has helped to enhance the WALE of the centre and reduced associated risks for our investors.
Looking ahead, we are in the process of implementing a capital works program to further enhance the performance of the asset while supporting the longevity of existing tenants and maximising the centre’s future appeal to prospective buyers.
Overall, these leasing transactions have brought the centre to 100% occupancy, secured approximately $692,303 in rental income for our investors, and increased the WALE from 4.4 years (January 2019) to 6.4 years as at January 2020 .
What’s ahead for MPF?
Mair Property Funds has another busy year of leasing ahead in 2020, and we are already in the process of engaging with tenants whose leases are approaching expiry later this year and into 2021 as we further our focus on delivering stable and secure income for our investors.
If you would like to find out more about the latest opportunities for investment with Mair Property Funds, please visit our website or contact our Key Relationships Manager, Brad Dunn, at email@example.com.