Ask a Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part three of this edition, we're joined by Grant Nichols, fund manager of the $2.4 billion Centuria Office REIT (ASX: COF), Australia's largest listed pure-play office real estate investment trust (REIT). Today, Nichols discusses the threats and opportunities ahead for Australia's commercial office sector.
The Motley Fool: Earlier, we discussed how tenants' flight to quality has helped your leasing success. Noting that most of your REIT's office space is outside of city centre locations, what impact has that had?
Grant Nichols: Yes, COF doesn't have a lot of CBD exposure in the eastern markets. In fact, we have no assets in either the Sydney or Melbourne CBDs.
It's a bit of a contrast from what you hear, that people have this great desire to be located in CBDs. That's not always the case.
There are a couple of things worth noting.
We've looked at the S&P/ASX 200 Index (ASX: XJO). And 53% of the ASX 200 corporations are headquartered either in metropolitan or regional office markets. It's a big proportion of the Australian economic output that want to be located in markets we're investing into.
The other key to investing in markets outside of the CBD is they generally can allow for a much more pleasant commute. People want to be close to home, and the public and private transport accessing their workplace won't be as congested.
What's interesting to note is that the most important aspect of employment workplace satisfaction is the commute. If you can address that, you have a distinct advantage from a tenant perspective for attracting and retaining employees.
MF: Do you have any regrets over the past year with the COF REIT?
GN: Like a lot of peers, everyone's been somewhat shocked by the velocity of the interest rate change. It's been a very dramatic shift from March to where we are now.
In retrospect, we would've tried to mitigate that interest rate risk more than we were able to. Ultimately, the velocity of change was quite unprecedented, so it's been difficult to moderate and foresee.
MF: And what was your best call in the Aussie office market sector?
GN: Really, it's the way we've been changing and creating the COF portfolio.
We listed on the ASX back in 2014. And during that period, from 2014 to 2022, we've dramatically improved the quality of the COF portfolio. And that has enabled us to complete the leasing that we have. Because of that flight to quality and experience that tenants are demanding, we've provided a much better product than we were able to eight years ago.
That's enhanced our position and protected us from that volatility in tenant demand. Having a more desirable portfolio certainly aided us through the COVID period.
MF: What's the biggest threat for investors in ASX office REITs in the year ahead?
GN: The biggest threat is if the RBA goes too hard with interest rate rises. If they go too hard and we incur an economic downturn, that's going to have ramifications not only for business but the broader economy. Office markets are almost directly related to economic output and unemployment.
We certainly hope the RBA is fully informed on what their impacts are and they can engineer a soft landing.
MF: And what's the biggest opportunity you see for ASX office REITs ahead?
GN: That relates to my earlier comment on how we position the COF portfolio. One of the things we've been doing across the portfolio is trying to improve the amenities we have within our office buildings.
At 818 Bourke Street, one of our assets in Melbourne, we've undertaken a lot of upgrades to amenities. We've done floor refurbishments, put in prayer rooms, provided more breakout spaces for teams to collaborate outside of their tenancy.
We also had a very large, underutilised rooftop on this building. So we utilised that to put in an outdoor exercise space, barbecue space, outdoor meeting space. Just creating an area where people can go outside of their workplace and utilise that space for their own personal downtime. Or for the tenant to utilise the space to improve their own collaboration within their business.
That's something we're looking at across our portfolio. I think the flight to quality and amenity is going to become more and more important. Particularly as employers are wanting to get their employees back to the workplace. If they can work with the landlord to facilitate an outcome that's more appealing, I think we will continue to see opportunities across our portfolio.
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If you missed the earlier installations of our three-part interview series with Grant Nichols, you can find part one here and part two here.
(You can find out more about the Centuria Office REIT (ASX: COF) here.)
