BUILDING ON THE BACK OF SUBURBAN COMMERCIAL PROPERTY DEMAND

A CBD property trust group has made big investments in the Queensland property market, seeking positive returns in the 2012 financial year.

Cromwell Property Group (CMW) has its eye on commercial buildings outside of Brisbane’s CBD. It acquired HQ North Tower in Fortitude Valley for $186 million and the Icon Ipswich Tower for $93 million that were developed by Leighton Properties.

Managing director Paul Weightman (pictured) believes demand for suburban office space is driven by population growth in Ipswich and the State Government’s desire to decentralise and continue to grow the corridor to the west of Brisbane.

“Ipswich is an early version of the Parramatta market in Sydney. There are the same factors to enable Ipswich to grow into a strong commercial property market,” he says.

“Tenants requiring a lot of floor space that cannot be accommodated in the CBD are driving growth in the Fortitude Valley. The area has good amenities, transport services and is fundamentally linked to the CBD.”

The lack of new available stock has increased demand for office space, prompting it to explore opportunities in refurbishing and upgrading buildings to asnew condition with relatively low rent rates.

The group recorded a loss after tax of $6.7 million for the half-year ending December 31, 2011 compared with a $28.9 million profit in the previous corresponding period. Weightman reveals the difference in profit was due to $10.4 million in transaction costs write-offs involved with the HQ North deal and a non-cash adjustment to the fair value of interest rate swaps totalling $27.5 million.

“It is an accounting loss; you can have a $27.5 million profit or loss depending on which way the market goes,” he says.

“However, we have gone from having a potential $24 million to a $12 million write-off.”

CMW has observed a property value growth in the Brisbane and Melbourne markets, but Sydney and Adelaide remain flat with Canberra still on the downturn.

Weightman suggests the short-term viability of Queensland commercial property investment depends on consumption from commodities and resources companies.

Earnings from property investments were up 15 per cent to $37.5 million in the first-half of FY12.

The group plans to continue building its portfolio of high-quality office assets.

“We have signalled to the market, we raised a significant amount of capital, but we are not looking at raising more to buy assets. We want to grow our portfolio organically through acquisitions and sales,” he says.

CMW has completed a two-year capital raising program to drive earnings and net tangible assets growth from capital recycling opportunities and funds management activities.

“We have been busy with a $49 million equity raising for the unlisted Ipswich City Heart Trust. We will use proceeds to improve the portfolio.”

The group manages four unlisted funds with $530 million in external assets under management. More than $900 million in capital raised to date has been absorbed by the group as part of its FY07 stapling.

It has also moved into wholesale funds management by launching Cromwell Real Estate Partners with five financial experts led by Steven Papadopoulos and Robert Percy who will work from the Sydney office.

The group will have no material debt maturities until June 2013, but generally owes $783 million to the big-four banks and a European bank that Weightman is keeping under wraps.

“We entered the GFC lowly geared and acquired assets, but still bear the legacy of having to use capital raisings to reduce debt,” he says.

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TOP PUBLICLY LISTED COMPANY
15.
Cromwell Property Group (CMW)
MD: Paul Weightman
Market Cap: $839m
Revenue ’11: 181.9m
Profit ’11: $88.1m
Staff: 77
Established: 1971 as White River Corporation (rebranded to Cromwell in 1998)

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