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Annual Report 2017

RESILIENT
GROWTH

WHAT SETS
US APART

As a property funds and investment manager we own and manage a commercial property portfolio valued at $19.8 billion comprising 329 office, retail and industrial and logistics properties on behalf of our institutional and retail investors.

OUT PERFORMANCE
OVER 1, 3, 5 YEARS (% P.A.)

1 YEAR P.A.

19.8%
12.0%

3 YEAR P.A.

16.1%
11.6%

5 YEAR P.A.

14.7%
10.3%

2017
HIGHLIGHTS

OPERATING EARNINGS

35.9cps

18.1%

STATUTORY PROFIT AFTER TAX

$257.6m

19.7%

TOTAL PLATFORM RETURN1

27.6%

FUNDS UNDER MANAGEMENT (FUM)

$19.8b

13.7%

PROPERTY INVESTMENT PORTFOLIO

$1.5b

BALANCE SHEET GEARING

0%

  • Property Investment Portfolio
  • MSCI IPD Index Performance
  1. Total Platform Return is calculated as the distribution per security plus the growth in NTA per security divided by the opening NTA per security adjusted for contributed equity.

OUR
STRATEGY

  • FY17 RESULTS
  • 5 YEAR STRATEGY PERFORMANCE

ACCESS

Accessing equity from listed, wholesale and retail investors

$2.3b
$8.1b
gross equity raised

DEPLOY

Creating value through attractive investment opportunities

$5.2b

gross transactions

$17.3b

transactions

$3.0b
$11.7b

acquisitions

$2.3b
$5.6b

divestments

MANAGE

Funds management, asset management, leasing and development services

$2.4b
$11.4b

FUM growth

329

assets

144

additional properties

7.7years

Weighted Average Lease Expiry (WALE)

INVEST

Investing alongside our capital partners

$430m

increase in PI1 to $1.5b

39%
$1,050m

increase in PI

220%
19.8%

Total Property Investment Return2

14.7p.a.

Total Property Investment Return2

  1. PI refers to the Property Investment Portfolio
  2. Total Property Investment Return calculated as distributions received from funds plus the growth in investment value divided by the opening investment value of the Property Investment Portfolio. This excludes any investments held for less than a year.

DAVID
CLARKE

Chair

CHAIR’S
REPORT

Charter Hall Group has produced another solid full year financial result, delivering growth in the 2017 financial year across all key metrics to provide shared value to our securityholders and investors, our tenants, our people and the communities we operate in.

In the 2017 financial year, we continued to focus on our strategy to access, deploy, manage and invest equity alongside our investment partners in our core real estate sectors to deliver a total property investment return of 19.8%.

VIEW THE CHAIR’S REPORT

CHAIR’S
REPORT

The Group continues to perform strongly, driven by a purposeful strategy that has been judiciously executed to deliver a record result.”

Dear Securityholders,

Charter Hall Group has produced another solid full year financial result, delivering growth in the 2017 financial year across all key metrics to provide shared value to our securityholders and investors, our tenants, our people and the communities we operate in.

The Group continues to perform strongly, driven by a purposeful strategy that has been judiciously executed to deliver a record result.

This continues our solid growth trajectory which, in the past five years, has resulted in the Group delivering compound average growth of 11.6% in operating earnings per security and compound average growth of 10.5% in distributions per security.

Our ranking as one of the highest performing A-REITs in the ASX 200 Property Accumulation Index endures. In the 2017 financial year, we continued to focus on our strategy to access, deploy, manage and invest equity alongside our investment partners in our core real estate sectors to deliver a total property investment return of 19.8%.

Sustainable balance sheet

Your Board has purposefully engaged the management team to focus on maintaining a best in class approach to capital management. As a result, the Group continues to have no net debt on balance sheet, and look-through gearing has fallen to a conservative 20.1%.

This places the Group in an excellent position to capitalise on opportunities across its investment portfolio, with some $3 billion in available investment capacity across our platform.

A high performing, diverse and engaged culture

As a business, we have a clear vision to deliver innovation supported by inclusion and diversity. An inclusive and diverse culture delivers greater equality, and better ideas. The achievement of such a culture requires practical action and unrelenting focus.

The question we considered at a Board and Executive level was ‘What do we need to do to make a real difference and how will diversity and inclusion support our business strategy?

In response, we have a very clear policy that sets gender targets for leadership levels and further commits to genderbalanced shortlists and hiring panels for all leadership positions.

Another important aspect to achieving a high performing, diverse and engaged culture is a focus on internal talent. Charter Hall’s unique operating model, as well as the level and type of activity across the Group means that we are able to provide a wide variety of opportunities for our people to develop and grow their career with us.

To ensure that we are building our talent pipeline and that our people see clear career pathways for themselves in the business we look at transferrable skills and provide employees the opportunity to work anywhere in the business.

Our commitment also extends to attracting young talent to grow our talent pipeline and facilitate greater innovation. Our partnership with Western Sydney University and the University of Technology Sydney as part of the Charter Hall Scholarship Program is testament to this.

A strong board with a diverse skill set

The Charter Hall Board continues to comprise a majority of independent directors, in line with best practice.

During the period, Mr Peter Kahan resigned from the Charter Hall Group board effective 20 December 2016. We thank him for the significant contribution he made during his seven-year tenure as a non-executive director.

Mr David Ross was appointed as an Independent Director of the Charter Hall Group with effect from 20th December 2016. Mr Ross has 30 years’ experience in the property industry in Australia and overseas, including a total of 8 years as Chief Executive Officer of GPT and Global Chief Executive Officer, Real Estate Investments for Lend Lease.

I encourage all our securityholders to familiarise themselves with your directors – our biographies can be found on page 30 of the Directors Report.

Sustainability and community

We are committed to creating shared value outcomes in our business through the key pillars of environment, workplace and community, and are proud to be collaborating with our industry partners, GBCA, NABERS, GRESB and WELL Building Institute to expand our Green Star footprint.

During the period, Charter Hall became the largest Green Star rated portfolio in Australia with 178 performance ratings across assets we manage. We’ve also improved our NABERS energy rating in our office portfolio to 4.5 and had our retail portfolio rated 3.77. We will continue to look to further improve upon these positions and lift our portfolio ratings.

We are also proud to partner with the international movement, Pledge 1%, which integrates our business commitment with investment in our communities, through our people, our places and our partnerships.

Outlook

The strong financial position of Charter Hall Group, and the quality and diversity of its underlying investments, which it holds through direct property, partnerships and funds are well positioned for resilient performance.

The focus of your Board is in providing clear governance and oversight to assist management in continuing to create sustainable, long-term investment returns through diligent value creation and prudent capital management.

As we continue to build on the Group’s solid foundations, I take this opportunity to thank our customers, investors and securityholders and our highly skilled people for their continued support.

DAVID
CLARKE
Chair

DAVID
HARRISON

Managing Director
& Group Chief
Executive Officer

MD & GROUP
CEO LETTER

Charter Hall Group has delivered a record result in the 2017 financial year as we continued to focus on accessing, deploying, managing and investing capital to deliver secure and growing income for our capital partners and investors.

VIEW THE MD & GROUP CEO LETTER

MD & GROUP
CEO LETTER

Charter Hall Group has delivered a record result in the 2017 financial year as we continued to focus on accessing, deploying, managing and investing capital to deliver secure and growing income for our capital partners and investors.”

GROUP PROPERTY INVESTMENTS

PROPERTY FUNDS MANAGEMENT EARNINGS DRIVER

FUNDS UNDER MANAGEMENT GROWTH

Performance highlights

In a period of intense activity, the 2017 financial year was marked by a record $5.2 billion of gross property transactions as our teams worked collaboratively to drive value for our funds, partnership investors and securityholders.

At the property level, we executed 646 leases – covering 729,000 square metres of space – with a healthy weighted average rent review of 3.5% across the portfolio.

The strength of the Group’s financial performance can be seen across all our key financial metrics:

  • Statutory profit after tax grew 19.7% to $257.6 million
  • Operating earnings per security pre-tax grew by 33.3% to 40.5 cents per security
  • Operating earnings per security post-tax grew by 18.1% to 35.9 cents per security
  • Net tangible assets grew 56 cents per security to $3.60, up 18.1%, and
  • Distributions grew 11.5%, to 30.0 cents per security.

Following another active 12 months of securing equity flows, deployment via development and acquisitions, together with the successful IPO of the Charter Hall Long WALE REIT (ASX:CLW), we have achieved Funds Under Management growth of 13.7% to $19.8 billion.

Our balance sheet Property Investment portfolio has also grown, rising to $1.5 billion in value and generating an attractive 6.9% property investment yield during FY17.

Delivering sustainable returns

We continue to curate our portfolios with a risk-adjusted focus on optimising returns, and delivering resilience and durable cash flows by enhancing tenant quality, extending WALE and driving income growth.

The Group successfully raised and deployed additional equity over the year into a range of new fund initiatives as well as investing alongside our capital partners into our existing vehicles.

Our Property Investments have continued to outperform their respective benchmarks, with the Group’s Property Investments delivering 14.7% per annum return over the 5 years to 30 June 2017. As a result, our Property Investments, outperformed the MSCI/IPD Unlisted Wholesale Pooled Property Funds Index which returned 10.3% over the same period.

Delivering on strategy

Performance and new fund innovation continue to reap significant rewards for the Group, delivering strong equity flows across our diversified equity sources.

We raised a record $2.3 billion of gross equity over the year, taking gross equity flows to $8.1 billion over the past five years.

Notably, all equity sources contributed to this growth during FY17.

Across our investment portfolios, the $5.2 billion of record gross transactions included $2.3 billion of divestments as we sought to crystallise gains for our investors and enhance portfolios.

We have now made over $5.6 billion of divestments over a five-year period, successfully repositioning our funds to drive sustainable returns and lock in realised returns. Preservation of capital and driving resilient income remain core strategies.

The 13.7% growth in our overall funds under management has been driven by net acquisitions, development capex and net revaluations, with completed office developments contributing strongly to valuation growth.

Maintaining a strong balance sheet

The Group’s balance sheet remains ungeared with $174 million of cash on hand as at June 30, providing us with sufficient scope to capitalise on current market conditions, with $3 billion of available investment capacity across the platform.

We continue to extend and deepen our relationships across both the banking and debt capital markets and, during the year, we completed three US private placements, raising $548 million and delivering increased debt tenor, enhanced Fund liquidity and diversification of lending sources.

Growth in property investment earnings

Our Property Investment Portfolio represents the ‘Invest’ part of our strategy which provides a strong alignment of interest with our investor customers. This alignment of interest ensures our investors and securityholders prosper together, collectively benefitting from our property and investment expertise.

The Group’s investments are well diversified across sectors and funds. During the period, our Property Investment Portfolio grew significantly by 39% and is now over $1.5 billion in value. This was a result of $304 million of net investments and $118 million of positive net revaluations, aided by our recent successful equity raising.

Property Investment Portfolio earnings grew 8.2%, primarily driven by weighted average rent review growth of 3.6 %, complemented by strong market rental revision in the Office sector and the $304 million increase of net investments in the Property Investment Portfolio during the year.

The Group property investments chart shows the growth of our total Property Investment Portfolio to $1.5 billion and our co-investment yield, which was relatively stable over the past year, at 6.9%.

High quality, diversified property portfolio

The weighted average lease expiry (WALE) of the Property Investment Portfolio is high relative to our peers at 7.4 years, but did decline year on year, reflecting a strategic change in the portfolio composition.

The Group swapped most of its stake in the Long WALE Investment Partnership into an equity position in the listed Charter Hall Long WALE REIT, moving a portion of our investments from a WALE of 17.2 years to a WALE of 11.8 years. We still maintain our exposure to these assets, but now in a more diversified portfolio.

Our tenant retention remains high, at 76.2%, albeit our team has capitalised on some vacancy opportunities in Sydney to capture rental upside through tenant movement, taking advantage of the strength in the Sydney office leasing market. This contributed positively to an uplift in our weighted average rent review from 3.4% to 3.6%.

Growth in funds management

Our Property Funds Management portfolio is well-diversified, having grown to 329 properties, leased to 2,658 tenants and delivering nearly $1.5 billion dollars of gross rental income.

We have continued to diversify our equity sources, which now comprises:

  • 65% Wholesale equity
  • 21% listed equity (comprising Charter Hall Retail REIT (CQR) and the successful IPO of Charter Hall Long WALE REIT (CLW)), and
  • 14% equity in our market-leading Charter Hall Direct delivering a significant earnings contribution.

We also continue to focus on delivering a sustainable and resilient return through property sector diversity, with 46% of our investments in Office; 26% in Industrial, and 28% in Retail.

That resilience exists across all our assets. In the Retail sector, for instance, more than 35% of the portfolio is in Long WALE assets leased to the market leader Bunnings in Hardware, and ALH and Dan Murphy’s in pubs and big box retail liquor stores.

Investment Management revenue increased 41% year on year, contributing nearly 75% to FY17’s Property Funds Management revenue, while funds management fees grew nearly 20% – a result of new fund creation, property acquisitions by existing funds, and valuation gains.

Development skills a core competency

The Group currently has $1.9 billion of committed development projects with a forward pipeline of identified projects of $2.8 billion.

All development activity takes place in our managed funds, which have mandates that permit development, refurbishment and repositioning of assets to enhance value and expand their core investment holdings.

These developments will generate high quality, long leased commercial property for our funds, at yields in excess of current transaction pricing. This also provides attractive incremental FUM growth for Charter Hall and enhances our credentials to attract capital.

Outlook and guidance

Looking forward, we remain confident in the underlying strength of our Australian portfolio, which is well diversified to position us strongly through market cycles.

We believe the investment landscape will continue to accommodate growth based on; the relative attractiveness of real assets, continued forecast equity flows into real asset fund managers with strong track records, and asset values remaining well supported.

As a result, we expect to see continued support for our business model, which benefits from multiple sources of equity flows towards high quality real estate.

With another active year ahead of us, we will be as focused as ever on delivering our strategy to access, deploy, manage and invest alongside our listed, retail and wholesale investors.

Based on no material change in current market conditions and having regard to the 18% earnings growth achieved in FY17 over FY16, our FY18 guidance is for operating earnings per security post-tax to be no less than FY17 of 35.9 cents per security.

The distribution payout ratio is expected to normalise and fall within our longerterm target range, being 85% to 95% of Operating Earnings Per Security post-tax on a full-year basis.

Finally, I would like to thank our people based around Australia for their continued hard work and dedication toward achieving these results. And on behalf of our senior executive management team, I thank you, our securityholders, for your continued trust in us as we deliver for you.

DAVID
HARRISON
Managing Director & Group Chief Executive Officer

PORTFOLIO
PERFORMANCE

PROPERTY FUNDS MANAGEMENT
PERFORMANCE

VIEW CASE STUDY

DIVERSIFIED EQUITY SOURCES

As an investment and fund manager, we understand that performance is everything. Over the past five years we have accessed $8.1 billion in gross equity from wholesale, retail and listed investors and deployed this into $11.7 billion of acquisitions across our core real estate sectors.”

RICHARD STACKER,
GROUP EXECUTIVE – GLOBAL INVESTOR RELATIONS

Charter Hall Group has continued to attract investors to our real estate funds management platform with $2.3 billion of gross equity raised from domestic and international investors across all equity sources in the past year. We deployed this equity into $3 billion of acquisitions in our core real estate sectors – office, industrial and logistics and retail – to create value and generate superior returns for our customers.

“The Group is in an excellent position to capitalise on opportunities across its investment portfolio, with some $3 billion of equity and undrawn debt available as investment capacity.”

The addition of 18 new local and offshore wholesale investors supporting capital raisings validates our high performance as does the fact that 10% of those funds raised came from international high net worth investors, a reflection of the quality of our real estate portfolio and the strength of the Australian commercial real estate market.

Investors have been attracted to our investment management platform based on a focus on real assets and in the global context, Australian funds rank highly among other countries in Asia Pacific.

During the period, the Group’s $3.4 billion flagship office fund, the Charter Hall Prime Office Fund (CPOF) completed an equity raising of over $500m, oversubscribed. CPOF, which provided investors with a 19.2% return in fiscal 2017, the highest return of all funds in the Mercer/IPD Australia Unlisted Wholesale Index, was accepted into the core series index from July 2017 based on a gearing level of less than 30%.

The Group’s largest industrial fund, the $2.4 billion wholesale Charter Hall Prime Industrial Fund (CPIF), closed its $300 million equity raising, also oversubscribed and was on top of the $450 million raised in FY16. The fund also enhanced and increased the tenor of its debt-funding platform in March 2017, raising AUD$350 million (equivalent) through a US Private Placement (USPP) transaction.

Both CPOF and CPIF are expected to open for further equity in FY18. CPOF continues to focus on the office markets in the strong eastern seaboard states, where it has a strong pipeline of build to hold opportunities. CPIF will continue to leverage its strong relationships with tenant customers in delivering new purpose built industrial facilities and when strategically acquiring assets.

The Group’s market leading unlisted Direct Office Fund (DOF) has also accepted a further $250 million in equity from investors during the period and in total has raised $500 million since reopening in 2015 and continues to see further equity inflow in the new financial year.

The Charter Hall Direct business was acknowledged during the year for its high performance awarded the “Property Fund of the Year” at Money Management /Lonsec’s 2017 Fund Manager of the Year Awards along with the “Commercial Property – SMSF Member” award at the CoreData Self Managed Super Fund Awards 2017.

The equity raisings have strengthened the funds’ balance sheets, provided capital for new build-to-hold assets, enhanced current assets and given us further capacity for acquisitions. Providing solutions for our tenant customers across office, industrial and retail also helps us to deliver results for our investors and capital partners.

  FY14
$m
FY15
$m
FY16
$m
FY17
$m
Wholesale Pooled Funds 651 663 606 776
Wholesale Partnerships 261 598 467 217
Listed Funds1 260 274 76 988
Direct Funds2 277 180 318 355
Gross equity raised 1,449 1,705 1,467 2,336
Equity flows includes equity raised or returned only and excludes undrawn equity commitments
  1. Listed Funds include equity raised in CHC, CQR and CLW
  2. Funds and syndicates for retail, SMSF and high net worth investors

104

Properties
valued at $7.9b

77

Properties
valued at $3.7b

46

Properties
valued at $2.7b

21

Properties
valued at $1.0b

2

Properties
valued at $0.1b

71

Properties
valued at $4.3b

7

Properties
valued at $0.2b
FUM By Equity Source
Asset type diversification

SHARED
VALUES

At Charter Hall, we have integrated sustainability and community into our business to create a shared value framework.

To become Australia’s best and most highly recognised property investment and funds management business, we acknowledge that this requires a cohesive, Group-wide approach to sustainability and corporate responsibility that addresses all aspects of the property value chain.

Charter Hall’s Shared Value Framework recognises the UN Sustainable Development Goals and is aligned with the four pillars that underpin our corporate strategy: product, performance, people and partner. Our framework focusses on three key themes that will create Eco-Innovation, Place Creation and Wellbeing, with our people, in our assets and the communities in which we operate.

DOWNLOAD SUSTAINABILITY INITIATIVES

NATALIE DEVLIN, GROUP EXECUTIVE - PEOPLE, BRAND AND COMMUNITY

VIEW THE CASE STUDY

CREATING SHARED VALUE WITH PLEDGE 1%

We are proud to be the first Australian property company to commit to Pledge 1%. Our Pledge initiative aligns with our Shared Value Framework and demonstrates our approach to investing in our people, customers and the communities in which we operate.”

NATALIE DEVLIN,
GROUP EXECUTIVE – PEOPLE, BRAND & COMMUNITY

Charter Hall has joined Pledge 1% – the first property company in Australia to do so. Pledge 1% is a philanthropic movement that encourages organisations to create a culture of giving. We are joining an impressive network of companies across the globe, including Atlassian and Salesforce, who have spearheaded their own philanthropic efforts through the Pledge 1% movement.

“We are thrilled that Charter Hall has joined the Pledge 1% movement and is committed to sharing its success with the community. Employees, shareholders, customers, and the community all benefit when a company builds giving back into its DNA. It’s one of the best decisions we ever made.”
SCOTT FARQUHAR, CO-FOUNDER AND CO-CEO, ATLASSIAN

Pledge 1% enables part of our Shared Value Framework, where we focus on three key themes; eco-innovation, place creation and wellbeing extended through how we engage with our people, in our assets, and the communities in which we operate.

By pledging 1% of our people’s time, use of our places and support to our community partners, we are creating a difference that delivers a positive impact for our investors, our people and the communities in which we work and operate.

Charter Hall has always had a strong commitment to giving back to its people and the communities in which it operates and during the period Charter Hall’s people and teams:

  • Supported 24 charities through workplace giving including preparing meals for the homeless, sorting clothes for domestic violence shelters, care for animals, planting trees and building playgrounds for sick children
  • Supported our three national community partners which comprise the Property Industry Foundation (PIF), Foundation for Young Australians, and Australian Red Cross through training, mentoring and donations
  • Developed a new partnership with WithYouWithMe that solves the problem of effectively transitioning personnel from the Australian Defence Force to the Australian private sector. As part of the program we have taken on our first ex veteran, who is working across our Retail Operations in Western Australia.
  • Provided more than $1 million ‘in kind’ contribution of retail and office space across more than 100 communities around Australia; and
  • Contributed $500,000 to community partners either directly or through matching employees’ donations.

The exciting aspect about Pledge 1% is that it formally recognises the great work our people, our customers and the Group already contribute. As we strive to become Australia’s best and most highly regarded property investment and funds management business, we acknowledge that our focus on creating a Shared Value Framework requires a cohesive, Group-wide approach to sustainability and corporate responsibility.

“Salesforce is dedicated to changing the way companies think about corporate philanthropy. Today, we’re excited that Charter Hall is joining us in giving their resources back to the community. This is another great example of the power that business has to create change in our communities.”
SUZANNE DIBIANCA, EVP OF CORPORATE RELATIONS AND CHIEF PHILANTHROPY OFFICER, SALESFORCE

ANNE EDWARDS, HEAD OF GROUP FINANCE - CHARTER HALL

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OUR SECTORS

  • OFFICE
  • INDUSTRIAL
  • RETAIL
  • DIRECT

OFFICE

“As one of the largest managers of CBD office properties in Australia, our proactive asset management strategy means we are focused on portfolio composition, through selectively disposing of non-core assets and acquiring, re-developing or repositioning existing assets to ensure they remain attractive to our tenant customers and deliver enhanced value for our investors.”

ADRIAN TAYLOR,
GROUP EXECUTIVE – OFFICE

View the case study
View the case study
Watch the video

Comfy app that gives power to the people

This is a game changer in the way we manage our buildings and provide our tenant customers the best working environment.”

Geoff Sloan,
Head of Office Asset Management, Charter Hall

In an Australia-first innovation, Charter Hall has put power in the hands of its people by implementing a trial of the Comfy software application at its head office in No 1 Martin Place, Sydney. Once downloaded to a smart phone, Comfy enables users to provide feedback on their comfort and adjust the temperature in their office space to match their personal needs. It delivers on-demand, personalised comfort in the workplace and turns every employee’s smart phone into a ‘remote control’ for the office thermostat.

Due to the positive feedback on the trial, we will be soon be discussing Comfy with our tenant customers so they too can tailor the temperature in their spaces, enjoy greater comfort control for their people, and save on energy-related costs. As we are one of Australia’s largest owners and managers of CBD office space, the introduction of Comfy to our clients has the potential to transform how organisations approach workplace comfort and productivity.

We are also participating in a program with University of Sydney’s Indoor Environmental quality Lab called SAMBA - Sentient Ambient Monitoring of Buildings in Australia - which involves trialing high tech sensors that monitor the internal environment of a workspace. We are monitoring our temperature, acoustics, lighting and air quality, gaining deep insights into the workspace experiences that contribute to overall wellness of those who work in commercial buildings.

The Comfy trial in our head office had a positive effect on productivity, cost, data-gathering and general well being of employees in just three months. Between March and June 2017, there was an estimated 12.8% reduction in energy usage, positive feedback on productivity - with 58% of employees reporting they feel more productive with Comfy – and, with the data insights gained from the app, we can better understand how our buildings perform and how people utilise and enjoy the space.

Comfy will provide valuable information on how tenants are using their spaces and the conditions under which they are most productive. The current ‘one size fits all’ approach to temperature control in buildings doesn’t recognise that people feel temperature differently and that they do their best work under different conditions.

Comfy changes the way people interact with their space. It is both a game changer in how buildings and costs are managed. It is also one example of innovative tools and processes that we are continually exploring and engaging with to create and deliver the best experience for our tenant customers.

Education as an asset class

The ‘ivory towers’ of learning are transforming to meet modern learning needs. Charter Hall sees an opportunity for a fresh approach in how universities manage their property assets.”

Andrew Borger,
Head of Office Development

A sector in transition

Even the most cursory examination of Australia’s higher learning institutions will discover a sector responding to rapid change brought by market forces such as; globalisation, digitization, competition, government policy and the rise of the knowledge economy. During the past decade, universities have adjusted, adapted and innovated to continue their important contribution to social and economic stability in society.

Look deeper into the sector and you will see the impact of these market forces on the learning environment at a university. The ‘ivory towers’ of learning are transforming to meet modern learning needs, where knowledge is accessible 24/7 and can be delivered through a myriad of channels.

Large lecture theatres, some holding up to 1000 students, have been superseded by collaborative learning spaces. Learning spaces are designed for group work and participation by those not in the physical space. Learning is also being sourced through industry partnerships and digital channels.

The built environment of universities is part way through a metamorphosis evidenced by the emergence of vertical classrooms such as 1 Parramatta Square (1PSQ) - University of Western Sydney’s 14-storey campus – developed by Charter Hall and located in the heart of Parramatta’s CBD.

Student profiles have also changed markedly with international students making up close to 25 percent of the student population and providing a significant boost to Australia’s revenue from exports. Education – and more particularly – higher education – had the third highest export revenue earnings (as at January 2017) at $21.8 billion, after coal and gas in Australia. Its contribution and importance to our economic wellbeing increases year-on-year, with approximately 130,000 jobs created by the sector.

The growth in international student numbers has transformed the student accommodation market and ancillary services. January 2017 saw 382,000 international students enrolled in Australian educational institutions, a 16% increase over the same period in 2016.

Opportunities from disruption

It is clear that the education sector plays an essential role in Australia’s prosperity and the impact of any major changes or disruption to education will spill over into other sectors. The dominant operating model in Australia’s universities, which is asset rich and supports a large in-house back office and other services will, according to research conducted by Ernst & Young, ‘prove unviable in all but a few cases over the next 10-15 years.’ Like many disrupted industries, there are opportunities in the higher education sector that, if change had not been swift and structural, may otherwise have lay dormant.

The changes in delivery channels for higher education in particular have opened up significant opportunities for how universities manage their assets. Australia’s 39 universities have combined net assets worth $67 billion, with two-thirds of the value residing in property. In the pre-digital world, property assets had high utilisation and paid their way. But in our increasingly digital economy, where lectures and course materials can be downloaded, virtual assets are replacing some property assets.

Charter Hall sees an opportunity for a fresh approach in how universities manage their property assets, which will free up much needed capital for teaching and research, provide a solid, long term asset class for investors, and foster innovation and partnerships – fast becoming a core feature of universities’ offerings. The opportunities will extend existing relationships, lead to new partnerships and break new ground in how we teach and learn.

Property-related partnerships

Australia’s universities are ideally placed to participate in the property sector. This report, ‘Education as an asset class’ showcases several innovative property solutions from universities in Australia and internationally.

The business case is clear; university education assets can provide opportunities for universities, investors, the property sector and related stakeholders to identify and act on shared opportunities. These may lead to public private partnerships, a new approach to building student accommodation, innovative leasing arrangements, portfolio management and operations management. The report identifies education sector initiatives that include property strategies such as the vertical campus, mixed-use developments and innovation hubs, along with a range of property financing arrangements such as reserves, government, donations, university bonds and debt finance.

Most of Australia’s universities have, during the past decade, embarked on ambitious construction of new campuses, which are purpose designed for the new teaching and learning environment. Many of these new buildings are influenced by the transition of the corporate sector to the so-called ‘workplace of the future’, where the focus is on collaboration, productivity and cost efficiency.

In Australia, 1PSQ is garnering attention for its absence of lecture theatres. The 10,000 students will work in collaborative technology enabled spaces and informal learning environments such as roundtable spaces and private study or reading nooks.

Transforming the future

Societies that function to their full potential enjoy economic and political stability. The role of education in achieving stability is pivotal and Australia must continue to have a strong and robust higher education sector to remain competitive, foster innovation and create jobs. The activity of universities is ‘a direct and significant driver of growth in incomes, output and employment across the Australian economy’. (Deloitte Access Economics 2015)

Universities are profoundly changing how, where and when they teach in order to prepare students for life in the21st Century. They are competing on a global stage for students, academics, and partners and, due to the rise in importance of university rankings and global accreditation standards, their brand. Innovation is key to their success, which relies in part on funding, which they source from various stakeholders.

Government funding has tightened and the sector needs more revenue streams for universities to produce graduates who meet Australia’s evolving skills demands. Part of the solution, which until recently, had been hiding in plain sight, lies in the built environment of the university. We are starting to see the construction of innovative campuses that have the flexibility to adapt to the needs of their students now and in the future. Their learning spaces synthesize with the rhythm of their cities and students – with proximity to transport, jobs, accommodation, and the location of their industry partners.

Also emerging are innovative financing and leasing arrangements, borne out of closer partnerships between the higher education, property and investment sectors. Viewing education as an asset class is an investment in the future. Our universities hold the future in their hands – or perhaps more accurately – in the physical and virtual campuses, innovation hubs, industry partnerships and their continued response to the exponential shift in societies.

The ‘ivory towers’ are slowly peeling back barriers to change, as universities step more comfortably into new models of operating. Their transformation will benefit all of us.

1PSQ showcases the future of learning

1 Parramatta Square (1PSQ) is the home to Western Sydney University’s (WSU) new 14-storey CBD campus, positioned in the heart of Parramatta. It is a world-class education and research facility, incorporating a digitally infused, technology-rich teaching and research space. The new vertical campus showcases how workspaces and education can unite to deliver a smart and energy efficient building. WSU have been visionary in their pursuit of creating innovative ways for students to learn. Its 10,000 business students will be able to foster relationships with local businesses while they study.

The $220 million building, developed by Charter Hall and constructed by John Holland, will also be home to up to 200 staff from PricewaterhouseCoopers, who will work with the university to create learning opportunities and mentoring for students.

The A-grade building has approximately 26,500 square metres of commercial office space across 14 floors, with the University committing to the entire building on a 15- year lease, with further options. The asset is owned by two Charter Hall funds (50% by the Charter Hall Direct Office Fund and 50% by the Charter Hall Core Plus Office Fund).

$2.09b

TOTAL DEVELOPMENT PIPELINE

$9.1b

FUM

6.5yrs

WALE

50

PROPERTIES

5.87%

CAP RATE

98.5%

OCCUPANCY

$594m

CHC INVESTMENT

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INDUSTRIAL
& LOGISTICS

“As one of Australia’s leading managers and developers of industrial and logistics real estate, our focus is on owning and managing a geographically diverse portfolio of high quality properties with strong tenant covenants, whilst harnessing and growing relationships with our tenant customers across all sectors of our business.”

SEAN MCMAHON,
CHIEF INVESTMENT OFFICER

$1.65b

TOTAL DEVELOPMENT PIPELINE

$5.2b

FUM

9.2yrs

WALE

111

PROPERTIES

6.4%

CAP RATE

97.4%

OCCUPANCY

$409m

CHC INVESTMENT

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RETAIL

“As the leading owner and manager of Australian convenience based supermarket anchored shopping centres and with a portfolio of hardware, automotive showroom and hospitality assets, we are providing a secure and growing income stream for our investors, building positive partnerships with our tenant customers and creating great places to work for our people.”

GREG CHUBB,
GROUP EXECUTIVE – RETAIL

$5.5b

FUM

8.5yrs

WALE

168

PROPERTIES

6.08%

CAP RATE

97.5%

OCCUPANCY

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DIRECT

“Charter Hall Direct is Australia’s leading manager of unlisted property funds and syndicates for retail investors including high net worth, self managed super funds and mum and dad investors that are self directed or use financial advisers.”

STEVEN BENNETT,
HEAD OF CHARTER HALL DIRECT

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Award recognises the strength of Charter Hall’s Direct Office fund

Charter Hall Direct is Australia’s leading manager of unlisted property funds and syndicates for retail investors including high net worth, self managed super funds and mum and dad investors that are self directed or use financial advisers.”

Steven Bennett,
Head of Charter Hall Direct

The Charter Hall Direct business was acknowledged during the year for its high performance awarded the “Property Fund of the Year” at Money Management /Lonsec’s 2017 Fund Manager of the Year Awards along with the “Commercial Property – SMSF Member” award at the CoreData Self Managed Super Fund Awards 2017.

This recognition is evidence of our conviction and strategy that continues to deliver enduring risk- adjusted returns to our investors. It is also a testament to the Charter Hall Direct team, a diverse group of property experts who are passionate about property and driven to achieve the best leasing deals and acquire the highest quality properties for the fund.

DOF, the recipient of Property Fund of the Year, provides investors with a market leading direct property investment opportunity that is usually only available to wholesale and institutional investors. This not only sets it apart from other funds, but also enables financial advisors and self-managed superannuation funds (SMSF) an opportunity to directly invest in Australian commercial property.

Charter Hall Direct provides an attractive investment for SMSF because the quality of the property investments are high and the income yield of 6.25% is significantly greater than the net income returns that are generated from Australian residential property.

Since March 2010, we have upgraded the portfolio and increased its value from approximately $400m to over $1.1b with a much longer WALE and high quality tenants. In a nine-month period in 2016-2017 we raised over $250 million dollars in equity making DOF one of the largest unlisted office funds in Australia that is available to SMSF, high net worth investors and financial advisers and their clients. The Fund has a sustainable gearing range of 25-45% and a focus on delivering an income stream, paid quarterly, to our investor base.

A key strength of Charter Hall is our ability to access attractive long leased property for our investors. We do this by having a large and focused transaction team and, through the group’s strong relationships with agents and external parties, we can transact assets on and off market.

We invest our own funds into the products we offer to investors, bringing alignment between Charter Hall Group’s investment strategy and that of investors. Our investment philosophy is long term and we are continually upgrading the portfolio for investors.

$2.9b

FUM

9.5yrs

WALE

52

PROPERTIES

6.42%

CAP RATE

99.8%

OCCUPANCY

  • BOARD
  • EXECUTIVE

BOARD OF
DIRECTORS

EXECUTIVE
LEADERSHIP