Commercial Portfolio

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<p>Melbourne based hotels dynasty, the Zagame family, has put its hotel portfolio of six properties located in Melbourne and Vanuatu with price expectations of more than $300 million.</p>
<p class="p1"><span class="s1">The gaming-centric portfolio comprises five Victorian freehold going-concern hotels, generating combined revenues in excess of $94 million, with current ownership of 490 gaming machine entitlements<span class="Apple-converted-space"> </span>representing an opportunity to enter the lucrative Victorian gaming sector with one of the largest gaming machine holdings and market share.</span></p>
<p class="p1"><span class="s1">The hotels are among Victoria’s best performing gaming hotels including Zagame’s Reservoir Hotel, Zagame’s Caulfield Club (below), Zagame’s Boronia Hotel (bottom), Zagame’s Ballarat Club, and<span class="Apple-converted-space">  </span>Victoria’s number four ranked gaming venue, Zagame’s Berwick Springs Hotel.<span class="Apple-converted-space"> </span></span></p>
<p class="p1"><span class="s1">Also included in the sale is Vanuatu’s premier hotel and casino (top) -<span class="Apple-converted-space">  </span>the 4-star Grand Hotel &amp; Casino, offering a casino, VIP room and 74 luxury accommodation rooms.</span></p>
<p class="p1"><span class="s1"><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/5/8/zag%20caulf.jpg" alt=""></span></p>
<p class="p1"> </p>
<p class="p1"><span class="s1">Situated 10km from the airport and Port Vila’s business and entertainment precinct, the eight-level waterfront hotel offers a variety of income streams generated from its 16 table games, 136 gaming machines, accommodation and food and beverage facilities.<span class="Apple-converted-space"> </span></span></p>
<p class="p1"><span class="s1">CBRE Australia's Mark Wizel, whose team has been appointed with Cropley Commercial to manage the marketing campaign, said the Zagame family had been industry innovators establishing one of Australia’s most successful and respected operators.</span></p>
<p class="p2">"Victor Zagame was an innovator and leader of the Australian hotel and hospitality industry with a product that immediately captured a loyal clientele at The Albion Charles Hotel more than 46 years ago (1971) for what became the Zagame Corporation – one of the Australian hotel and service industry’s most respected and well-known businesses," Wizel said.</p>
<p class="p1"><span class="s1">"The successful purchaser or purchasers will have the significant advantage of buying into that success story."</span></p>
<p class="p1"><span class="s1">The portfolio will be offered on an individual basis, in any combination or in-one-line and is expected to generate significant interest locally and internationally.</span></p>
<p class="p1"><span class="s1"><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/5/8/zag%20boronia.jpg" alt=""></span></p>
<p class="p1"><span class="s1">Wizel said they are confident of attracting interest from international buyers, particularly Asia and North America.</span></p>
<p class="p1"><span class="s1">He said Melbourne remained very much on the investment radar from a global perspective, given the economic and political stability and the consistent high levels of population growth.</span></p>
<p class="p1"><span class="s1">Zagame Corporation director Victor Zagame Jnr said the incoming purchaser would be buying a proven business model that had grown successfully over 50 years.<span class="Apple-converted-space"> </span></span></p>
<p class="p2">"Our venues are exceptionally well presented, our staff are leaders in the industry, and our product is second to none," Zagame said.</p>
<p class="p2">These successful businesses are well placed to continue to deliver substantial growth."</p>
<p class="p1"><span class="s1">Cropley Commercial’s George Iliopulos, said the portfolio comprised the single largest gaming portfolio to ever hit the market in Victoria, a portfolio poised for strong trading growth.</span></p>
<p class="p1"><span class="s1">Iliopulos said further underpinning the value of the portfolio was the Government’s recent announcement to freeze the number of poker machine numbers for the next 20 years and increasing the current machine ownership terms from 10 years to 20 years, essentially providing an incoming purchaser with 24 years absolute certainty around the existing 490 gaming machine entitlements.</span></p>
<p class="p2">  </p>
<p class="p1"><span class="s1"> </span></p>
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jrobinson-rf4aSBido9

Zagame family list $300 million hotel empire

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<p>APRA has released its conclusions and high-level observations from its thematic review of commercial property lending over 2016.</p>
<p>Brandon Khoo, executive general manager, Diversified Institutions Division said the review was in response to recent market dynamics and indications that underwriting standards were under competitive pressure.</p>
<p>He said as part of the review, APRA assessed the portfolio controls and underwriting standards of a number of larger domestic banks and foreign bank branches.</p>
<p>"In current market conditions, it is important that the Boards of ADIs are conscious of the settings for underwriting standards and portfolio controls, and in a position to challenge as appropriate," he said.</p>
<p>"In particular, Boards should actively challenge whether expectations of growth in commercial property lending are achievable, given the position in the credit cycle, without compromising the quality of lending.</p>
<p>"APRA’s review revealed that the ability of the Board and senior management to fully understand and challenge the risk profile of lending has often been hampered by inadequate data, poor monitoring and incomplete portfolio controls. APRA expects ADIs to improve their capabilities in this area, and has written to individual ADIs with specific requirements in these areas."</p>
<p>Below is a copy of the review</p>
<p>INDUSTRY OBSERVATIONS</p>
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<p><span>Underwriting Standards </span></p>
<p><span>Sound credit underwriting standards are fundamental to the safety and soundness of lenders, as well as the stability of the financial system as a whole. This is particularly the case in the area of commercial property lending, which has historically been the source of significant credit losses for the Australian banking industry. It is critical that ADIs maintain appropriate standards through the credit cycle, and are prepared to tighten those standards as circumstances dictate. </span></p>
<p><span>APRA has observed a general tightening of underwriting standards, especially for residential development lending, over the past year or so. This has not been uniform, however, and there is a need for ADIs to exercise particular care to ensure that they are not unduly accepting greater risk as other lenders step back. </span></p>
<p><span>The review also revealed evidence that some ADIs were justifying a particular underwriting stance based on what the ADI understood to be the criteria applied by another lender. Underwriting standards </span><span>should be reflective of the ADI’s </span><span>own risk appetite and not based on a </span><span>potentially erroneous appreciation of a competitor’s criteria. </span></p>
<p><span>A summary of key observations follows: </span></p>
Income producing investment lending</div>
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<div class="column">Insufficient constraints on debt size - A key concern is where ADIs have not adjusted the minimum Interest Cover Ratio (ICR), used for debt sizing investment loans, as interest rates have declined. At this point in time, APRA does not intend to prescribe an approach to setting minimum ICRs for debt sizing purposes; however, it does expect ADIs to have thoroughly considered and addressed this risk. ADIs should similarly consider their policies in relation to Loan to Valuation Ratios (LVRs) in light of recent strong asset price growth.</div>
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<br>Debt yield as a complementary underwriting measure - Debt yield (net operating income to total debt) is used by some overseas banks as a key underwriting measure, but it is not commonly used within the Australian market. This metric, supported by prudent ICR and LVR measures as appropriate, could offer benefits to lenders as it provides a measurement of risk that is independent of the interest rate, amortisation period, and capitalisation rate.<br><p>Need for greater focus on refinancing risk - A number of ADIs demonstrated only limited analysis of the risk in refinancing a facility at maturity. </p>
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<p>Residential Development Lending</p>
Sponsors to contribute sufficient equity – A number of ADIs noted an increasing awareness of the use of mezzanine debt / quasi equity from third parties and reliance on material uplifts in land valuations to reduce the size of a sponsor’s contribution of ‘hard equity’. APRA expects ADIs ensure a sufficient level of ‘hard equity’ is at risk from sponsors.<br><p>Presale quality and coverage – In the past year, some ADIs have tightened underwriting criteria for presales coverage following market concerns with regard to settlement risk. ADIs are now generally requiring qualifying presales equivalent to at least 100 percent of committed debt and have tightened the proportion of qualifying presales permitted to foreign purchasers. However, there was still scope for improvement in a number of ADIs’ policies on what constituted a qualifying presale, and the thoroughness of analysis of presales achieved for particular transactions was sometimes lacking.</p>
<p> Need to consider end product, location and quality – The consideration of potential marketability issues for properties, such as being poorly located, small apartments lacking in amenities and/or suffering from design issues, was not always evidenced in transaction analysis.</p>
<p>Portfolio Controls</p>
<p>A key finding from the thematic review is that many participating ADIs fell well short of expectations regarding portfolio controls for commercial property. This has been in part driven by an underinvestment in information systems, leading to challenges in extracting portfolio data. Ready availability of detailed and reliable transaction level data, appropriately aggregated, is a key component in obtaining a sound and complete understanding of the risk profile of the commercial property portfolio. Deficiencies in data hamper an ADI’s ability to implement and monitor underwriting standards and portfolio controls.</p>
<p>A summary of key observations follows:</p>
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<div class="column">Availability of transaction data lacking – The identification, recording, tracking and reporting of key transaction characteristics, in a manner which can be readily aggregated, is fundamental to sound risk management. These transaction characteristics include asset type, geographic location, construction contractor and developer concentrations and key underwriting metrics such as ICR, debt yield, loan-to- development costs (LDC), presales to debt cover and LVR. Analysis of these transaction drivers helps an ADI to understand its risk profile at different stages of the cycle. A large number of ADIs were unable to readily provide reasonably basic portfolio information to APRA as part of this review.<br><p>Portfolio limits can be improved – APRA expects that ADIs with commercial property exposures should manage not only the risk of individual loans but also consider build-ups in risk at the portfolio level. A deeper understanding of the portfolio can be particularly helpful for the Board and senior management in setting and monitoring portfolio limits, and adherence to the lender’s risk appetite, as market conditions change. One fundamental management control to prevent a build-up in risk is an overarching sector concentration limit, as per Prudential Standard APS 221 Large exposures. Better practice would be to also have sub-limits to control concentrations in riskier segments of the portfolio, such as lending for development or land. In addition, improvements in data and system capabilities would permit the establishment of a more targeted risk metrics and controls relating to key transaction drivers for the stage of the cycle.</p>
<p>Better practice is for deep dives into heightened risk segments – A number of participating ADIs had reacted to perceptions of heightened risk in market segments by undertaking deep dive exercises, targeted stress tests and the provisions of additional targeted reports to key stakeholders. This was particularly noticeable for locations where there was considered to be increased settlement risk and had led, in some cases, to tightened underwriting standards for that segment.</p>
<p>Identifying and managing exposures originated outside of standards</p>
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<div class="column">Inadequate monitoring of exceptions to underwriting standards - Many ADIs fell short of APRA’s expectations with respect to monitoring exceptions to policy and underwriting standards in the commercial property portfolio. This has been a long-standing concern and many ADIs need to improve their capabilities in this area. Inadequate monitoring of policy exceptions/overrides potentially exposes the ADI to a build-up of risk outside of the documented underwriting standards, representing a shift in risk profile beyond the levels formally approved.</div>
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<div class="column">Insufficient justification for deviation from standards – APRA’s review of transactions with higher risk characteristics, or outside ADI underwriting standards, indicated varying levels of qualitative assessment supporting the taking on of higher risk. Justifying lending decisions on the basis of ‘long-standing relationship’ or ‘good track record’ are insufficient, by themselves, to mitigate higher risk characteristics such as higher leverage or weaker presale cover, especially if these are outside approved underwriting standards. </div>
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jonathanchancellor-7SQnKwU6yx

ADIs fall short regarding portfolio controls for commercial property: APRA

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<p>Several factors are changing the Australian retail landscape and increasing the importance of shopping mall location and quality for mall owners, according to Moody's.</p>
<p>These factors are changes in consumers' shopping habits, including the growing popularity of online shopping, sluggish consumer spending growth, and increasing urbanization that is widening the wealth gap between metro areas and the rest of the country suggests that latest report from Australian real estate trusts (A-REITs).</p>
<p>"These factors will have varying effects on the five single-A-rated (A-REITs) with retail exposure over the next three to five years," the Moody's report said.</p>
<p>"Scentre Group, GPT Group and Mirvac Group are better equipped to face these challenges and will maintain their portfolio quality because of their malls' favorable tenant mixes and locations in wealthy and densely populated catchment areas."</p>
<p>The report notes that it "expects year-on-year retail comparable net operating income (NOI) growth to be 3.0%-3.5% for Mirvac during the coming 12-18 months, and 2.5%-3.0% for GPT and Scentre."</p>
<p>Without recycling initiatives, portfolio quality will weaken for Vicinity Centres (A2 stable) and Stockland Group (A3 stable), whichhave higher exposure to underperforming, midsize shopping malls.</p>
<p>It is expected their retail comparable NOI growth will remain below the others in the peer group, with Stockland at 2.2%-2.4% and Vicinity at 1.4%-1.6% during the coming 12-18 months.</p>
<p>The three A-REITs' exposure to the retail sector varies, it is around 20% of group EBIT for Mirvac, 30%-35% for Stockland, and 40%-50% for GPT according to the report.</p>
<p>Of the three, Moody's suggests Stockland's portfolio is the most exposed to the changes in the retail sector because of its lower asset quality and higher exposure to midsize assets located in areas with weaker economic fundamentals.</p>
<p>"Vicinity and Stockland are working to improve asset quality, their plan's are to sell weaker performing assets and to develop residential, hotel and office space at existing malls are likely to improve their portfolio quality. However, we believe that they are unlikely to make step changes in their portfolio quality as it will take time to market assets and find appropriate buyers at this point in the property cycle," noted the investment analysers.</p>
<p><img src="https://www.urban.com.au/images/2018/6/22/Moody%20Graph%201.JPG" alt=""></p>
<p>The retail environment is challenging and shopping mall owners have been facing slowing retail sales growth in Australia for the past four years, driven by low wage growth, rising household costs and, more recently, moderating house price growth, especially in Sydney and Melbourne.</p>
<p>These factors will continue to challenge retail A-REITs and their tenants, because they will constrain consumer spending and retail sales over the next 12-18 months.</p>
<p><img src="https://www.urban.com.au/images/2018/6/22/Moody%20Graph%202.JPG" alt=""></p>
<p>Additionally, the increasing popularity of online shopping will slow sales for traditional brick-and-mortar retailers and increase competition among shopping malls.</p>
<p>Despite what was only a soft launch of Amazon.com, in 2017, the percentage of retail sales made online in Australia (by dollar value) was 7.5%, the report noted.</p>
<p>With online sales in more established markets like the US and the UK at 12.5% and 15.5%, respectively, the Australian online market has room to grow over the next several years.</p>
<p>In move to capture a greater share of this growth, Amazon launched its subscription-based free delivery service, Amazon Prime, on 19 June at half the price of membership in the US.</p>
<p>Shopping mall owners are adapting to the increasing popularity of online shopping by expanding digital, social media, and mobile retail offerings as well as increasing their weighting to service-based tenants.</p>
<p>The report expects, "A-REITs to maintain this focus as they look to maintain their relevance in the face of changing consumer habits".</p>
<p>"As sales growth slows, expect retailers to focus more on store productivity across their existing networks."</p>
<p><img src="https://www.urban.com.au/images/2018/6/22/Moody%20Graph%203.JPG" alt=""></p>
<p>The recent acceleration of store closures, particularly from large department stores such as Myer, Target and Big W that are actively looking to scale back their sizable footprints, will alter shopping malls’ tenant mixes and weaken their ability to re-lease space now occupied by specialty stores at values above previous leasing arrangements.</p>
<p>The report forecasts that, struggling retailers will continue reducing floor space and closing stores but that despite these challenges, solid economic conditions are expected, which combined with stringent planning and zoning restrictions that limit new shopping mall development, will continue to support A-REITs' shopping mall portfolios and credit quality.</p>
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