28 September 2004

Property group, St Hilliers, today launched a new style of fund to give investors better risk adjusted returns from investment in properties having an initial income stream and with the potential for value to be enhanced through refurbishment, redevelopment or repositioning.

Called St Hilliers Enhanced Property Fund No. 1, the fund is aiming to have $50 million in equity, with gearing increasing the fund's ultimate value.

The fund's seed investors, contributing up to $5 million each, are St Hilliers and Westpac Institutional Bank, which is arranger and sole lead manager of the capital raising for the fund as well as being a member of the fund's investment committee.

With a minimum investment of $500,000, a target return of 15 per cent per annum IRR, before tax but after all fees and fund expenses and a six year life, the fund is targeting wholesale investors and larger private investors.

The market niche being targeted by the fund is medium size property over the medium term, an area not covered by large developers, large listed property trusts and smaller developers.

St Hilliers group managing director and director of the fund's manager, Mr Tim Casey, said the fund had been established because there were wholesale investors wanting investment alternatives that improved the returns from their property allocation.

"With the enhanced fund, we're seeking a middle course between higher risk opportunistic development and passive ownership of long term leased property," Mr Casey said.

The fund begins with three seed properties, representing around 25 percent of targeted equity, which are two office buildings (496 Northbourne Avenue, Dickson, ACT, and 119 Wells Street Southbank, Vic) and an 85 per cent interest in an industrial building (Lot 2, 1 Box Road, Taren Point, NSW).

Each is currently tenanted, which meets the income phase of the fund, and, with leases expiring over 2006 to 2007, there are opportunities with each to enhance value.

Among value enhancement strategies with each property are:

• at Taren Point, possible lease renegotiation on expiry, or demolition of the older style building and either sub-division and sale or construction of either industrial units or a purpose built facility
• in Canberra, possible lease renegotiation with Telstra, or refurbishment and expansion to increase gross lettable area or redevelopment into a new residential or commercial facility
• at Southbank, refurbish or redevelop as either a residential or commercial property.

The intention with each property, and others to be purchased, is to manage risk and enhance return by utilising the income phase for tenant negotiation, assessment of development alternatives and gaining of relevant approvals, ready for proposed action on lease maturity.

Establishing the Enhanced Fund is an extension of one of the four core activities of St Hilliers, which include funds management, property, contracting and asset management

While the fund's investment committee sees as advantages the utilisation of St Hilliers 15 years experience in the property sector and exclusive access to its deal pipeline, the fund structure has built in various corporate governance measures to ensure independence of decision making.

Among these measures are inclusion of two independent members on the investment committee, a requirement that committee decisions be unanimous, regular reporting on related party transactions and annual meetings of investors.

Independent members of the investment committee are Messrs Mike McFarlane, (former Macquarie Bank executive director) and Peter Dransfield (former Australand executive general manager), with other members being Messrs Tim Casey and Grant Hodgetts, (director, Specialised Capital Group, Westpac).

Chief Executive Officer of the Fund Manager, Mr Matt Joyce, said the combination of the structure and fund strategy presented a genuine alternative in the property marketplace.

"With an attractive return and risk managed across property sector, location and enhancement options, we are giving investors access to a development pipeline that has safeguards built in, "Mr Joyce said.

Among the property sectors targeted by the fund for investment are industrial, office, bulky goods and retail.