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Posted on May 15, 2024

Bush Mango Shopping Centre (Bush Mango) is a 21,945 sqm freehold neighbourhood shopping centre building built in 1965 and located 4km southwest of the Wollongong

Bush Mango Shopping Centre (Bush Mango) is a 21,945 sqm freehold neighbourhood shopping centre building built in 1965 and located 4km southwest of the Wollongong CBD. Recognized as the best neighbourhood shopping centres in the Illawarra Region, the centre is located in a vibrant trade area encompassing over 200,000 residents. The population is projected to experience approximately 1% annual growth, coupled with a forecasted annual increase of approximately 3% in spending power, extending until 2029.

Your client is a specialist real estate fund, Horizon Edge Investments, that has recently raised a new fund, Horizon Edge Value Acquisitions ("HEVA"), dedicated to investing in Australian real estate. HEVA's strategy is to buy high-quality assets that target a total levered returns of 10-15% per annum to its investors over a 5-year investment period. HEVA will look to fund their investments with debt financing with a maximum of 65% of total costs. HEVA has expressed initial interest in Bush Mango, which is being marketed by a local real estate agent on behalf of the current owner, Green Bay Partners ("GBP"), a USA based real estate fund that is shifting away from the retail sector due to pressure from their investors. As an investment consultant to the real estate fund, you have been asked to provide a brief analysis of Bush Mango's potential investment, which would be the first acquisition in the HEVA Fund. Given HEVA's close relationship with the local real estate agent, they were given an opportunity to pre-empt the marketed process if they submitted an attractive proposal endorsed by HEVA investment committee in the next 2 weeks. Time is short: The outcome of your analysis will play a pivotal role in determining whether to proceed with an extensive and potentially costly due diligence process.

Bush Mango is a single-level shopping centre anchored by Kmart, Coles and Woolworths located in an affluent neighbourhood in Wollongong. Wollongong is the third largest city in NSW and the tenth largest in Australia and its household income is growing faster than the national average. The centre is currently 98.5% leased with 88% of the income generated by national tenants. Coles and Kmart are performing well financially, collectively trading 35% above the Urbis benchmark for single DDS based shopping centres. The Kmart in particular is one of the top 10 performing Kmarts in the country. However, Woolworths is not performing as well and their lease expires in December 2025. HEVA have received information that Woolworths informed GBP that they will not renew their lease if their space is not expanded. Woolworths believes its poor trading is due to the fact its store is significantly smaller than Coles. HEVA has also learned that Harris Farms is looking for a location for its 1stWollongong fresh food shop and is willing to pay a higher rent at $450 psm however will require $2 million for its fit-out.

Summary of Asset
Title	Freehold
Site Area	5.1 ha
GLA	21,945 sqm
Year Built / Latest Refurb	1965 / 2018
Major Tenant	Kmart, Coles, Woolworths
Mini-Major Tenant	The Reject Shop & Jetts Fitness
Other Tenancies	72 specialties, nine kiosks, four ATMs & three pad sites
Car Parking	940
Net Income / Occupancy	$11.9m / 98.5%
Outgoings (Operating Costs)	$190 psm increasing by CPI per annum
Weighted average lease term by GLA / Income	8.1 years / 5.6 years
Trade Area Population	207,100

Summary of Areas
	Tenant Court	GLA (sqm)	% of GLA	% Occupied	% of gross rental income
Majors	3	12,829	58.5%	100%	30.7%
Mini-Majors	2	1,080	4.9%	100%	4.1%
Specialties	72	7,054	32.1%	95.9%	60.3%
Kiosks	9	193	0.9%	83.9%	2.6%
ATMs	4	5	0.0%	20%	0.1%
External Tenants	3	784	3.6%	100%	2.3%
Total	93	21,945	100%	98.5%	100%

Shopping Centre transaction activity in the NSW has been slow, with recent shopping centres selling at a cap rate of ~5.75%. The current 10-year Australian government bond currently trades at 4.12%. The GBP Fund's current book value for Bush Mango is $235 million and the fund manager is looking to achieve a premium in a competitive marketed sales process. The current average cap rate for NSW Shopping Centres is5.75%. In terms of transaction costs, you should assume5.0% acquisition costs and2.5% exit costs.

Senior Australian banks typically finance Shopping Centres within the Wollongong CBD at a margin of 2.00% - 3.00% above3 month BBSW (3MBBSW) and at an LTV of up to 60%, depending on asset quality and income security. Banks generally require an ICR of >1.5x, or a clear pathway to improving asset cashflow. For your analysis, you may assume that the 3MBBSW rate either remains the same / increases / decreases over the holding period - your analysis should include an explanation of your assumption.