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APIL Investor Update – with MD Peter Hughes

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Dear Investor,

How things have changed since our February newsletter!

The global COVID-19 pandemic has massively impacted our everyday lifestyles to which we were accustomed and it continues to affect public health and of course, the economy.

Responding to the pandemic, the Reserve Bank of Australia (RBA) was swift in cutting interest rates twice in March to a record low of 0.25%. The Governor of the RBA, Philip Lowe said, “it’s likely we’re going to see interest rates at current levels for years to come.”

Westpac’s Chief Economist, Bill Evans, anticipates the RBA will hold the cash rate at current levels until “at least December 2023.”  The lowering of the cash rate has decreased the 10-year Australian Government bonds to a near historic low yield of 0.85% (as at July 2020).

As discussed in our February newsletter (when the 10-year bond yield was 1.25%), a lower long-term cash rate is likely to compress property yields as the margin between bond yields and prime property yields move towards its long-term average.

We therefore anticipate that future syndicate cash distributions in the range of 6.5% – 7.5% per annum, will be the norm, particularly for properties that are well located and securely leased to prominent tenants.

In late July the Federal Treasurer, Josh Frydenberg, delivered the Economic and Fiscal Update, the first of its kind since the pandemic began. He outlined Treasury’s budget deficit forecast of more than $184 billion in 2020-2021, the largest deficit since World War II. The unemployment rate, currently at 7.4%, is anticipated to increase beyond 9% by the end of this year. The bleak outlook for unemployment has led the Federal Government to extend its stimulus program of JobKeeper and Jobseeker payments beyond the initial September 29 deadline, to March 2021.

COVID-19 restrictions during the early stages forced businesses to close or reduce trading hours, which enabled many retail and hospitality businesses to meet the turnover reduction criteria to qualify for JobKeeper and rental deferment/relief under the Code of Conduct (Code), a framework for commercial tenants (with turnover of <$50m) and landlords to engage in a fair negotiation of rent payments.

Implementing the code to over 300 tenants spread across the APIL portfolio, presented our Fund Managers with a significantly increased workload through often complex negotiations with tenants, in an endeavour to keep property returns for investors at the highest level possible. Some of our syndicates, particularly in the retail sector, have seen significant reductions in rental income during the Covid 19 emergency period.

The impact of COVID-19 across the three major commercial property classes has been disproportionate. According to the Director of Metropole Property Strategists, Michael Yardney, “the current economic environment is changing the face of retailing and use of office space brought on by Coronavirus… On the other hand, demand for industrial properties used for warehousing looks set to boom.”

Our current investment opportunity is the “APIL Industrial Fund No 1”, which has been well supported by almost 220 investors and has a current fund value of $60 million. Further acquisitions are proposed for the fund to meet our objective of achieving a fund value of about $100 million of diversified industrial property across Australia.

During this difficult period, we remain focussed on one of our core values, namely maximising investment returns for our investors.  We expect to do so by applying our management expertise in assisting as many of our tenants as possible to return to normal business operations as quickly as possible, whilst at the same time ensuring all of our syndicated properties are COVID safe.

Peter Hughes

APIL Managing Director

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