“Success has come from focusing on what we know and what we have a good track record with.”
Matt Spring neatly summed up during a recent conversation with DevelopmentReady’s Rob Langton.
Matt is the Managing Director at Vantage, a boutique funds manager in the value-add property investment sector. The firm was co-founded by Matt’s father Peter Spring in 1985, with an ideology that has stayed tried and true during the 35 years of operation.
“The experience of the first generation of Vantage, and the stable philosophy that they laid down from the very beginning, provide us with guidance and assurance to stick with what we do best."
When Matt talks about playing to their strengths, he’s, of course, discussing the value-add property sector. Vantage actively seeks out ‘value add’ opportunities, promising sites in emerging locations and opportunities to purchase assets at below replacement cost or where short-term valuation upside is readily achievable. When it comes to assessing these opportunities, an individualised approach is taken, albeit with a fundamental underlying philosophy.
“We look at them all differently. Generally speaking, however, from a qualitative perspective, we target multi-storey and multi-tenanted buildings. Corner locations are ideal, with good natural light, and floor plates that can be divided easily to accommodate any tenant demand.
“From a quantitative perspective, we keep it fairly basic. We look at replacement costs as a first attribute and understanding the underlying land value is also an important aspect. Ideally, we want to buy assets that have a below-market rent across the board that we can look to improve the value through value add opportunities.
“We also try to ensure that any asset we purchase has an exit strategy at the end. So, from a timing perspective, we always leave that fairly open. Assets are purchased with a four-to-five-year horizon and hopefully, we can continue ownership beyond that.”
Playing to strengths, staying true to the philosophy
While discernibly conservative in their approach, it is a strategy that has been very favourable to the firm and its investor partners over the years. Matt joined the business in 2005 and at this stage, Vantage had not bought any new assets for a couple of years.
The management circle of the time had seen multiple economic and property cycles by this stage and there was a general consensus that something unsettling would be arriving shortly.
“When I joined the firm, it was pre-GFC and there was quite a build-up of activity in the marketplace. At that stage with the information we knew, we weren’t comfortable competing. We just didn’t see the value at that time. So we turned our focus to repositioning some of the assets that needed attention – that really laid the foundation and the platform for those assets to perform well.
“We needed to be upfront with our investors, and the communication coming from my father and the senior members of the team at the time was that; ‘We sense a change coming. We don’t know when or exactly what it looks like but be patient and when that arrives we’ll be able to make a decision from there.’
“Then the GFC arrived. We didn’t predict how severe it was going to be, but certainly what our activity leading up to it allowed us to use it as a stepping stone to grow the portfolio. At that particular time, we had $90 million under management and within a few years we tripled the size of the portfolio.”
Post GFC Growth, staying true to the philosophy
Since the GFC, Vantage has grown its portfolio to include more than $600 million of assets under management. Matt is proud to disclose that the success they have seen is a direct result of their unwavering dedication to the mantra established at the firm’s beginning.
“We deal with assets that first we know that we can turn around, and second that are in locations that we are familiar with. Our focus is realistically in that office environment, and that’s where our focus will stay. We’ve had industrial and retail assets in the past that have done well, so we definitely will consider them in the future, but it is the office sector that is realistically our strongest.”
One example of office sector success that Vantage has seen took place at 247 Collins Street in Melbourne, where Vantage was able to deliver a total return for investors of 37.21% per annum, with a net gain of 74.41%. The property was acquired for $22.68 million in 2015 for a single offshore listed investor. Vantage then undertook a refurbishment and established 100% tenancy within 12-months. Two years after the original purchase date, the asset was sold for $35 million – a 54.32% uptick in value.
Another example of worthy note involves 420 St Kilda Road in Melbourne. Purchased in 2017 for $68.84 million, Vantage went into partnership with private equity firm KKR for this value add/opportunistic real estate investment. Again, a refurbishment program was undertaken, with the ground floor foyer and lift also receiving an upgrade. Rental levels grew by 58% and when the property was sold for $98 million in 2019, Vantage delivered its investors a 41% net gain.
The future post COVID, and of course, staying true to the philosophy
“We’re not immune to the perils of the year, but I don’t subscribe to the narrative that we seem to be seeing a lot of, that the CBD is dead.”
Matt’s experience and intuition tells him that the CBD is going to continue to make a strong contribution to the future of Vantage; but he’s definitely aware that it won’t be the same as before.
Vantage will not only be looking to the city centre for its next phase of opportunities, as the CBD-fringe market demonstrates considerable strengths.
“From a fringe comparison perspective, I see that suburban locations, with good amenity, that are surrounded by transport, will continue to do well.
“The fringe market is two-tiered. You find either really good quality achieving a strong rent or poor quality achieving a rent that is reflective of the asset. We’ll continue to look for the later and for ways in which we can add-value.”
When dealing with tenants moving out of this current health crisis, Matt believes the response will be similar to that of a world post-GFC. He thinks that tenants will continue to look for A and B Grade fit-outs, rather than the lower quality offerings. Whether they are prepared to pay for them is another story.
“We’ve found in our experience, that occupiers want to make sure that the presentation and functionality of the asset is of a good standard. It’s a direct reflection of their business, so we like to think that we can create an environment that a tenant is proud to have their office in and proud to show off to visitors and clients.
I think that there will always be a market for every budget, but there may be more of a disconnect between the A and B Grade as tenants start chasing quality more than they have in the past.”
Some things change, but mostly they stay the same
Ultimately Vantage is proceeding as they have always done, staying true to their underlying principles and seeking out opportunities based on experience, sound forecasts and patience.
“As we come out of this downturn and into this upswing, we’re going to see a slower growth story to what was predicted at the end of 2019. I think that if there is patience and long-term views taken, there are good opportunities to be found.
“We won’t be moving much from the office sector moving forward. We’re a business that focuses on a long-term income story for our investors. We keep a fairly conservative approach and we’ll back our repositioning experience to get these assets into a better position than what we purchased them at. That’s where Vantage’s opportunities lie.”