Sydney-based funds management company Serene Capital recently expanded its hospitality portfolio with the AU$41.5 million acquisition of 152-key Abode Hotel and Apartments in Canberra, sold with a long-term lease to Iconic Hotels.
It’s the first acquisition in over five years for Serene Capital, which has over $750 million in assets under management and advisory across the hotel and office sectors.
Serene Capital CEO and Co-Founder, Glen Boultwood, spoke exclusively to HM about the recent acquisition of Abode Woden, value in the serviced apartment segment, and Australia’s economic outlook.
This latest acquisition is the first for Serene Capital Hotel Fund 1 in over five years. Why is now the right time?
Serene Capital is very much a value investor. We’re not a fund manager who will invest all the way through cycles. When I set up Serene Capital business, I made a promise to myself that we’d only invest where we had high conviction. Over the last five years up until now, we just couldn’t see the value in the hotel space that we’re dealing with across the board as cap rates compress materially on the back of significant reductions in interest rates. We’re of the view that what goes down must go up and what goes up must go down. From that perspective, it was obviously the interest rates couldn’t be sustained at those record low levels forever, so we’ve just been patient and waited until interest rates have now risen, and we can get yields up above 8%, which we haven’t seen since we set up the fund back in 2014.
Tell us about the appeal of Abode Woden?
Serene Capital Hotel Fund 1 was set up to focus on high income returns but there was also a desire for capital preservation. And given that we couldn’t get those yields in the major markets of Sydney, Melbourne, that meant we had to go to fringe CBD, secondary CBD, suburban or major regional locations, which have less liquidity and less invested debt. We had to develop a strategy that would last the test of time. The strategy was really designed around withstanding a global financial crisis. We learned through holding both commercial office as well as hotel real estate during the GFC that there was a big hit on international demand. And so, we developed a portfolio that was very much focused on hotels that had the majority of their demand source from domestic Australian sources.
Secondly, we focused on markets that have very much defensive demand drivers, underpinned by sectors such as defence, health, ports, airports, education, government, sticky infrastructure projects, and then major infrastructure projects being developed as well. This was on the basis that we wanted to target the sectors that typically performed through any market cycle or tend to improve during difficult economic cycles like government spending – because typically the government takes over from private in recessionary environments.
Abode Woden is underpinned by health – Canberra’s major hospital is down there and it’s expanding, the Department of Health is there as well as another four major government departments. There’s education with the development of the new TAFE and then transport infrastructure with the extension of the light rail. In addition to that, you’ve got massive population growth going into that area as well as part of the rejuvenation of it.
Is serviced apartments a sector that you see a lot of value in?
We like serviced apartments as a defensive play, as well. It has been quite widely publicised that during Covid, serviced apartments typically outperformed hotels, and it gives an extension to demand sources in terms of that long-stay infrastructure focus – health focused business such as doctor rotations or where they’ve got to import labour, or specialised labour for major projects. Serviced apartments tend to get that demand over and above hotels. And we saw that through the four Quest properties that we already have – they tended to perform better from an occupancy level during Covid than some of our hotel product.
What other areas or sectors of accommodation do you think are primed for growth?
If we look at our portfolio surrounding defense, we’ve got Nowra, Newcastle, Rockingham in Perth and a little bit of exposure in Canberra as well. We look at other markets that are underpinned by defense because we think defense spend is only going to go one way moving forward. We also like markets whereby the amount of infrastructure projects is in the billions, but that generally have relatively small populations, because they have to import specialised labour to finish those infrastructure projects and that creates demand on its own accord – which will generally mean above average demand growth. We prefer markets where there’s barriers to entry in the supply. And while we can’t predict necessarily how well they’ll perform in the very short term, we’re pretty confident over a 10-year period that we’re going to be in much better position than we are when we get in.
What’s your view on Australia’s economic outlook? What do you think we can expect over the next six to 12 months?
Australia is a weird, wonderful country economically and it’s different compared to probably any other country in the world in the sense that there are a couple of things that typically keep it out of recession. I’m a believer that it is due to the fact that Australia has natural diversification benefits, and it always has winners and losers. When the east coast is suffering because there’s a global recession – and finance and insurance and banks are down – generally what we’ve seen in the past is a lot of developed countries around the world then spend a massive amount on infrastructure projects to basically buy their way out of recession; and that helps the West Coast. And vice versa, when the east coast is booming, then the west coast generally is in the doldrums because the governments don’t need to spend on all these infrastructure projects. It’s a very well diversified economy that balances itself out. Overlay that with continuous population growth, driven by migration and that propels the Australian economy forward. Whether we go into recession or a technical recession, I think it will feel like a recession to some people and not for others. But I don’t think it’s going to be to the same extent as what you might see in other parts of the world.
What’s on the agenda for Serene Capital over the next 12 to 18 months?
We are continuing to look for hotel opportunities while we continue to see value. Once that value turns off, then we’ll stop investing. We’re happy to sit on the sidelines, as we’ve shown. We’re basically trying to take advantage of the dislocation in the market, which is really driven by high interest rates and economic uncertainty globally, to really boost our portfolio.
We’re also exploring setting up a fund or mandate to invest in east coast office real estate. We’ve got a commercial portfolio over in WA which has four office assets in that and that’s been performing extremely well – we’ve leased almost 30,000sqm of office space over the last two years. The east coast office market is a bit of a bloodbath at the moment, coming off record low yields, as interest rates now are above the yields that people were paying only six to 12 months ago. So, we see an opportunity that we haven’t seen in that market to potentially buy good quality office assets at significantly lower values than they have been in the past three to four years, and really take advantage of a normalisation in that market over time.
So, there’s plenty of opportunity ahead?
There’s plenty of opportunity. Unfortunately, what always happens when there’s uncertainty is that while there’s a plenitude of capital out there, it’s very hard to get investors to release that capital. Everyone seems to be sitting on the sidelines at the moment. We raised AU$20 million as part of our first close, we’ve got our second close in September this year but we’re fortunate to be in a place that we’ve got an existing portfolio which makes it easier to ramp up gradually, as opposed to starting off with a new asset or fund. Once interest rates make a u-turn and start falling the other way, we think that’s probably going to be the point in time where global investors start to get comfortable that the worst of interest rates are over and it’s time to take advantage of the high yields now and potentially future lower cost of debt from where it is today.