Colman's Next Crusade

Julius Colman, one of Australia's property innovators, has switched his attention to the retirement property market. A former property lawyer, he co-founded MCS Property Ltd, the property syndication group sold to ASX-listed Centro for $193 million in 2003.

Now he is popping up in the property pages as part of consortium acquiring privately held retirement homes around Australia. With his new venture, he aims to create a new property trust covering the aged care and retirement market, again with the focus on property management services. “If you can manage the business of the care of the aged well, then you can build a base of massively mispriced property and deliver exceptional returns, just as we did in shopping centres,” he says.

MCS started life as a small property syndicate run by Colman and his business partner Peter McGrath from a suburban law firm in Melbourne. Throughout the 1990s, he specialised in acquiring regional centres, packaging them in syndicates and selling them to retail investors. Over the 11-year life of the Colman-era MCS, investors enjoyed net returns of 19.2% a year.

"I'm not interested in holding property, I'm interested in managing it," says Colman, who shook up the staid world of property trusts when MCS steadily accumulated a portfolio of 55 shopping centres, despite the prominent position within the retail market held by aggressive market leaders such as AMP, Westfield and Gandel.

Well respected as a property analyst, Colman’s views are constantly in demand within property circles. He sits alongside ABC Learning Centres chairman Bill Bessemer on the board of the Australia Pacific Exchange, a venture that aims to create tradeable parcels of direct property. He is a regular guest at Property Council forums where his legal skills are called upon when he “interrogates” leading property figures at industry seminars.

Eureka Report caught up with Colman as he put the finishing touches on plans for a new trust venture concentrating on retirement property.

James Kirby: I'm pretty sure most of our subscribers have money invested in their own homes. What's your view on residential property?

Julius Colman: Ridiculously overpriced.

But you don’t believe it’s going to drop do you?

Well one of two things will happen. It’s got to get back to the median. It will get back to the median by drifting sideways until it catches up with where it allows inflation and so on to bring the graph up till the two lines meet. Or, of course, it can drop. It just needs a negative event for this to occur '¦ these are unstable times. You just need some big shock there, such as a pandemic, inflation, interest rate increases, more world instability and of course you will have a residential downturn. I mean, you only need to look back 12 years to see what sort of a residential downturn you can have.

So you're saying we've yet to have the downturn in residential property?

I can't say I'm feeling calm about residential property prices. No way. And the proof of it is, if you put a $1 million house on the market today you couldn’t rent it for $1000 a week. If you put a $500,000 house on the market today you probably couldn’t rent it for $500 a week, so you’re not even getting 5% gross. On top of that, you've got people still buying a second home as an investment, without realising what the Government’s done in land tax.

Do you mean land tax has removed some of the attractions of property investing?.

Some of it? They're removing it entirely for those wanting to buy a second home. If you’ve got a $1 million property then land tax is effectively taking more than a quarter of your rent, sometimes up to half '¦ half of your net income. Investors didn’t expect to have that sort of arrangement when they bought the house in the first place.

What's your view on the outlook for holiday properties?

They're a potential disaster area of their own. You only have to have a look at what happened in the property crash in 1994 and holiday homes were just decimated. If you are out of a job and financially squeezed, are you selling your house? No. Selling your car? No. Pulling your kids out of school? No. Are you selling your holiday home? Yes, it's the first thing you'll do. Today is not the time to be buying holiday homes '” at the end of a 12-year boom '” and I don’t think it’s the time to be buying residential. And certainly not residential as an investment.

In relation to the Australian commercial market: we've a strong economy yet vacancy rates are relatively high. How does that work?

There’s a couple of points here that are important. We’re 15 years into an economic cycle that’s gone in a straight line upwards. To be 15 years into that cycle and to have 8% vacancy rates in the major cities it’s dead set worrying. What's more you’ve got to say that the next economic movement is not going to be upwards. It’s likely to be downwards and if you’re starting off with vacancy rates of 8%, that’s a worry.

Many investors have their property investments in the form of listed property trusts, but it strikes me LPTs are not what they used to be. Do you think investors realise how much they have changed.

Probably the most fundamental change in LPTs has been that 10 years ago most were mainly property owning entities. There’s no doubt that most of them today are not; the ones most loved by the market are “stapled” entities, with a business stapled to the property ownership.

Do you think investors should be concerned that LPTs are now dependent on overseas earnings: 40% of Australian LPT assets are now in the US, mostly in shopping centres.

Well, it’s very difficult to get good assets at good prices in Australia today. So is it bad thing to go offshore and get them?

But there’s a terrible history of Australian managers going overseas and getting it wrong. Multiplex in London is the latest story. Why will this time be any different?

We’re very good at property. A lot of the managers that are going over, such as Westfield and Centro, have an extraordinarily strong track record of being able to look after their special sort of a property asset.

And of course many investors also have investments in property syndicates. Has the Westpoint scandal damaged the property syndicate business.

Yes it has, but hopefully the market in syndicates will be like the market in everything else and investors will understand that one bad apple doesn’t really destroy a good industry.

In the Westpoint case, there were advisers getting extraordinarily high commissions for selling the product. The most we ever paid to planners at MCS '” and it was always fully disclosed '”was 3%. Occasionally somebody would suggest, 'Pay us 5% and we’ll sell your product’. We'd say no thanks. When I hear figures like 10% at Westpoint, it’s frightening. You can’t pull that sort of money out of a transaction and have hopes of it performing well.

Will financial planners charging fees always be essential to how property syndication works?

The issue is how you source investors. And it’s not easy to source investors directly and so the planners are an important part of it because they’re the people that bring along potential investors and they should be getting fees. They’ve got a lot of work to do. They’ve got to research a product. They’ve got to form a view of it. They’ve got to go behind what you tell them and make sure that you’ve got proper systems, proper people; that what you say you will deliver you’re actually able to deliver; that you’ve got the systems, the people to do it. So they’ve got a lot of work to do. They deserve to get some fees for that before they recommend.

You're concentrating now on retirement property '¦ a lot of people are '¦ but there has been a lot of failure already, I'm thinking of Village Life, one of the worst-performing stocks on the ASX last year. What's happening in retirement property?

Yes, I’m now getting into the aged care area with a vehicle not dissimilar to what MCS was, and with some very skilled people alongside me. The retirement area is an extraordinary property opportunity but you can’t just be a property player. It’s not enough to build a retirement village or buy an aged care centre and hope that they’ll come.

Is it true you're accumulating nursing homes at the moment?

Yes , we are acquiring aged-care facilities.

And you're paying top prices for these facilities?

Not yet. High prices are said to be paid but that’s only relative to what the prices were a year ago. In terms of other property assets, the prices are, I believe, cheap, particularly if you can manage the asset. Good quality shopping centres are around the 6% yield mark. Aged care assets are not within a bull’s roar of that yet, so there’s tremendous upside.

What's the attraction to property investors in the retirement market?

Where have you seen a property area, an area of property, where the growth in underlying demand is forecast to be better than 4% a year for the next 45 years? And government statistics show that the number of people aged over 70 is expected to grow by more than 4% a year, for each of the next 45 years. That’s the engine driving this whole thing.

So you're buying these properties in order to put a new trust together?

That’s what we’re doing at the moment. Putting a trust together to own the property with trust investors getting a pure property income stream: a pure property investment. We then run the aged-care business and in five or six years’ time we put the two together and give the property trust investors part of the aged-care operation and then list or provide some other liquidity event for the two and so deliver very special returns.

OK, so you’re going to do it all over again are you?

Got to do it. Got to keep working. Property is a fascinating area.