When two companies merge, it is always touted as a perfect fit and meeting of like-minded cultures. Then a year later it becomes obvious which of the two cultures was the dominant party.
When specialist property manager SAI merged with syndicator TeysMcMahon three years ago, it was a marriage of convenience.
At the time, SAI was a financial advice firm dealing mainly with high-income clients, providing advice on tax planning, which then involved superannuation and self-managed funds. In the course of this work, SAI needed investment opportunities with long-term structures.
“We had stable funds under advice and a unique long-term vision on investing,” SAITeysMcMahon managing director Grant Ross says.
“To meet the needs of our clients, we were forced to look at unlisted assets, and 10 years ago there were not a lot of retail products around that suited our client needs.”
Looking at asset classes that would outperform in the long-term, SAI started building its own products, mainly focusing on unlisted commercial property.
The first unlisted property syndicate was started in 1993 with assets possessing long-term leases.
This was followed by a diversified property trust, which is still around today.
Recently, the trust bought the Adelaide landmark building, Santos House, for $102 million in a joint venture with Abacus Property Group. Each will own 50 per cent of the joint venture.
The introduction of the Managed Investments Act in 1998 formalised the company’s fund management operations and also required a broader client base. Up until this point, SAI had only offered investment products to its own clients.
“We needed to distribute our products outside our own client base to get scale, but we didn’t have any background in retail distribution,” Ross says.
This was where a merger with TeysMcMahon — which had distribution capability but no commercial property expertise — began to look like a good match.
Headquarters for the company is in Melbourne, which is where the property team, headed by Graham Brewer, is based.
The distribution team is based in Sydney, run by executive director Judy MacMahon, who says after three years, the group is fully integrated.
“We didn’t rush the integration and left the good things that work in place,” MacMahon says.
Ross says the merger has created the opportunity to bring in new key staff to the funds management business as it expands.
“We are not chasing funds under management, but we had to get the organisational structure in place as the clients grew,” he says.
“In the last two years, our funds under management have doubled, but we are still looking for quality assets as part of a very long-term approach.”
According to Ross, the strategy now is to balance the inflows with the quality of the property assets SAI acquires.
Brewer says the company is looking for property with a strong value proposition.
“We have a very clear idea of the strategic asset allocation, fund equity/debt financing mix required for each fund to deliver performance true to its mandate,” he says.
The points Brewer and his team look for in potential properties are long lease duration and a focus on listed company tenants.
After acquisition, SAI is an active manager of the property to improve the performance of the asset. There is also a focus on diversification of the assets in a fund, which can include investing in all property classes and in different states.
Ross says the acquisition of assets is largely opportunity-based, but sometimes the company targets a particular property that it thinks will fit in a portfolio.
“A property such as Santos House came up just as we were thinking about adding a CBD building to the diversified fund,” he says.
“We knew we had to re-balance the portfolio, as we had been light on offices for the last 12 months.”
Ross says listening to investors and advisers also gives SAI an idea of what type of investments in property it should be looking for. In recent times, this has seen the launch of childcare and healthcare investments.
“Because of our background through SAI Private, we tend to know what people want, so often we are ahead of the curve,” he says.
“An example was when we created trusts rather than syndicates, which took time to explain the concept to potential clients.”
The $100 million purchase of Santos House has put SAI firmly on the radar screen. Runners-up for the property included Deutsche, which apparently wasn’t too happy to be beaten by a smaller player to what it regards as one of its traditional playing fields.
Ross says the size of the asset is not a factor when looking at acquisitions. He points out that SAI had looked at Shell House in Melbourne (SAI’s headquarters) as an acquisition when it was offered for sale, but the fund manager decided against it.
“We will look at something like this, but it has to have superior risk/rate of return that is attractive,” Ross says.
And buying property assets is only half of the investment strategy; maintenance of the asset is equally as important.
Brewer says he likes to have a small number of tenants in a building with long leases.
“We do use managers to look after the properties and we manage the managers,” he says.
Meanwhile, SAI is continuing to expand its distribution and MacMahon says the aim is to get on approved lists.
“We are targeting the independent planner, although some large groups have included our products on their lists,” she says.
Grant says the type of investments offered by SAI would appeal more to hands-on advisers, rather than those just selecting from a wrap menu.
MacMahon believes the fund manager has an advantage over its competitors due to its 10-year track record.
This track record also influences the future and rather than reinventing the wheel, Ross says SAI will be doing “much the same” for the next 10 years.
“That is not saying we won’t look at new property sectors in the future, but the quality of the portfolio is paramount,” he says.
John Wilkinson is a financial journalist. The author’s superannuation fund holds units in SAITeysMcMahon’s Diversified Property Trust.
