Cromwell Has Asset Sales Planned to Reduce Debt, but It Remains to Be Seen Whether This Is Enough
Cromwell Property Group is an Australian property company that currently generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income. Cromwell is growing its funds management business, and is exploring options to dispose of property assets, and instead act as fund manager of those assets, and build new funds management ventures. Directly held property investments account for more than half of group revenue, nearly all of this being offices. The office portfolio has significant exposure to less supply constrained areas such as fringe central business districts, or CBDs, or suburban sites in Sydney, or less built-up capital cities such as Canberra. Relative to its largest rivals, this makes Cromwell more exposed to economic and property market conditions. Increasing CBD supply and cautious businesses could particularly hurt tenant demand in suburban and fringe locations. Reassuringly, Cromwell has solid tenants in many sites, with government accounting for circa half of Australian rent, and a decade-long lease to Qantas another big chunk. A minority of earnings is from funds management activities, but this segment is likely to grow as Cromwell sells property assets and increases its focus on funds management. This segment generates a high return on equity because while it relinquishes rental income, it frees up capital for use elsewhere, while still generating management fees. A portion of revenue comes from indirect property holdings, mostly Cromwell’s stake in the Cromwell European REIT, listed in Singapore.