How to upgrade the office, essentially

A Melbourne-based funds manager is putting a long-term twist on the tried and true capital growth generation strategy of renovating for profit.

Buying an older house, renovating it and selling for a profit has been a well-known and popular wealth generation tactic in residential property for decades. 

In commercial property, the practice is less common, but diversified funds management group Quintessential Equity is finding that principles similar to ‘house flipping’ can also create significant capital growth in the office sector.

Where Quintessential Equity's strategy differs from the 'get in and get out' nature of renovating for profit, however, is the fact that the company generally holds onto its properties after upgrading them, having converted the buildings into assets that produce income long-term.

Quintessential Equity was founded around a decade ago by Shane Quinn and Harry Rosenberg, combining the professional know-how of Mr Quinn, a civil engineer, and Mr Rosenberg, an accountant and investment advisor.

Chief executive Russell Bullen, who joined the firm shortly after its inception, said the initial strategy was to provide investors for value-add returns, while at the same time focusing on risk mitigation.

“We looked at buying properties that were unloved but very well engineered properties,” Mr Bullen told Australian Property Investor Magazine. 

“We would target well located properties, which either through a lack of management or a lack of capital, were requiring some forms of regeneration.

“So we would go in and regenerate all the things that you can’t see, so the plant and all the equipment, to provide a healthy, reliable, environment for tenants and then all the things that you could see we would do as well.”

Mr Bullen said that strategy had resulted in Quintessential Equity having an enviable tenant retention rate of 95 per cent, with the company employing two philosophies - love the investor and love the tenant.

He said Quintessential Equity’s initial investment strategy was in line with many of its peers in the commercial property sector, in that a building would have to tick the boxes of a good location close to amenity and infrastructure to be considered.

“But after that, we really don’t even look at the cash flow,” Mr Bullen said.

“If it’s in a location that can actually attract tenants, the first thing we will look at is the quality of the building, and it’s bones, making sure that it can be regenerated to a high standard.

“If it can’t be, no matter what the cash flow is like, we won’t buy it. 

“It’s a prerequisite that we have to be happy and comfortable with the quality of the building and the engineering of the building, so that we know if we spend all of this money on it it’s going to be appealing to a future tenant.”

To ensure the buildings are attractive for tenants, Mr Bullen said a big focus of any renovation was on creating healthy buildings, a strategy that was in place even before the COVID-19 pandemic placed cleanliness and wellness at top of mind for office tenants.

One of the company’s most recent projects, Worksafe Victoria’s headquarters in Geelong, is a 15,604 square metre office building that became the second project worldwide to achieve a Well Platinum Health Safety rating from the International Well Building Institute.

The Well ratings system evaluates the robustness of operational policies, maintenance protocols, stakeholder engagement and emergency plans and their impacts on the health of building occupants. 

“We have always been focused on the healthiness of buildings,” Mr Bullen said.

“Making them run efficiently, yes, that’s good from an environmental standpoint and for financial health, but the actual real healthiness - making it have clean air and clean surrounding and healthy surroundings is really important.

“People need to feel that a building is healthy, especially now in this environment that we’re in.

“The wellness of a building is probably something that is going to be at the forefront when people start going back to the office.

“I think it’s going to start getting a lot of attention and it’s something that we’ve been focusing on for the last four or five years.”

Mr Bullen said the current crisis would not deter Quintessential Equity from carrying out its investment mandate, with the company cashed up after raising more than $145 million from investors late last year.

He said while the company would be cautious not to acquire property in a falling market, its operations were full-steam ahead, notwithstanding that much of the team is currently experiencing lockdown due to Melbourne’s stage four restrictions.

“We’ve had a lot of enquiry, we’ve got a list called our ‘hot to invest’ list and that’s grown considerably,” Mr Bullen said.

“I think people who know us, there is a high degree of trust with what we do.

“People know we won’t just do a deal to do a deal, we’ll only do it if it is really in the best interest of our investors and if we can not only preserve their capital but actually get a pretty decent return on it.”

And for those in commercial property that have predicted that the pandemic will usher in the end of office buildings as we know them, Mr Bullen said it was much too early to say what, if any, structural shift would be.

“There are a lot of things to play out, and this thing has shown how unpredictable it is as well. You’ve got to be pretty careful about making bold statements too early,” he said.

“There are a lot of knee-jerk reactions that are being made and statements like ‘it’s the end of the office’. 

“I don’t believe that, but I also don't believe that the office is not going to be impacted.

“Inevitably there will be more of a remote way of people working going forward but in terms of remote working and as much as I think it’s got a place to say, I think it’s got to be a balance because you do lose things working remotely.”

Mr Bullen said he believed collaboration was an underrated aspect of having employees together in an office, while developing a company culture would certainly be challenging if the workforce operated remotely.

“What does remote working mean for culture - can you establish it, can you maintain it, can it thrive?,” he asked.

“I don’t really think it can, I think there needs to be some form of being together.

“We’re kind of in a mixing pot at the moment and frankly it’s a bit too early to try to be too smart for your own boots and predict what’s going to happen. 

“I think there will be a change but I think there will be a balance overall.”