Castlerock sees opportunity knocking in regional property

An unlikely success in the regional office market is ready to open for retail investors.

Castlerock chief Hank Bronts, wife Margie and sons Adam (left) and Jason. Picture: Aaron Francis

It has been a good pandemic for property fund manager Castlerock and its group of investors reaping the rewards of a portfolio of buildings leased to government departments in country towns.

With roots in Victoria’s Latrobe Valley, Castlerock has quietly snapped up $180m worth of Centrelink, Australian Taxation Office and other government department offices in regional centres over the past 18 months, and defied the downward trend of many office investments.

Founder Hank Bronts oversees a family business that now has close to $500m property funds under management, mostly spread across two funds: AusLink Property Trust No 1 and No 2.

The No 1 Trust contains 14 Centrelink offices worth about $110m and has been established for 12 years, returning about 12 per cent per annum in that time. The No 2 trust has been around for six years and has recorded a similar return, with a portfolio of about 10 assets that are valued at almost $350m.

Castlerock plans to have up to $1bn funds under management within a few years, and will likely launch a new fund that also concentrates on regional property assets. As part of that move, it is also opening up to retail investors for the first time.

Bronts says investors are attracted to the certainty of having a safe, relatively passive investment that returns better than many cash products, with the certainty of having government departments and service providers as tenants. “These are government-leased assets and they can get 7 per cent (return). So property prices for our assets have gone up,” he suggests.

Castlerock has been on a buying spree during COVID-19, shelling out a record $57m for a Wollongong office block mostly leased to the ATO in September after making its biggest acquisition yet — $93m for a Queensland government building in Townsville — in April.

“We didn’t strategise or set this business up for the pandemic, but you can take advantage of the opportunities when they come along,” Bronts says.

“We usually are around the $40m-$70m mark. So we’re in the middle between the little people and the bigger Charter Halls of the world space. So maybe we’re in our own little world a bit.”

The attraction of buying in Townsville or Wollongong, or developing a Victorian government office building in Morwell, is also having less competition than in the bigger cities.

“It is not like you’re in a CBD, where you can be in William Street to Collins Street. They can’t move (in regional centres) because there’s nothing else they can move into. Unless they build something new.

“So we look at a building as a competitor in a marketplace, and who are our competitors? It is nobody. That is the advantage of being regional, it is different to being in the city.”

At the height of the commercial property crash in the early 1990s, Bronts won a tender to build a small state government office block in Orbost, East Gippsland.

He struck a deal for a 7 per cent rental increase annually and was “making money hand over fist” as interest rates dropped. By year eight of a 10-year lease, he got a visit from a government official.

“He said ‘we’ve been paying 7 per cent more rent each year and now we’re paying more rent in Orbost than we are in Collins Street’,” Bronts laughs.

Buildings in places like Cranbourne, Sale and Horsham followed, and later a big K Mart in Bairnsdale. Bronts eventually moved to Melbourne. Rather than syndicating one building at a time, he established Castlerock.

The business now also includes sons Jason, the chief financial officer, and Adam, Castlerock’s business development director.

Jason Bronts says most of Castlerock’s investors are self-funded superannuation fund owners and investors based in Tasmania or regional Victoria, with an average $500,000 invested.

Until now it has been restricted to sophisticated and wholesale investors.

Minimum investment is $100,000 and many investors are repeat customers, gradually adding to their holdings annually.