Private equity carnivores hunt Asia property trusts

By Dominic Whiting and Jane Williams - Analysis

HONG KONG/MELBOURNE (Reuters) - Private equity funds are sniffing around Asia-Pacific property trusts, hoping to buy them cheaply after share price declines in the last month, but rising debt costs could hamper their acquisition ambitions.

Billions of dollars have been raised globally in the last year for booming Asian property markets, with the likes of Morgan Stanley (MS.N), Blackstone Group (BX.N) and Goldman Sachs (GS.N) to the fore.

But fund managers are stuck for acquisition choices in a region where many of the more attractive buildings are tightly held by wealthy families -- often as a status symbol.

So they are considering amassing a large portfolio in one fell swoop by buying a whole real estate investment trust (REIT).

The tactic took hold in the United States early this year and spread to Australia. Asia could be next, after the U.S. mortgage default crisis provoked a sell-off in the region's REITs -- even though the region's property markets show little sign of a downturn.

"Today one of the best opportunities is to take a REIT private," said Phillip Levinson, head of Asia client services at LaSalle Investment Partners, which is planning to spend $15 billion on Asian property over five years. "Watch this space."

Blackstone set the tone for buyouts, taking U.S. landlord Equity Office in February for $39 billion, including debt, and selling buildings off to other investors in smaller chunks.

Morgan Stanley followed up with a A$4.7 billion ($4 billion) deal for Australia's Investa Properties Ltd. IPG.AX.

In Asia, several Hong Kong REITs are trading below their net asset value (NAV) -- theoretically making them prime takeover targets. While Chinese stocks have soared in the last year, Hong Kong investors have been cool on the bond-like characteristics of REITs, which pay most of their rent as dividends.

CARNIVOROUS

Sunlight REIT (0435.HK), comprising office and retail buildings, is trading at about 20 percent below NAV, while Prosperity REIT (0808.HK) is at a discount of 31 percent and Champion REIT (2778.HK) is at a 35 percent discount, according to UBS.

"You'll see groups like us looking at REITs not a million miles from here to see what the break-up value will be," John Pattar, managing director at CLSA Capital Partners, told a recent conference in Hong Kong.

"It's very exciting for us," Pattar added, prompting a REIT manager next to him to label his sentiments "rather carnivorous".

Despite global credit fears, many Asian banks which are lumbering under high deposits and low loan growth are still willing to lend to fund acquisitions in rising property markets.

In Australia, where REIT buyouts are easiest, debt market players believe mid-sized deals will still get done. But jumbo leverage buyouts could struggle, with senior level debt likely to cost as much as 37 basis points more now than before the credit squeeze sparked by the U.S. subprime mortgage crisis.