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Summit News

Australia property trusts ripe for shake-up

SINGAPORE (Reuters) - Australia’s property sector looks set for another shake-up as cheap share prices attract investors who believe the market is still healthy despite a slowing economy and high interest rates.

Suburban homes are seen in Australia in a file photo. REUTERS/David Gray

"For the first time in 15 years, it's becoming arguably an opportunistic market," said Simon Treacy, Asia chief executive for MGPA, a property fund management firm partly owned by Australia's Macquarie Group MQG.AX.

“There’s a window at the moment to support some of the companies that need cash.”

The stock market value of Australia's real estate investment trust market has fallen 27 percent in the last six months to $75 billion, as debt refinancing problems at shopping mall operator Centro Properties Group CNP.AX fuelled fears for other highly geared firms.

Babcock & Brown Ltd BNB.AX, which manages about $72 billion in global infrastructure assets, lost half its market value this month and some media reports say private equity firm Kohlberg Kravis Roberts KKR.UL is planning a bid for the company.

Many property trusts are trading at big discounts to their net asset value (NAV), making them potential takeover targets.

They are also badly in need of money. In the year to June 2009, Australian REITs will require up to A$4.2 billion of external capital to fund development pipelines and distribution payouts, according to Citigroup analysts.

For companies such as AMP Capital Investors, a unit of Australia's pension fund manager AMP Ltd AMP.AX which hopes to expand its investments globally, it is time to buy.

“We’ve got capabilities. We have a lot of people on the ground,” said AMP Capital’s Chief Investment Officer Andrew Bird. “We know that market very well, so if there are opportunities in Australia, we will definitely look at them.”

AMP has made an offer for MacarthurCook Ltd. MCK.AX, which holds listed and unlisted property vehicles in Asia and the United States. Meanwhile, Lend Lease corp LLC.AX made a $1.2 billion bid this month bid for FKP Property Group

FKP.AX.

Other potential targets include GPT Group GPT.AX, whose shares trade at more than 20 percent below its NAV.

“We view GPT as a deep value buy,” Merrill Lynch said in a note to clients last month, citing a potential takeover as a share-price driver.

PREDATORS WITH MONEY

Although there are some signs of a slowdown, the physical property market in Australia still looks relatively healthy.

The central rank appears to have paused, for now, after raising interest rates to 12-year highs earlier this year to restrain inflation.

Central Sydney office vacancies fell to an 18-month low of 3.7 percent in January, while offices are full in Perth, which has benefited from booming natural resource industries.

Rental values for prime retail in Sydney rose 4.6 percent year on year for the first quarter of this year, according to Jones Lang LaSalle.

In the meantime, private equity funds are ratcheting up capital raising for Asia-Pacific property.

Merrill Lynch ML.N said in April it was raising a $2.5-3 billion Pacific Rim real estate fund. ING Real Estate, LaSalle Investment Management, and Dubai's ETA Star Property Developers are also raising new funds this year.

“There could be some private equity attempts to take over quality assets at discounts,” said Richard Cruickshank, managing director for PIR Independent Research Group.

“I think if anything happens, it’s likely this year, in the next three to six months.”

Some analysts say Middle East companies, which have huge construction plans for their home markets, could snap up Australian firms, partly to tap their expertise in finance and project management.

Because of the global credit crunch, the volume of mergers and acquisitions in the Australian real estate sector has actually dropped this year.

About $1.34 billion worth of M&A deals involving Australian property companies took place between Jan 1 and April 22, according to Thomson Reuters. That represented only 3.7 percent of all Australian deals, compared with 26.5 percent for the same period last year.

The Australian REIT market went through its first bout of consolidation in the early 2000s with the number of listed trusts declining to 29 in 2003 from 51 in 1999. The next round is more likely to have an international flavor.

“Last time, it was more Australian domestic,” said Quentin Velleley, an analyst at Citigroup.

“This time around, the market cap of a stock is bigger, so any transactions could have a much bigger impact on the structure of the Australian REIT sector.”

Australian REITs will probably need to reduce their leverage and cut dividends, which are currently more than rental income, before the sector sees active takeover activities.

"Moving a little bit more back towards a pure sort of property ownership, that is something likely to be a characteristics of the shakeup of this cyclical downturn," said Scott Crowe, a global strategist and portfolio manager for Cohen & Steers Inc. CNS.N in New York.

“There’ll be fewer players, bigger players, better balance sheets and greater focus on rental income than what we saw a year and a half ago.”

(For summit blog: summitnotebook.reuters.com/)

Editing by Kim Coghill

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