article.. brisbane times.. takeover talk

A fall in interest rates will tip the balance of benefit towards property trust yields



Adele Ferguson
October 24, 2011.


After a slow year, the listed property trust sector is bracing for a shake-up in the next six months as a new Centro property vehicle is expected to muscle its way into the sector and a bevy of trusts launch big share buybacks to try to close the gap between their flagging share price and their net tangible assets.

Last Friday Centro hosted a property tour in Western Australia and Victoria that was well attended by analysts and fund managers. If the merger of Centro's two listed properties, Centro Retail and Centro Properties, gets the green light from investors next month, it will have a big impact on the sector.

The general feedback is that Centro's assets have held up surprisingly well and, if it can pull off the merger, this will prompt Lend Lease to make a bid.

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Despite most trusts successfully completing recapitalisations in the past two years after going on a debt binge in the years leading up to the global financial crisis, the country's $70 billion-plus listed property trust sector continues to trade at a big discount to its net tangible assets (NTA), which is stultifying corporate activity.

If the gap can be closed, it will trigger some long-awaited mergers and acquisitions in the sector.

For this reason, some listed property trusts are believed to be on the verge of launching share buybacks to close the gap between stock prices and their NTA by buying their own stock cheaply.

Those tipped to go next include Mirvac and Dexus, with Deutsche Bank speculating it makes sense for Stockland to double its buyback to 10 per cent of issued capital.

"Subject to further asset sales, we would not be surprised to see the buyback expanded to 10 per cent of issued capital, given Stockland's relatively strong balance sheet position (22 per cent gearing as at June-11)," Deutsche Bank said. Challenger Diversified Property Group, Charter Hall Retail, GPT Group and Investa Office Fund all launched buybacks this year.

One attributed reason for this discount to NTA is the opportunity cost investors face in terms of investing in the property sector or putting their money in the banks.

The median yield for listed property trusts is 7 per cent, with a forecast 8.8 per cent next year, compared with about 6 per cent for long-term bank deposits. With several issues still to sort out, including debt repayments, many investors are still wary.

But if the Reserve Bank cuts interest rates - which is looking increasingly likely - it will make the yield on property trusts more attractive, which will boost the share price and close the NTA gap.

If interest rates fall, this will tip the balance in favour of the property trusts, particularly retail funds, as they will benefit from a double whammy of improved retail spending in speciality retail areas and more attractive yields on the investment vehicle.

For example, Westfield Retail Trust's net tangible asset backing is $3.21, compared with its latest share price of $2.56.

If the trusts can boost their share price, then the next phase for the sector is rampant takeover activity. The big listed property trusts, with cleaned-up balance sheets, will be under pressure to get bigger to become more relevant and show a decent earnings growth profile in the next 12 months.

Shares in the sector have plunged in the past few months, partly due to an overall fall in the sharemarket but also because hedge funds started unwinding their positions after a failed hedge-fund attack on Charter Hall in July. The three hedge funds had hoped to oust the external manager, take control and make a lot of money arbitraging the gap between the share price and the NTA.

But the battle for Charter Hall was tougher than expected and the hedge funds have moved to other targets, leaving an opportunity for sovereign wealth funds which recently bid for Charter Hall. A Macquarie Group-led consortium including Singapore's GIC and Canada's Public Sector Pension Investment Board fund bid for the trust, excluding its US portfolio.

Sovereign wealth funds in China, Singapore, Canada and the Middle East have a keen interest in property, particularly Australian property.

Some sovereign funds have had cornerstone investments in listed property trusts since the global financial crisis and, when the time is right, will flex their muscles either with a full takeover offer or by using their stake as a block against other predators or to privatise and get the assets.

Big global pension funds have stakes in trusts that include Mirvac, GPT and Goodman Group.