Pressure on property trusts to divest Turi Condon, Property editor | July 07, 2008
HAVING embarked on an international spending spree over the past three years, Australia's bruised and battered listed property sector could be forced into a fire sale of its $70 billion offshore portfolio, after being caught up in the global economic slowdown.
Confronted with falling rental income and under increased pressure to reduce borrowings, the potential number of retail properties that local trusts might have to sell in the US is "huge", according to leading US research group Real Capital Analytics.
Australia's listed property trusts -- which have 40 per cent of their assets offshore -- bought $US20 billion ($20.8 billion) worth of US shopping centres between 2005 and 2007.
"Over that period they acquired one out of eight strip shopping centres sold," said Real Capital in its June Capital Trends Monthly publication.
"All Australian REITs (real estate investment trusts) are under pressure to sell and many of their non-US assets have recently been up for sale."
A large swag of those recent acquisitions was made by the debt-laden Centro Properties Group, which is currently surviving on the goodwill of its banks.
On top of the market deals, Centro paid $US3.3 billion for Heritage Property Investments Trust's portfolio of 160 shopping centres in 2006, and early last year bought New Plan Excel Realty Trust's 290 neighbourhood centres for $US3.7 billion.
But the volume of retail property sold in the US during May fell to $US1.3 billion, down 70 per cent on the same month a year ago, according to Real Capital.
The only notable transaction for the month was the Australian-listed Macquarie CountryWide Trust's sale of its 75 per cent interest in a portfolio of centres, the researcher said.
"Even without mass dispositions by the Australians, the balance continues to shift in favour of buyers," it said, adding that new listings of properties for sale exceeded those that had sold by a multiple of 3.4 in May.
"So far this year, new offerings have totalled nearly $US25 billion, more than double the volume closed (sold)."
However, there is a stand-off between buyers and sellers, with sellers not yet willing to discount substantially.
Those selling centres got 94.8 per cent of what they were asking, Real Capital said.
John Freedman, head of real estate research for investment bank UBS, agreed that trusts with overseas holdings would be under substantial pressure to sell assets to reduce their borrowings.
He said they were also facing less income from flagging offshore property markets, where vacancy levels were rising and consumer sentiment was weakening.
Australia's listed property trusts, with total assets of $172 billion, have 30 per cent of their properties in the US, 5.8 per cent in Europe, 2.6 per cent in New Zealand and 2.3 per cent in Asia.
Australia's biggest listed property owner, Westfield Group -- which last week announced it was moving ahead with its pound stg. 1.5 billion ($3.06 billion) Stratford City retail project in London -- has about half of its assets offshore.
However, Mr Freedman said Westfield was expected to weather the storm.
While Australian property markets had also been hit hard by the credit crisis, debt was still being rolled over here, he said.
Overseas, property owners are facing less income, and some buildings are more highly geared than in Australia, carrying debt of up to 90 per cent of their value.
"The rent isn't always covering the borrowings and the banks have stepped in," Mr Freedman said.
Last month, the crisis of high-profile New York developer Harry Macklowe came to a head when his financier, Deutsche Bank, sold three of the seven skyscrapers it took control of for $US2.38 billion, a 20-30 per cent decline from the price Mr Macklowe paid last year while at the top of the market.
"That's not happening in Australia where there have been more orderly disposals," Mr Freedman said.
"Banks in Australia have been loath to step in because the interest is being paid."
While Australia's property markets are not nearly in as bad a shape as those overseas, Mr Freedman still expects some merger and acquisition activity this year, with possible privatisations among the trusts that have all their assets overseas.
Global real estate adviser DTZ said it would be some time before the credit crisis eased, freeing up capital for cash-starved property markets.
A 2008 survey of lenders by DTZ found no significant freeing up of the European debt markets was expected until 2009 at the earliest.
In the meantime, the underlying real estate markets continue to deteriorate with demand for office space in London falling 30 per cent in the last quarter of 2007, DTZ said.
Ends.
Cheers, Pie :)
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