Australand door opens for GPT and rivals

Australand in December dismissed GPT's healthy offer for its investment and industrial portfolio. But the game is back on as the property group's key Singaporean shareholder looks set to cash out.

When GPT’s Michael Cameron made his unsolicited approach to Australand a month ago, offering to buy its $3 billion portfolios of investment properties and its commercial and industrial business, it seemed reasonable to assume that he believed it was possible to prise loose those assets. Despite Australand’s rejection and refusal to engage, it now appears he was right.

Australand said today that its major shareholder, Singapore’s CapitaLand, had announced an intention to conduct a strategic review of its 59 per cent shareholding in the Australian entity.

Australand’s fate is now out of its own hands and control of a highly strategic collection of property assets is now up for grabs at a point where there is expected to be another bout of consolidation within the listed property sector.

GPT isn’t the only group interested in Australand. Rival Mirvac has been reported to also be interested and, if CapitaLand does decide it wants to cash out its $1 billion-plus stake in the group to focus on its interests in Asia, there could well be other players.

The GPT approach involved an offer to buy all but Australand’s residential property division from the group and was pitched at a $140 million premium to the assets involved at a time when Australand’s securities were trading at a discount of about 13 per cent to the book value of the underlying assets (today they trade almost in line). The assets involved represent about 70 per cent of Australand’s asset base, which would have left it as a listed residential property group.

GPT has no interest in the residential property division. It wants the $2.3 billion of office and industrial properties within Australand to reduce its exposure to retail property, which is now almost 60 per cent of its portfolio.

Mirvac, with a residential property business of its own, could take on the entire Australand portfolio – but would inevitably have to do it via a scrip merger or a massive and deeply discounted equity raising. Mirvac currently trades at a discount of just over 10 per cent to its asset backing.

That would be a gutsy move from its new chief executive, Susan Lloyd-Hurwitz. Lloyd-Hurwitz was previously managing director, Europe, at LaSalle Investment Management and has also had senior executive roles at Macquarie Group and Lend Lease.

Cameron is in a better position to offer the cash that one assumes CapitaLand would prefer if it decides to exit Australia but he might need to find a partner to take the unwanted residential property business off his hands.

There could well be other interested parties. There is, as indicated, an expectation that there will be some large-scale consolidation of the sector this year because conditions for acquisitions are exceptionally favourable. There are also a lot of cashed-up investment groups scouring the globe for returns better than the meagre yields available on fixed interest securities.

With historically low interest rates property yields have become increasingly attractive and funding costs have fallen dramatically – the spread between borrowing costs and cap rates is a big as it has been for decades – while the historic strength of the Australian dollar has created a window of opportunity for offshore companies to cash out exposures to Australian assets on compelling terms.

Greater scale and diversity for the consolidators ought to produce an opportunity for the consolidators to further reduce and lock in lower funding costs. The Temasek-backed CapitaLand, as one of Asia’s largest property groups, might see the interest in Australand as a one-off opportunity to take a big gain from a mature and slowing economy and redeploy its capital in faster-growing and less developed markets.