Battle lines now drawn

It's game on. The floodgates have opened to let through a new surge of mergers and acquisitions among the real estate investment trusts.

Analysts and investment bankers have been predicting takeover activity would dominate the real estate investment trust sector for at least the past two years.

This sentiment was founded on remarks by the managers of REITs, who all said they wanted to grow their funds and assets under management.

This, of course, could only be done through acquisitions as Australia is not flush with excess space for which to develop new assets.

The exception is Barangaroo, which took at least a decade to get the tick of approval.

Others such as Mirvac have had to pull down buildings and rebuild.

But to get to targets of $10 billion, such as what GPT flagged it wanted in its February results, buying properties was the only way. And to get a good portfolio required a takeover.

Amid the talk and only a couple of ill-fated attempts, not much has happened. But the past month has changed the game.

It effectively started in July when the Commonwealth Bank said it was looking to internalise the management of its two funds, the Commonwealth Property Office Fund and CFE Retail.

That gave potential buyers the chance to wade in, which is exactly what Dexus has done. And after two rounds of sweeteners and partnership with the Canada Pension Plan Investment Board, it looked like Dexus had won.

But GPT's Michael Cameron, who looked at Australand, but walked away (his words), has entered the fray with a rival takeover.

Given the two offers are very similar, being cash and scrip - and the cash price is very close - investors are effectively being asked to choose the best manager.

Both have quality office assets across the country and CPA's portfolio, which includes a share in the 5 Martin Place asset, will be a good buy for anyone. In the end, CPA shareholders are the big winners.

But with the focus on office assets, activity has flowed through to other office landlords including Investa Office, Mirvac, Charter Hall and Cromwell, among others.

John Kim at CLSA said he believed Dexus shares would be under pressure near-term, but may re-rate if it acquires assets and/or sell its CPA stake which it bought at $1.13 per security.

"We believe GPT may be perceived to be lose-lose near-term, given it faces either a bidding war with execution risk, or miss out on another acquisition. However, longer-term GPT may be able to prove the acquisition fruitful if it successfully sells down the assets in the funds and manages the assets more effectively than CPA's current manager.

But as GPT and Dexus directors battle it out, more mergers and acquisitions are expected.

The sale of a 20 per cent stake in Australand by CapitaLand makes the former a more likely target. According to brokers, under a scrip takeover, CapitaLand would own a smaller stake in the combined entity, facilitating a further sell down.

Other potential targets are Investa Office, which has Morgan Stanley as a major shareholder.

Analysts at Moelis & Co said merger and acquisition activity in the real estate sector had been subdued for three years but was likely to rebound in the next two to three years.

"As capital markets remain accommodating for M&A activity, many companies are once again in a position to make meaningful acquisitions," they said.

"In addition to the public players, some of the largest real estate private equity groups have recently raised large property funds."