As investors in the $70 billion-plus listed real estate investment trust sector brace themselves for another round of interest rate cuts - and improved yields - speculation is rife that it will trigger a takeover frenzy.
Industry talk is that next year a number of big deals will come to fruition, including the sale or dismemberment of FKP Property Group and its retirement village assets, the sale of the newly listed Centro vehicle, the sale of Dexus's billion-dollar US industrial portfolio, and a share buyback of at least 5 per cent by Mirvac.
There is also talk that Westfield Retail Trust will do something radical to improve its flagging share price after a disappointing spin-out on the ASX a year ago.
In the past year listed REITs have outperformed the broader market by almost 10 per cent as self-funded retirees, wealthy individuals and fund managers chased defensive stocks with high-dividend yields.
The median yield for listed REITs is 7 per cent, with 8.8 per cent forecast in 2012, compared with 6 per cent for long-term bank deposits.
If the Reserve Bank cuts interest rates in the first quarter of 2012 - which looks increasingly likely - it will make the yield on property trusts even more attractive, which will boost the share price.
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 solid earnings growth profile in the next 12 months.
Stockland, which owns 14 per cent of FKP Property Trust, is expected to either pounce on the company, sell its stake to majority shareholder Mulpha International, a Malaysian property group, or do a deal with Mulpha to split FKP between its retirement and land development divisions.
Stockland is part way through a share buyback, and is in the midst of selling some industrial and office portfolios, worth more than $1 billion. The purchase of FKP makes sense, given Stockland's strategy to expand into retirement villages. The property giant first emerged on FKP's share register in 2008 when it took part in a $2 a share placement. FKP is at present trading at 47? a share, which puts it on a market capitalisation of $563 million.
Like FKP, many REITs are trading at well below net tangible asset backing, making them a sitting duck for a takeover. Sovereign wealth funds in China, Singapore, Canada and the Middle East have deep pockets and a keen interest in property, particularly Australian property.
There are already several sovereign wealth funds with cornerstone investments in some of the listed property trusts. When the time is right they will start flexing their muscles, either via a full takeover offer, to block potential predators or to privatise and get the assets.
This already happened with Charter Hall Office Trust, which recently agreed to a bid by Singapore's wealth fund GIC and Canada's Public Sector Pension Investment Board.
Big global pension funds have stakes in trusts, including Mirvac, GPT and Goodman Group. In the meantime, the listed property trust sector continues to offload international property assets to overseas operators.
Earlier this year Lend Lease managed to get $US545 million for its stake in the King of Prussia Mall in Philadelphia, while Centro sold its US shopping centres to the private equity group Blackstone for $US9.4 billion in March.
The next trust expected to follow this trend is Dexus and Westfield Group, which is trying to offload some non-core shopping centres in the US. These are believed to include Chicago Ridge, Downtown Plaza, Eastridge, Fox Valley, MainPlace, Meriden, Palm Desert, Promenade, Solano and South Shore. Westfield has said it is looking to sell $US1 billion to $US1.2 billion of its assets in total.
Other activity in the sector
is expected to be the sale of the
new Centro property trust, with Lend Lease tipped as the most likely buyer.
If 2011 can be summed up as the year of buybacks for REITs, 2012 will be the year of further consolidation. The performance of the listed property sector has been solid: up almost 10 per cent year in the year to date, versus minus 9.7 per cent for equities.
This is in contrast to the past five years, when REITs have lost almost 15 per cent of shareholder value, compared with a 2 per cent loss for the S&P/ASX 200 index.
In the $15 billion unlisted retail funds and direct property syndicate sector, a similar upheaval is taking place. In the past year, a series of funds have either collapsed or been wound up as the banks forced assets sales to repay debts after covenants were breached.
In 2012 more asset sales and wind-ups are expected and, in some cases, management changes.
While most listed REITs have managed to recapitalise their balance sheets by launching rights issues and placements, the unlisted direct property funds sector still has in excess of $6.4 billion of bank debt, down from $7.4 billion in 2010.
The upshot is the next
12 months is set to be a wild ride for investors in both listed and unlisted property trusts.
Frequently Asked Questions about this Article…
What takeover activity does the article say could happen in the Australian REIT sector?
The article says industry talk points to a potential takeover frenzy if yields improve and share prices rise — with speculation around big deals including the sale or break-up of FKP Property Group, a possible sale of the new Centro vehicle, Dexus selling its US industrial portfolio, and consolidation moves by groups such as Mirvac and Westfield.
How would Reserve Bank interest rate cuts affect property trusts and investor yields?
According to the article, an RBA rate cut would make listed property trust yields even more attractive compared with bank deposits, which could boost REIT share prices and encourage takeover interest and consolidation in the sector.
Why is FKP Property Group seen as a likely takeover target and what might Stockland do?
The article notes FKP is trading well below net tangible asset backing, making it vulnerable to bids; Stockland — which owns about 14% of FKP — is expected either to bid for FKP, sell its stake to majority shareholder Mulpha International, or work with Mulpha to split FKP between retirement villages and land development.
What role do sovereign wealth funds and global pension funds play in Australian property trust deals?
The article highlights that sovereign wealth funds and big global pension funds have deep pockets and existing cornerstone stakes in some trusts; when conditions are right they may make full takeover offers, block predators, or privatise assets — exemplified by the Charter Hall Office Trust bid led by Singapore's GIC and Canada's PSP Investment Board.
Are listed REITs outperforming the broader market according to the article?
Yes — the article reports listed REITs were up almost 10% year-to-date while broader equities were down about 9.7%; however it also notes that over the past five years REITs had lost almost 15% of shareholder value compared with a 2% loss for the S&P/ASX 200.
What overseas asset sales by Australian property groups does the article mention?
The article cites several examples: Lend Lease sold its stake in King of Prussia for about US$545 million, Centro sold US shopping centres to Blackstone for about US$9.4 billion, and Westfield and Dexus were reported to be offloading non-core US assets (Westfield aiming to sell roughly US$1–1.2 billion).
What risks and upheaval are described for unlisted retail funds and direct property syndicates?
The article describes a wave of collapses and wind-ups in the $15 billion unlisted retail and direct property sector after banks forced asset sales to repay debt following covenant breaches; unlisted direct property funds still carried more than $6.4 billion of bank debt (down from $7.4 billion in 2010), so further asset sales and manager changes were expected.
How might share buybacks and consolidation shape REIT strategy in the near term?
The article suggests 2011 was a year of buybacks and that 2012 was likely to be the year of consolidation: some trusts are doing buybacks and selling assets to clean up balance sheets (Stockland is partway through a buyback and selling >$1 billion of industrial/office assets), while others may pursue larger deals or buyouts to grow and improve earnings profiles.
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