Can GPT really placate CapitaLand?

GPT wants to limit its exposure to the troubled retail sector via its offer for Australand's office and industrial properties. But, prima facie, the battle to win over Australand's Singaporean parent looks difficult.

GPT’s unsolicited approach to Australand to acquire its investment properties and commercial and industrial business is a neat fit with its strategy. The critical question, however, is whether or not it fits as well with the Singapore-based CapitaLand group’s thinking.

GPT’s Michael Cameron has made it clear to the market that he wants to reduce the group’s exposure to retail property, which sits at about 57 per cent of its portfolio. He wants to reduce that to about 50 per cent by lifting the weighting of office properties within the portfolio to about 35 per cent and the weighting of logistics and business parks to around 15 per cent.

The approach to Australand last Friday would, if successful, add about $2.3 billion of office and industrial properties to GPT’s portfolio, as well as its commercial and industrial development business.

It would also, however, gut Australand. The assets targeted by GPT represent more than 70 per cent of the group’s asset base and would essentially leave it with only its residential property business, which generated $38 million of Australand’s $123 million of earnings before interest and tax in the June half.

A decision to sell the assets GPT is seeking would therefore represent a major strategic call by Australand’s controlling shareholder, Singapore’s CapitaLand. CapitaLand owns about 59 per cent of Australand and therefore GPT can’t succeed without its support.

CapitaLand is one of Asia’s largest property groups and pursues a diversified strategy so a decision to sell the investment portfolio and the commercial and industrial businesses would represent a major strategic shift in this region and potentially herald a complete exit.

Cameron is, however, unlikely to be a mere tyre-kicker, which means he must believe there is a realistic chance of prising loose the assets he wants.

Australand’s securities do trade at a discount to their net tangible asset value – they were at a discount of almost 13 per cent before today’s announcement – so he might believe that he can make a compelling case to CapitaLand that he can unlock value for the Singaporean group. Its dominant security holding presumably dictates any offer would have to be compelling.

It is conceivable that GPT, which itself trades almost in line with its asset backing, could make the numbers work on an attractive offer.

The A-REIT sector has had a good year, partly due to the Reserve Bank. With interest rates falling steadily its yields have become increasingly attractive even as its funding costs have been sliding.

That, and the historic strength of the Australian dollar, should create an interesting window of opportunity to fund and acquire property assets from offshore owners on terms that are attractive to both buyer and seller.

With a security price close to NTA, debt cheap, and the spread between borrowing costs and capitalisation rates as wide as it has been for decades the capacity to fund major acquisitions and generate accretive returns is far greater than it has been for a very long time.

GPT would be aware that there aren’t that many available portfolios that would deliver meaningfully on its strategy of lowering its exposure to retail, a sector which is experiencing both cyclical and potentially structural pressures.

While it is difficult to separate the two pressures there are obvious cyclical issues from the impact on retailers from the conservatism of consumers while the longer term threat from online retailing is only just starting to be recognised as a potentially destructive influence on rents and vacancy rates.

Given the question-marks over retail it does make sense for GPT to try to diversify its portfolio and the conditions today are positive for the execution of that strategy.

Whether CapitaLand’s attitude towards an unsolicited approach that would so diminish its Australian presence will be as helpful, of course, is the multi-billion-dollar question.