CBA move puts real estate trusts in play

The three listed real estate trusts owned by Commonwealth Bank have become takeover candidates, with the bank reviewing its property holdings and looking to bring the management in-house.

It would be the first major takeover activity in the real estate investment trust sector since GPT launched a failed bid for Australand in December.

The three REITs - CFS Retail Fund, Commonwealth Property Office Fund (CPA) and the Kiwi Income Property Trust - are managed by Colonial First State Global Asset Management, which is under the Commonwealth Bank banner.

Each trust has its own direct management, with Michael Gorman at CFS Retail, Charles Moore at CPA, and Chris Gudgeon at Kiwi Income. They report to Colonial head Angus McNaughton.

The bank said: "The proposal in relation to CFS Retail also incorporates CFS Retail acquiring the wholesale property funds management business and the integrated retail property management and development business owned by CBA."

Analysts said it was a signal the bank wanted out of the direct holdings and had therefore opened the floodgates to other buyers.

These could include DEXUS Property , GPT, Mirvac, Investa Office Fund and Lend Lease for CPA's office assets, and Charter Hall for CFS Retail's assets.

The bank's property division has been estimated at $20 billion, but the management rights would be worth a fraction of that amount.

CPA has a market capitalisation of $2.6 billion, CFS Retail about $5.6 billion and Kiwi Income $NZ1.1 billion ($948 million).

Pricing for a funds management business is generally between 2 per cent and 3 per cent of total assets under management, depending on debt levels and asset quality.

Commonwealth Bank owns 7.8 per cent of CFS Retail (worth about $430 million) and 6.2 per cent of CPA (about $150 million).

CLSA real estate analyst John Kim estimated the cost of internalising CPA's management would range between $73 million and $97 million, and would be 1.9 per cent to 2.5 per cent dilutive to next year's earnings, assuming it was all funded by debt.

CFS Retail has a buffer in that its largest direct shareholder is billionaire John Gandel, who owns 15.5 per cent of the retail landlord and has a first right of refusal over the bank's stake.

Analysts at Bank of America Merrill Lynch have issued a buy rating on CFS, despite a weaker retail environment and its 25 per cent exposure to "B-grade" malls.