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Charter offer to open flood gates

MACQUARIE GROUP'S swoop on Charter Hall Office REIT, on behalf of a consortium of global hedge and sovereign funds, has led to forecasts that other deals are in the wings.

MACQUARIE GROUP'S swoop on Charter Hall Office REIT, on behalf of a consortium of global hedge and sovereign funds, has led to forecasts that other deals are in the wings.

The gap between net tangible asset (NTA) values and share prices has triggered the rush by hedge funds into Australian real estate investment trusts (A-REITS).

Corporate governance issues between internal and external management have also left the door open for investors.

Brokers and investors believe more deals from hedge funds will emerge unless A-REITs close the share price-NTA gap. Many trusts are buying back shares in an attempt to narrow the gap.

Merrill Lynch's property team said it was likely A-REITs would be the subject of corporate activity, or they would have to consider selling assets to crystallise their net asset backing.

"Already this year, we have seen a number of deals, most notably takeovers of ING Industrial Fund by a Goodman group-led consortium, Valad Property by US private equity group Blackstone, and EDT by EPN Retail," Merrill Lynch said.

"In these deals, we believe the fundamental rationale was likely the opportunity to take advantage of the disconnect between the stock price and the value of its portfolio of assets."

Macquarie Equities analysts said discounts to NTA were widespread in the REIT sector, and demand for quality real estate from unlisted investors was high.

The broker said while there were impediments to several groups being taken over (in the case of co-ownership of properties and management covenants), they believed sufficient value was evident in the sector for investors to be considering companies with quality property portfolios trading at substantial discounts to valuation.

One factor that will make it difficult for an outside party to attempt a full takeover for Charter Hall Office REIT is the cross-ownership it has on some key assets.

Under the Macquarie plan, Charter Hall Group will retain management of the office trust and will also keep its 13.3 per cent direct stake.

The remainder of the register, which includes 19 per cent held by US hedge funds Orange Capital, Point Lobos and Luxor Capital, will be offered up to $3.52 a share, including a $1.10 capital return from the sale of its US assets.

It is expected the US hedge funds will use the offer as an exit from the office trust.

Charter Hall Office's independent directors are assessing the conditional offer before they hold any discussions with the consortium.

UBS analysts said the independent directors would be expected to consider several pricing issues and the NTA gap when forming their recommendation.

"We expect them to look at the offer price relative to NTA. In our view, the discount to NTA may be considered too big to warrant exclusive due diligence," they said.

"There is the potential for a superior bid, similar to the case of Goodman Group's IIF [ING Industrial Fund] deal ..." they said.


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