Kylie Rampa interview

Transcript of Michael Pascoe's interview with Kylie Rampa, chief executive of Macquarie Countrywide Trust.
Kylie Rampa: Macquarie Countrywide has really evolved over the past decade. We started as quite a small investment vehicle here in the Australian market, very much focused on grocery-anchored neighbourhood shopping centres.

Now that focus has changed, even though today we’ve expanded offshore and 75% of our properties are located in the United States, our focus still remains on core real estate fundamentals and I think that is a similarity right across our sector. And that focus for listed property trusts really has not changed, irrespective of the markets that we’re invested in.

Michael Pascoe: But that move offshore is a change.

Certainly. We moved offshore in 2000, we expanded to New Zealand and in 2001 we continued that expansion into the United States. If we wanted to continue to focus on producing very strong investment returns we felt that the offshore expansion was very important in being able to continue to do that.

We’ve been able to expand offshore, buy very strong real estate and continue to provide very strong investment returns to our unit holders.

So there’s been a geographical change; there’s also been a gearing change in that period.

Back 10 years ago, when listed property trusts were first formed, they really had no gearing at all. It was just straight property investment with no debt. Then, you know, all of a sudden 30% gearing became the benchmark and gearing has crept up over time. I think the sector average is probably just a little over 40%.

Now that’s quite consistent with gearing in the corporate sector; and when you think about it, property trusts have very stable income platforms, very secure, stabilised rental income, so it’s the perfect vehicle to introduce gearing into because we can manage our debt positions '” we’re very sophisticated in our approach '” and we have very aggressive hedging policies where we hedge our debt position; by hedging, I mean we actually fix our debt for long periods of time.

For example, at Countrywide, our debt '” 78% of it is fixed for five years and that really removes a lot of volatility in movements in interest rates.

Some property trusts have become developers. They still call themselves property trusts, but they’re really developers. Where does Macquarie Countrywide sit on that scale?

Macquarie Countrywide redevelop a lot of our properties, but we’re redeveloping existing assets, where we think we can improve the value of those for those for our investors.

We’re not active in land banking, we’re not active in looking at providing development returns as far as development fees to our unit holders, so the majority of our income comes from direct real estate.

And I think that some of the products on the market available for investment do offer a higher exposure to development and I think that’s really up to investors to '” from a risk-adjusted, cash flow point of view '” value those stocks.

Well to come back to the root of the changes, the move offshore is because Australian property trusts have bought everything here there is to buy?

Well Michael, our markets are highly securitised. The Australian listed property market is actually a world-class structure, and a very large percentage of institutional-grade, or A-grade, or good quality property is owned by institutions here, through our superannuation structure.

If the capital continuing to come into our sector just kept chasing Australian-based property our market would come under increasing pressure from return point of view. So that release into offshore markets has been very important for our sector to continue to provide the returns our investors want and are used to.

And the push into gearing comes from the same pressure?

They’re interlinked. If you reduce gearing, it usually corresponds with a reduction in return. So they go together: to maintain higher returns, gearing has been introduced to the sector. Most definitely.

Do you think the average retail level property trust investor understands that '” that it’s become international, it’s become geared, and sometimes there’s a fair bit of developer risk involved as well?

I’m not sure. I think that there’s a lot more choice out there in the products on offer, but as far as gearing is concerned, the Australian investor, the retail investor in our market typically has a mortgage on their home, or at some point has borrowed money, so they’ve geared their own house, which is a non-income-producing property.

That’s often geared at 80%. Now that’s actually a geared investment. So then to take gearing and put it into a listed environment over a very large portfolio of properties with management whose core skill is to manage those positions, shouldn’t be quite as scary as '¦ I think the terminology promotes it to be.

You’ve just spent another $360 million in the United States to buy another 10% of a major portfolio there. Is all your future investment overseas? Is there nothing left at home worth buying?

We continue to buy around the same value of property in Australia every year. We buy five or six properties here year in, year out. The Australian market just does not have portfolios to acquire where the offshore markets actually provide portfolios, and that’s what’s led to the accelerated growth in these markets.

So our focus very much remains on the Australian portfolio; we’re very active redeveloping property here and we’ve been producing very strong returns '” you know, 9%-plus '” you can’t buy assets for that here, and we’ll continue to focus in New Zealand and the United States. We’ll also look further afield. We’ve recently announced that we’ll consider opportunities in Europe as well.

Property trusts have outperformed the market for a number of years. There was a rerating last year. The outlook for 2006?

I think whenever you’re in an increasing interest rate environment, property yields of listed property trusts are often impacted by that. But I think the fundamentals for real estate remain very strong: there’s very strong consumer spending still in our markets; the quality of the real estate owned by the listed property trusts is very strong, so I think the fundamentals will remain strong for the sector.