EXPECTATION is growing that a new wave of mergers and acquisitions could hit real estate investment trusts, triggered by cashed -up superannuation funds.
While REIT analysts cautiously point out that the sector will not be crushed under the impact, many say the smaller end will see a rise in privatisation and internalisation of the funds.
They said share buybacks would continue to dominate activity, but mergers and acquisitions would return to the spotlight.
In the event of a takeover, the manager of a fund still receives fees, but the value of the units is more aligned to the net tangible value of the assets, without being affected by sharemarket volatility.
This will lead to the creation of more unlisted and wholesale property trusts, anchored by a listed parent and private investors. GPT Group has two such wholesale office and retail funds, while Macquarie Group is focused on its direct, unlisted real estate trusts.
The catalyst for the next round of possible deals has been the $1.2 billion conditional offer from the Macquarie-led consortium for the Charter Hall Office REIT.
Under the deal, the manager of the trust, Charter Hall Group, will retain its role as well as its direct 13.3 per cent stake. The remainder of the register will be held by superanuation and sovereign funds.
The independent directors of the Charter Hall Office REIT are still reviewing the proposal before making any recommendations to investors.
The bid for Charter Hall's office fund has led analysts to suggest its stablemate, Charter Hall Retail REIT, could follow the same route.
JPMorgan's team of property analysts, led by Rob Stanton, said mergers and acquisitions would dominate the REIT sector if the listed market continued to price trusts at discounts of more than 20 per cent to net tangible assets (NTA).
"Given Charter Hall Office REIT follows ING Industrial Fund as the second material REIT to be bid for in the last nine months, we believe careful consideration should be given to other REITs trading at substantial discounts to NTA such as Australand, Mirvac, Westfield Retail Trust and Stockland, among the larger liquid names," analysts at JPMorgan said.
Simon Garing, head of property research at Merrill Lynch, said in light of recent activity in the sector, it was pertinent to consider the potential for the REIT sector to be subject to takeover interest or similar corporate activity, or to otherwise sell assets to crystallise their net asset backing.
"Cashed-up sovereign wealth funds and global pension groups with a low cost of capital in particular have been attracted to the high yields and strong Australian economy, which has underpinned demand for the REIT sector," Mr Garing said.
Frequently Asked Questions about this Article…
Why are analysts expecting a new wave of mergers and acquisitions in the REIT sector?
The article says analysts expect M&A activity to rise because cashed-up superannuation funds, sovereign wealth funds and global pension groups are attracted to the sector’s high yields and the strong Australian economy, and many REITs are trading at discounts to net tangible assets that make takeovers more likely.
How could superannuation and sovereign wealth funds influence REIT takeover activity?
According to the article, large, low-cost capital pools from superannuation and sovereign wealth funds are able to pursue deals, and a Macquarie-led consortium’s conditional offer for Charter Hall Office REIT shows how these investors can anchor takeovers and push sector consolidation.
What happens to unit value and manager fees if a REIT is taken over?
The article notes that in a takeover the fund manager still receives fees, but the value of the REIT units tends to be aligned more closely to the net tangible value (NTA) of the assets and is less affected by sharemarket volatility.
Will share buybacks or mergers dominate REIT activity going forward?
Analysts in the article say share buybacks are likely to continue to dominate near-term activity, but mergers and acquisitions are expected to return to the spotlight as buyers target REITs trading at meaningful discounts to NTA.
Which REITs did analysts name as potential takeover or asset-sale candidates?
JPMorgan’s property analysts mentioned REITs trading at substantial discounts to NTA such as Australand, Mirvac, Westfield Retail Trust and Stockland, and the article also cites recent bids for ING Industrial Fund and Charter Hall Office REIT as precedent.
What details were given about the Macquarie-led conditional offer for Charter Hall Office REIT?
The article states the consortium made a $1.2 billion conditional offer for Charter Hall Office REIT, that Charter Hall Group would keep its manager role and its direct 13.3% stake, and that the remainder of the register would be held by superannuation and sovereign funds while independent directors review the proposal.
How might the REIT sector structure change if privatisations and internalisations increase?
The article suggests more unlisted and wholesale property trusts could be created, often anchored by a listed parent and private investors — examples given include GPT Group’s wholesale office and retail funds and Macquarie’s focus on direct unlisted real estate trusts.
What signal should everyday investors watch for that could prompt takeover interest in REITs?
The article highlights analysts’ view that REITs trading at discounts of more than about 20% to net tangible assets (NTA) are more likely to attract merger and takeover interest, so investors should monitor listed-price-to-NTA discounts.
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