Shake-up likely in REIT sector

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.