Three reasons why CBA is exiting property

Commonwealth Bank’s desire to exit the management of three property trusts was confirmed today. What wasn’t explained was why it wants to sell those rights to manage the trusts.

CBA said today that it had submitted indicative, non-binding proposals to the board of Commonwealth Managed Investments Ltd relating to separate internalisations of the Commonwealth Property Office Fund and CFS Retail Property Trust Group, as well as the acquisition by CFS Retail of CBA’s retail property management and development business. It had also submitted a similar proposal to the board of Kiwi Properties Ltd.

Neither the bank nor the trusts disclosed the amounts involved in the proposals. CFS Retail has a market value of about $5.6 billion and Commonwealth Property is valued at about $2.6 billion so the management rights would have some material value, albeit perhaps not that material in the context of CBA’s own market capitalisation of more than $117 billion.

CBA also owns about 8 per cent of CFS Retail and about 6 per cent of Commonwealth Office, which one would expect to be sold if it distanced itself from managing the trusts, so that would potentially see it extracting about $600 million of cash from the process.

The obvious conclusion to draw from the announcement would be that CBA wants to quit exposures that under the Basel III regime carry quite heavy capital requirements.

The amounts involved, however, aren’t sufficiently large to make that a compelling factor. The near-$600 million tied up in the securities of the two Australian vehicles, for instance, might represent perhaps 20 or 30 basis points of CBA’s tier one capital adequacy ratio, which stood at 10.5 per cent for the December half.

CBA isn’t short of capital – it is one of the better-capitalised banks in the world – and is generating new capital through its profitability at a rate of about 100 basis points a year.

It is more likely to be returning capital to shareholders, directly or indirectly, over the next few years than trying to find ways to raise new capital/reduce the capital intensity of its balance sheet, although capital efficiency will always be a priority for any bank in the emerging regulatory environment.

The better explanation is that CBA’s funds management business, which is predominantly focused on equities and fixed interest, looked at the property investment platform business it has and concluded that the returns and risks weren’t worth the effort.

There are indications that the impetus for the decision to try to exit the management of the trusts came out of the wealth management business rather than from the bank itself.

CBA’s Colonial First State funds management business has been involved in some large-scale retail property developments that perhaps haven’t gone quite as smoothly as it might have liked and that have seen it caught up in a stoush with building unions, which may have been another factor.

Also, and perhaps of greater consequence, across the listed funds management sector external management has increasingly become an anachronism and one not favoured by investors.

Internalising the management, on reasonable terms, would probably be a positive for the trusts and their investors.

If it were to produce a nice little windfall of cash and capital for CBA that it could either reinvest in higher-returning assets or businesses or use to supplement its returns to shareholders, that would an incidental outcome.