The move by Colonial First State Global Asset Management to launch a $520 million wholesale property fund highlights two important dynamics in the country's $279 billion property sector: wholesale funds are muscling in on listed property trusts and foreign investors are buying Australian property with their ears pinned back.
In Colonial's case, the wholesale fund was its first in 10 years and like just about every other deal going on in Australian property, foreign investor appetite was strong.
These two important trends came out loud and strong in the latest 2012 annual research report by the research house PIR, which found that in the $279 billion listed and unlisted property trust sector, listed property trusts, or REITS, continue to represent half of sector assets under management - $139 billion, to put a figure on it - but unlisted wholesale funds rose to their highest ever proportion of the sector, roughly 29 per cent, to $82 billion.
At the smaller end of the spectrum, the various property securities funds and mortgage/debt funds continued to decline as a percentage of the sector.
The overwhelming conclusion is that while most REITs continue to trade at a discount to their net tangible assets (NTA), the shift in interest by big investors to unlisted wholesale funds will continue on the basis that the funds have greater flexibility in sourcing capital than their listed counterparts.
To put it into perspective, REITs and unlisted wholesale funds offer a high-single-digit yield, have acceptable gearing and their cap rates have not materially fallen since the global financial crisis. The big difference between them is that most listed funds trade at a discount to NTA and that makes it more difficult to fund a deal through new equity compared with recycling assets or borrowing money.
In contrast, the unlisted wholesale market doesn't have such constraints and has therefore been able to raise equity. The most notable examples include CPPIB, which recently committed to invest $1 billion in two office tower developments at Barangaroo in Sydney, with other wholesale investors committing a further $500 million.
Other examples include GPT Wholesale Shopping Centre Fund announcing a $100 million capital raising this month. The implication is that unlisted wholesale funds enjoy a lower cost of equity capital and greater flexibility in sourcing capital than their listed cousins, despite the latter spending the past 18 months buying back their shares.
It raises some interesting questions about REITs and whether they should be parking assets into wholesale funds rather than taking them on their balance sheet. It is a trend Westfield and GPT have started to embrace.
For the past 18 months Australian REITS have been focusing their attention on share buybacks to try to close the gap between their share price and NTA. The sector has spent close to $2 billion on buybacks and is expected to spend a further $2.5 billion in the current round of buybacks. REITS have spent an estimated $2 billion on acquisitions. compared with $16 billion for foreign investors in joint ventures, unlisted local funds, direct property or taking strategic positions.
Recent figures from CBRE highlight the sheer magnitude of this trend. In 2010, foreign investors accounted for 19.9 per cent of all deals larger than $5 million. At the time, CBRE noted this was "almost twice" their usual share of acquisitions. For the same year, REITs clocked in at 23.5 per cent.
Last year, foreign investors accounted for 30 per cent of all deals larger than $5 million, and 37 per cent of all deals larger than $20 million - the highest level in almost 20 years.
By comparison, local superannuation funds, wholesale funds and unlisted trusts accounted for a combined 21 per cent. For the March quarter of this year, foreign investors accounted for 27 per cent of deals above $5 million and 43 per cent of all deals above $20 million, which was far ahead of the 26 per cent of deals attributed to local wholesale funds and 20 per cent from local private investors.
It is a trend that is starting to worry some institutional investors, concerned that REITs are missing out on some of the best properties in capital cities.
Interestingly, REITs have outperformed the overall sharemarket over the past 12 months, with the ASX 300 REITs index up 4.86 per cent for the financial year, compared with an 11.07 per cent slump in the S&P/ASX 300 index over the same period.
It seems that the sector has well and truly bounced back since the global financial crisis, which dragged Australian investors in the listed and unlisted property sector to hell and back, with property values plummeting, debt levels ballooning, returns crashing and, in the case of listed property trusts, share prices falling up to 80 per cent.
PIR supports the view, with leverage now down to 26 per cent, and most categories of property well on the way to sorting out a massive mess of overengineering of their balance sheets, which got them into serious trouble with their banks.
"Deleveraged balance sheets, better capital management, and a focus on operational efficiencies (reducing vacancy rates and management expenses, while incrementally boosting income) all increase our confidence in the sector as a reasonably secure long-term investment," the report concludes.
A JPMorgan property analyst, Richard Jones, recently described the growth of the unlisted wholesale sector as explosive, partly benefiting from an inflow of foreign capital.
The trend is on, but if the gap between NTA and the share price of REITs continues to close, then it could further open up the sector.
As PIR says: "We live not only in a post-GFC world, but a world weighed down by a forthcoming demographic tide. Meeting these obligations will demand long-term returns in excess of the paltry yields on government debt."
Frequently Asked Questions about this Article…
What are wholesale property funds and why are they growing in Australia?
Wholesale property funds are unlisted investment vehicles that pool capital from large or sophisticated investors to buy and develop property. They have been growing because they offer greater flexibility in sourcing equity and a lower cost of capital than many listed trusts—evidenced by examples such as Colonial First State launching a $520 million wholesale property fund and the unlisted sector rising to about 29% ($82 billion) of the $279 billion Australian property sector.
How do unlisted wholesale funds compare with listed REITs for everyday investors?
According to recent research, both unlisted wholesale funds and listed REITs offer similar high-single-digit yields and acceptable gearing, but unlisted funds have more flexibility to raise equity and don’t face the same NTA (net tangible assets) discount that many listed REITs do—making it easier for unlisted funds to fund deals via new capital rather than recycling assets or borrowing.
Why are many listed REITs trading at a discount to net tangible assets (NTA)?
The article notes that many listed REITs still trade below their NTA, which reflects market pricing of listed shares versus underlying asset values. That discount makes it harder for REITs to raise new equity without diluting existing shareholders, prompting some to prioritize buybacks or consider alternative funding structures like wholesale funds.
How are foreign investors affecting the Australian property market?
Foreign capital has become a major force: recent data showed foreign investors accounted for about 30% of deals larger than $5 million and 37% of deals above $20 million in the past year, and even higher shares in some quarters. Big commitments—such as CPPIB’s $1 billion investment in Barangaroo developments—illustrate how overseas money is helping fuel unlisted and direct-property transactions.
Are Australian REITs moving assets into wholesale funds instead of holding them on their balance sheets?
The article says this is an emerging trend and a live question for the industry: some major players like Westfield and GPT have started to embrace parking assets into wholesale structures, partly because wholesale funds can often raise equity more easily than listed vehicles that face NTA discounts.
Have REITs recovered since the global financial crisis and are they a secure long-term investment?
Research cited in the article shows the sector has largely bounced back: leverage is down (around 26%), REITs outperformed the broader sharemarket in the most recent 12 months covered, and analysts point to deleveraged balance sheets, better capital management and operational efficiencies as reasons for increased confidence in the sector as a reasonably secure long‑term investment.
What do yields, cap rates and gearing look like in the property sector since the GFC?
The article reports that REITs and unlisted wholesale funds generally offer high-single-digit yields, have acceptable gearing levels, and that cap rates have not materially fallen since the global financial crisis—supporting the view that income and risk metrics remain attractive compared with the immediate post‑GFC period.
How much money are REITs and other investors spending on buybacks, acquisitions and capital raisings?
Over the past 18 months the listed REIT sector spent close to $2 billion on share buybacks and was expected to spend a further $2.5 billion; REITs have spent an estimated $2 billion on acquisitions. By contrast, foreign investors committed far more—about $16 billion into joint ventures, unlisted local funds, direct property and strategic positions—and some wholesale funds and trusts (for example GPT) have announced capital raisings such as a $100 million raise.
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