GPT Group has made headlines over the past week as it susses out whether investors will support the listing of the Metropolitan Office Fund, comprising of business parks and offices in Sydney, Melbourne and Brisbane valued at $376m.
Boasting a reported starting yield of 7.4% I expect retirees sick of pygmy interest rates will jump all over it given half a chance. Most will ignore the fact that the portfolio is concentrated in B-Grade property in areas such as Sydney’s Olympic Park, 17kms west of the CBD, instead focusing on the difference between the starting yield and term deposit rates.
Despite sky-high property prices nor will they consider this is a great time to be selling commercial property, not buying it, which is exactly what GPT Group chief executive Michael Cameron is doing. GPT Group has only committed to signing up for a 10% stake in the fund. I’m not criticising Cameron, this is exactly what I’d be doing if I were in charge, particularly given GPT Group will get paid a 0.6% annual fee to manage the properties.
Yes, the fund will be externally managed. Remember this was the backbone of GPT Group’s overseas funds management strategy before the GFC intervened nearly sending the company to the wall.
The process is simple: Buy assets, package them into safe-sounding funds and then sell them to investors at the top of the market while retaining a management fee. Heads I win, tails you lose.
The only problem was that GPT Group got caught holding the over-priced properties before it had a chance to offload them.
That’s not going to happen this time around, and GPT Group is a far safer business now. But with so many A-REITs and listed infrastructure companies having internalised management since the GFC to regain credibility with investors, GPT’s latest fund suggests this process has run its course.
Most A-REITs now have ambitious plans to grow their funds management businesses, which means having a large pool of investors to sell funds to. Knee-high interest rates have created the demand, so expect to see more property companies hocking their lowest quality, yet highly prized property while the market is hot. That’s what I’d be doing.