Another interest rate cut could trigger a frenzy of REIT takeovers in 2012.
AS INVESTORS in the $70 billion-plus listed real estate investment trust (REIT) sector brace themselves for another round of interest rate cuts – and improved yields – speculation is rife that it will trigger a takeover frenzy.
Industry talk is that in 2012 several big deals will come to fruition including the sale or dismemberment of FKP Property Group and its retirement village assets, the sale of the newly listed Centro vehicle, the sale of Dexus Property Group’s billion-dollar US industrial portfolio and a share buyback of at least 5 per cent by Mirvac. There is also talk that Westfield Retail Trust will do something radical to improve its flagging share price after a disappointing spin-out on the ASX a year ago.
In the past year listed REITS have outperformed the broader market by almost 10 per cent as self-funded retirees, high-net-worth individuals and fund managers increasingly chased defensive, stable stocks with high dividend yields. The median yield for listed REITs is 7 per cent, with 8.8 per cent forecast in 2012, compared with about 6 per cent for long-term bank deposits.
If the Reserve Bank cuts interest rates in the first quarter of 2012 – which looks increasingly likely – it will make the yield on property trusts even more attractive, which will boost the share price.
If the trusts can boost their share price then the next phase for the sector is rampant takeover activity. The big listed property trusts, with cleaned-up balance sheets, will be under pressure to get bigger to become more relevant and show a solid earnings growth profile in the next 12 months.
Stockland, which owns 14 per cent of FKP Property Trust, is expected to either pounce on the company, sell its stake to majority shareholder Mulpha International, a Malaysian-based property group, or do a deal with Mulpha to split FKP between its retirement and land development divisions. Stockland is part-way through a share buyback, and is in the midst of selling some industrial and office portfolios, worth more than $1 billion.
The purchase of FKP makes sense given Stockland’s strategy to expand into retirement villages. The property giant first emerged on FKP’s share register in 2008 when it took part in a $2-a-share placement. FKP is currently trading at 47¢ a share, which puts it on a market capitalisation of $563 million.
Like FKP, many REITs are trading at well below net tangible asset backing, making many a sitting duck for a takeover. Sovereign wealth funds in China, Singapore, Canada and the Middle East have deep pockets and a keen interest in property, particularly Australian property. There already are several sovereign wealth funds with cornerstone investments in some of the listed property trusts and, when the time is right, they will start flexing their muscles either via a full takeover offer, to block potential predators, or to privatise and get the assets. This has happened with Charter Hall Office Trust, which recently agreed to a bid by Singapore’s wealth fund GIC and Canada’s Public Sector Pension Investment Board (PSP).
Big global pension funds have stakes in trusts including Mirvac, GPT and Goodman Group.
In the meantime, the listed property trust sector continues to offload international property assets to overseas operators. This year Lend Lease managed to get $US545 million for its stake in the King of Prussia Mall in Philadelphia, while Centro sold its US shopping centres to private equity group Blackstone for $US9.4 billion in March. The next trust expected to follow this trend is Dexus and Westfield Group, which is trying to offload some non-core shopping centres in the US. These are believed to include Chicago Ridge, Downtown Plaza, Eastridge, Fox Valley, Mainplace, Meriden, Palm Desert, Promenade, Solano and South Shore. Westfield has said in the past that it is looking to sell $US1 billion ($A950 million) to $US1.2 billion of its assets in total.
Other activity in the sector is expected to be the sale of the new Centro property trust, with Lend Lease tipped as the most likely buyer.
If 2011 can be summed up as the year of buybacks for REITS, 2012 will be the year of further consolidation. The performance of the listed property sector has been solid: up almost 10 per cent in the year to date, versus negative 9.7 per cent for equities. This is in sharp contrast to the past few years, when REITs lost almost 15 per cent of shareholder value in the past five years, compared with a 2 per cent loss for the SP/ASX 200 Index.
In the $15 billion unlisted retail funds and direct property syndicate sector, similar upheaval is taking place. In the past year, a series of funds have either collapsed or been wound up as the banks forced asset sales to repay debts after covenants were breached. In 2012 more asset sales and wind-ups are expected and, in some cases, management changes. While most listed REITs have managed to recapitalise their balance sheets by launching rights issues and placements, the unlisted direct property funds sector still has in excess of $6.4 billion of bank debt, down from $7.4 billion in 2010. The upshot is the next 12 months will be a wild ride for investors in both listed and unlisted property trusts.
aferguson@fairfaxmedia.com.au