Adele Ferguson | Sydney Mornig Herald | October 4, 2010
Australians investing in the $294 billion listed and unlisted property sector have been to hell and back in the past couple of years as property values plummeted, debt levels ballooned, returns crashed and in the case of listed property trusts share prices fell up to 80 per cent.
But as the economy rebounds, the sharemarket rallies and self-funded retirees, super funds and retail investors move out of cash, property is on the comeback trail, and analysts, consultants and many property fund managers are spreading the gospel that asset valuations have bottomed and property is once again a defensive investment class.
A report on the sector by Property Investment Research supports the view that green shoots of recovery are emerging in the sector, with leverage now down to 29 per cent and most categories of property well on the way to sorting out a massive mess of over-engineering of their balance sheets, which got them into serious trouble with their banks.
“Our conclusion is that now seems to be the time to invest in property,” the report says.
The $294 billion property sector is made up of three main asset classes: listed property trusts, or REITs, which represent $141 billion of assets under management; unlisted wholesale funds, which include funds managed by large institutions such as AMP and Colonial, represent $69 billion of assets under management; and unlisted retail funds and direct property syndicates, which represent $18 billion of assets and are leveraged to the tune of 53 per cent. The remainder is split between mortgage schemes, which have largely frozen redemptions, and property securities, according to research.
After the $20 billion equity raising bonanza of last year by the REITs, things have been relatively quiet. But with the latest profit season out of the way, and most of the 17 remaining REITs listed on the ASX managing to return a profit and provide investors with a distribution payment, activity is starting to return to both the listed and unlisted sectors.
In the past few months a number of new wholesale funds have opened, there has been $3 billion in fresh equity raised, and the long-awaited takeover frenzy is about to take place, which will push the share prices higher of the takeover targets.
Even properties in trouble are managing to find a way out. The latest were the DFO properties, which found a solution to their troubles when CFS Retail Property Trust raised $540 million through an institutional placement to fund the acquisition of four DFO centres. The placement was oversubscribed and CFS is trading above the offer price of $1.86 a unit.
Other activity includes Australian Unity buying the rights to one of Westpac’s property trusts, Mirvac’s purchase of Westpac Office Trust, Stockland’s takeover bid for Aevum and Centro Properties Group’s move to find a buyer for part of its Centro MCS syndicates business to high-quality fund managers.
John Freedman, a senior property analyst at UBS, said residential conditions were even stronger than he expected, driving near-term earnings growth, and in the unlisted sector fund managers were back raising capital much earlier and in greater amounts than he thought possible.
The sector as a whole has bottomed, with most of the listed REITs reporting a profit in the latest profit season and a number of the unlisted wholesale funds starting to raise money for new funds, but there are still pockets of trouble, says the Zenith Investment Partners senior investment analyst, Dugald Higgins. “Commercial real estate, which underlies all these property vehicles, bottomed in late 2009 and we are now bouncing back from the bottom. The better quality properties are actually increasing in value, with an increase in leasing deals taking place.” But he warned that the unlisted retail sector was a different story. “They have the bulk of secondary assets. There is a lot of debt that needs to be refinanced in the next two years. Banks have done a lot of hand holding instead of slaughtering in the first round of refinancing, but it will be interesting to see what they do with the second round of refinancing, which is next year and 2012. Many of these vehicles are overgeared, but the quality of property isn’t good, so it will be interesting to see what the banks do.”
When it comes to takeover activity, there is more to come, particularly as the bell tolls for some of the REITs to refinance more than $21 billion of debt over the next two years.
For them the banks will be putting on the vice grip to accelerate the sale of assets, many of which are second tier, or looking for new ways of restructuring.
For the listed REIT sector, which represents $141 billion of the total $294 billion property pie, most REITs are still trading at a big discount to net asset backing, making it cheaper to buy the trust than the individual real estate assets. The sector is trading at a median discount of 10 per cent to net tangible assets if Westfield and Stockland are excluded.
One of the reasons for this discount to net tangible assets is the opportunity cost investors face in terms of investing in the property sector or putting their money in the banks. The median yield paid from REITs is 6.5 per cent, compared with a similar amount for long-term bank deposits. With a number of issues left to sort out, many investors are still wary of re-entering the fray.