The Sydney Morning Herald
Weekend Edition

Confidence returns to REIT sector

Carolyn Cummins
Commercial Property Editor
10th October 2009

A WAVE of asset sales and new floats is set to wash over the real estate investment trust sector in coming months, backing up strong recent performances.

The head of investment markets research for Colonial First State, Stephen Halmarick, said the REIT sector gained 9.8 per cent in September and 16 per cent in August.

"The sector has now risen 56.8 per cent off its lows in May," he said. "Confidence has returned to the sector, following large capital raisings and debt reductions."

Property agents say the revival of the commercial real estate market means deals – both for individual assets and the formation of new trusts – will be plentiful in the lead-up to the end of calendar 2009.

While some high-profile properties have been withdrawn from the market, including the unlisted Macquarie wholesale fund's share of No. 1 Martin Place, the ability to bundle up a portfolio and offer it as a new trust is gaining traction.

Investors are hungry for quality REITs and direct property ownership, as evidenced by the $18 billion in cash raised through the sharemarket since September last year.

And as many investment bankers settle into new jobs, they will be keen to hit the ground running with mergers, acquisitions and large-scale portfolio sales.

There have been suggestions Morgan Stanley may sell or float the former Investa office portfolio, Brookfield Multiplex may sell the former AMP office portfolio and wholesale funds such as AXA Australia may look to sell or float property assets.

Should maturing debt be refinanced, which Merrill Lynch's property team believes is substantially more likely given recent debt refinancings, "we expect REITs will begin to use the surplus capital raised and excess gearing capacity to acquire assets at the trough of the cycle to grow earnings".

The broker also said that, after the large capital raisings, there was now evidence of an excess of cash for some trusts.

"We estimate $3.7 billion of excess capital was raised relative to our view of optimal gearing," the broker said. "The REITs are in a significantly stronger capital position following the large amount of equity raised over the past year and are now in a position to proactively use their balance sheet to grow.

"We believe Stockland, Mirvac and Lend Lease have the greatest capacity to fund acquisitions and the greatest potential accretion given the high development return targets and large cash balances.

"With debt markets improving materially over the past three months, yield (capitalisation) rates nearing their peak (we forecast a further rise of 25 basis points to 50 basis points in the next 12 months on book valuations) and most REITs recapitalised, we believe balance sheets and liquidity are no longer the focal points for most companies."

The broker says significant issues for the next year are expected to be keeping gearing in check and cash flows up, rental growth and office occupancy and the buying and selling of property.

Other fund managers say mergers and acquisitions are likely, with possibilities including Stockland taking out FKP and Aevum – and the persistent GPT suggestion; Mirvac bidding for the Mirvac Industrial Trust; Goodman Group acquiring ING Industrial Fund; and Centro Retail Trust separating from Centro Properties by internalising its management.

JP Morgan has said its major assets for sale are worth about $15.3 billion, which covers buildings such as GPT's remaining resorts, the biggest being Ayers Rock Resort at Uluru and the Sheraton Four Points at Darling Harbour, as well as its Homemaker portfolio, worth about $700 million.

There is also the Commonwealth Property Office Fund's 25 per cent interest in Grosvenor Place, worth about $277 million, and $600 million in the former Record Realty Trust, that remain for sale.