AUSTRALIAN REITS are in a quandary, they are sitting on a mountain of money and are ready to go on a spending spree. However the tightly held property markets are not providing enough opportunities locally, according to a CEO discussion forum at the Australian Property Institute's Pan Pacific Congress.
UBS Australia’s managing director and head of real estate Tim Church chaired a panel of CEOs in Melbourne yesterday, featuring Investa Property Group chairman and CEO Scott MacDonald, Australand managing director Bob Johnson and Future Fund’s head of property Barry Brakey, who all agreed that AREITs are sitting on large amounts of capital and are on the cusp of spending again.
Church said AREITs have recovered from trading at a discount to net tangible assets (NTA) experienced during the global financial crisis, where some trusts were witnessed a 70% fall in NTA from peak to trough, whilst the sector’s average discount was around 40%.
He added that currently the AREITs sector is on average trading at a 2% discount of NTA, led by outperformers like Westfield Group which are trading at a 30% premium and Goodman Group at a 50% premium to NTA.
Church said the recovery in NTA is good news because it now allows trusts to focus on replenishing their portfolio.
However the property trusts are in a tight spot because of a number of reasons. Firstly is the increased in competition between AREITs, which had overseas investments and had sold them to repatriate capital back to Australia. Secondly the rise of offshore buyers and thirdly, the scarcity of prime investment grade assets.
Church said Australia is one the most securitised real estate markets in the world and to get access to high quality assets is very difficult.
According to UBS, almost 90% of prime retail assets in Australia are held by either AREITS or unlisted property funds. And approximately 60% of investment grade offices are securitised, whilst industrial is slightly different with potential for further aggregation, with about 40% currently held by listed and unlisted funds.
Church’s views were echoed by Investa Property Group’s chairman Scott MacDonald, who said in Australia there are not many quality assets coming on the market regularly.
For example, MacDonald said when Investa Office Fund (ASX: IOF) sold its offshore investments, repatriating funds to focus its core portfolio in Australia, there were no assets to purchase.
MacDonald said superannuation funds, offshore investors, REITS and unlisted funds are all competing for the same assets and overseas buyers are aggressively trying to get a foothold in Australia because of attractive yields.
He said IOF sold an office building in Washington on a yield of 4% and falling. In contrast, a similar investment in Sydney’s CBD delivers a yield of 7%.
Australand’s Bob Johnson said the group sold a neighbourhood shopping centre on a yield of 8%. MacDonald said a similar retail investment in the United States would have sold on a yield of 5%.
Despite the challenge of finding local investments, the panel unanimously agreed that AREITs are unlikely to go offshore again, after many trusts were burned during the GFC.
“I don’t think that idea will get many investors’ support,” MacDonald said.
Johnson said the scarcity of investment grade stock means companies have to adopt different strategies and Australand has adopted a strategy of “developing into the cycle” rather than compete with existing players for assets.
He added that Australand’s speculative developments are paying off, particularly in the industrial property sector, where the precommitment market is challenging and incentives remain high.
“Occupiers are leaving their decision until the last minute.
“So having a product that is near or is completed available on the market has given us the advantage over competitors,” he added.
Johnson and the Future Fund’s Barry Brakey were able to offer some good news and said that the debt markets have opened up again in Australia and overseas.
Brakey said lenders are very selective and have redefined “core investments”. In addition to requiring long term leases such as 10-years, the sponsors for the project has also become a key criteria for the banks.
Although they both said margins will never return to pre-GFC.
“Banks don’t like long term loans, so if you want it, you pay more,” he added.
The panel said the leasing market continues to be in the favour of tenants than landlords, however that is variable across the different cities.
MacDonald gave some quick advice, “You want to sign long term leases in Melbourne and short term in Perth to take advantage of rents.
“However if the deals weren’t good enough, we just say no. No tenant has the power over us,” he declared.
“Also when the occupancy level rises, we remember those tenants who made big demands,” MacDonald joked. “What I can say is, universal forecasters always get it wrong! They said Melbourne office vacancy rates will be at 3% and Brisbane will not recover and don’t invest in Perth. From now on, when we get these forecasts, we should do the opposite,”
Property Review
