This article is from the Australian Property Journal archive
It has happened! The Australian property unlisted sector has shrunk with the recent announcements by Becton and Cromwell to merge their syndicates and list on the ASX in the form of stapled LPTs.
When the weather changes many birds migrate for a better climate. As they say, birds of a feather flock together.
In this landscape the change in the weather relates to the hot commercial property market. The inverse of this is that the yields on properties have tightened so as to send a cooling wind across the otherwise tranquil pool of investor expectations upon which many of the syndicates and unlisted trusts of these two managers rested.
That they are birds of a feather is that both had a long history in the syndication/unlisted trust sector (Becton purchased part of its portfolio from Glenmont), yet of recent times they had been noticeable more by their lack of activity in bringing new products to the market than anything else.
Both had syndicates and unlisted trusts. Both the Responsible entities are listed on the ASX. In essence, they had high yielding unlisted open ended property trusts. Last time PIR rated the Cromwell Diversified Property Trust, in October 2005, it still managed to offer investors an initial income yield of 9.00%. Becton had three separate syndicates that were operating like an open ended trust in that they were accepting further equity to fund ongoing purchases. The weighted average yield on those three vehicles when PIR rated them in May 2005 was just under 9.00%.
As any student of the market will know, finding any decent properties with yields up around the 9% mark has basically been an impossibility for at least the past 2 years. Responsible Entities have to act in the best interests of existing unit holders and, as such, adding any new properties would have been decretive to the earnings of existing unit holders.
It was clear that both Becton and Cromwell saw their property funds growth coming through their main funds rather than the now almost extinct single property syndicate sector. But adding properties at lower yields is not really acceptable to investors, unless there are significant demonstrable capital gain opportunities or diversification benefits. Add to this the fact that for a funds manager to grow their income, they need to add new funds under management. To not act and grow their business means that the directors may not be acting in the best interests of their shareholders. Hence the boards of both of these companies were facing a dilemma.
There was a further dilemma; the incredibly strong commercial property market is accepting much lower yields than less than 2 years ago, yet the investors in largely illiquid and unlisted property vehicles do not generally accept lower yields, and why should they?
The manager can just form another vehicle and offer that to the public at the lower yield and not affect investors in the existing vehicles, but that is not as profitable to the manager.
So what is the answer to that dilemma? Change the nature of the beast. Merge the larger vehicles with the smaller ones, staple them to the management company and list on the ASX.
This is not a bad move.
The investors will still largely get the same yield, as the properties have not changed, plus, as it is a stapled entity, the yield is supported by the profit that the management company made. Then there is the added benefit of liquidity, plus lower yields are generally more acceptable in the listed environment.
Both these mergers and listings are subject to unit holder approval. Becton was listed on 13 November 2006 and, assuming that approval is obtained for Cromwell and that they list, these two LPTs will be unique in that they will be the only two LPTs listed on the ASX with a portfolio of primarily B grade Australian properties.
They will not be small entities either. Cromwell is anticipated to be just over $500 million and Becton (which was admitted to the official list as a stapled security on 13 November 2006) has a market capitalisation of over $430 million. Both will be large enough to get into the S&PASXLPT300 index based on size. However, there are liquidity requirements for index inclusion. If the existing unit holders sit tight on their units then there may well not be sufficient liquidity to warrant index inclusion.
For Becton, one of the purposes of this stapling has been to enable the founder, Max Beck, to sell his shares (which he did shortly after listing), so this should enhance liquidity.
Readers should note that not all managers will spread their wings in this fashion and join in the migration.
The largest manager of unlisted funds, Centro, is already a listed stapled entity. The second largest, SAITeysMcMahon, is unlikely to be able to fly to such lofty heights burdened as it is by such a mouthful of a name, plus it is already planning to list, but not as a property trust. There are few others that have the scale to warrant a listing.
It is a pity, in some respects, that the potential for investors to gain Australian property asset class specific exposure is diminishing even further (especially from the Becton offerings), but such is the cost of change. Above all, it is symptomatic of changing times in the underlying properties that comprise syndicates. It is becoming increasingly harder for the smaller unlisted manager to be able to find suitable unlisted products. Without partnerships and/or large balance sheets, they are unable to easily head overseas.
The unlisted sector continues to grow, but it is heading the same way as its listed counterpart. It too is beginning to migrate with overseas assets and larger offerings. Where the flock that is the unlisted sector comes to rest is, as yet, unknown, but like the differences between a Muskogee and a Mallard duck, the lines of distinction between the listed and unlisted sector are fading like the twilight over the mill pond.
By John Welch, head of research with Property Investment Research.*
