This article is from the Australian Property Journal archive
The past year has been a period of intense activity in the property trust sector.
There has been significant consolidation of ownership among Australian listed property trusts, with, for example, the takeover of a number of AMP’s trusts and Principal Office Fund, the merger of the Gandel Retail Trust with CFS Property Trust Group and Commonwealth Property Office Fund and a number of strategic acquisitions by Macquarie Goodman.
The sector has also experienced increasing pressure on funds and fund managers because of perceived under-performance – this despite strong returns over the last few years relative to equities generally (a strength which is likely to reduce over the next 12 to 18 months).
Volatility in the sector, together with increasing competition for properties and the pressure to deliver performance, has led to an increase in the number of Australian funds looking offshore for investments. The shift overseas, particularly into the United States, is the most noticeable trend in property trusts at the moment. At the recent Property Council of Australia congress in Queensland, Wylie Greig from DB Real Estate noted that “there is no question that the move to get global is well underway”.
The structures of US investment vehicles are relatively simple (Australian investors invest in a US REIT, which in turn owns a portion of joint venture company that owns US properties). But, as always, there is devil in the detail and fund managers do face a number of challenges as they look overseas:
- The need for solid hedging protection against interest rate rises;
- The difficulty of assessing the reputation of overseas joint venture partners because of market unfamiliarity; and
- The importance of conducting a due diligence process that makes sense in the local environment but also complies with the “reasonable steps” requirements for an Australian product disclosure statement.
A step into the US is a step into the unknown for many fund managers and investors. Chanticleer commented in the Australian Financial Review on October 4 that: “The US pilgrimage is either fundamentally dangerous for Australian investors, or a welcome coming of age for the industry.”
Interestingly, our firm has also noticed an increase in the last few months in overseas property trust investors, looking at buying assets in Australia. We have received recently instructions from three major foreign property investors (two from the US) looking to buy assets in Australia for the first time. These investors are knowledgeable, cashed-up and interested only in quality properties. If the Australian dollar continues to improve against the US dollar, we might see a short-term check in interest, but long-term, Australia, a stable mature economy with quality assets, should continue to be attractive to investors.
Of course, this will mean increased competition for assets in Australia itself, which in turn might act as a further incentive to our fund managers to look offshore.
*Derek Heath, head of funds management real estate and superannuation at Allens Arthur Robinson.*
