Australand's residential and commercial mix does not appeal to investors: Mark Wist
With rumours that Mirvac may be interested in a possible bid for Australand following the exit of GPT, A-REITS analyst Mark Wist provides answers to the key questions behind Australand's decision to sell and what this may mean for the listed property trust sector.
Why is Australand so motivated to sell the business?
Australand is an A-REIT listed on the Australian Securities Exchange. It has a market capitalisation of just over $2.0 billion. Australand’s major security holder is the Singapore based property group, CapitaLand Limited, which owns approximately 59% of the issued capital. CapitaLand’s stated intention following a business review is to divest its holding in Australand which is a non-core asset.
What aspects of its business would appeal to investors?
Australand has a commercial office and industrial property portfolio of $2.3 billion. It is also possible that some capitalisation rate decreases will see values increase in this portfolio. Australand has a substantial residential development business with development land held on balance sheet mainly in Sydney and Melbourne with completed value estimated at $8 billion. It also has an office and industrial property development business.
In December 2012, GPT announced an interest in acquiring the investment property portfolio and commercial and industrial business of Australand.
GPT had a particular interest in Australand’s industrial portfolio. An acquisition of a controlling stake in Australand would have given GPT the opportunity to bolster its own industrial portfolio with quality assets, some of which had value-adding potential.
In May, GPT announced that it was no longer pursuing the proposal.
Mirvac had also expressed interest in Australand, however withdrew from the bidding process earlier than GPT.
What would be the concerns for investors?
There are two major components of the business being an investment portfolio and a residential property development business. The combination does not attract interest from a wide range of potential providers. Asian investors do consider both activities.
Ultimately it seems that there were two stumbling blocks to a successful conclusion to a sale of CapitaLand’s stake to GPT. First was the price of the acquisition. GPT made it clear that there was a pricing expectation mismatch between it and the vendor. Second was that GPT had little interest in Australand’s residential development business or assets. GPT could not identify a partner to acquire that part of the business and Australand for its part was only considering selling its stake in one transaction without separating the businesses or assets in the portfolio.
What does the potential sale of Australand mean for the AREIT sector?
If Australand was acquired by, it would result in further consolidation among A-REITs. In April 2012 there were 53 A-REITs listed on the ASX. In April 2013 this number had fallen to 46 despite the market capitalisation of these A-REITs increasing from $81 billion to $100 billion.
If acquisition is by cash it would release capital for re-investment prospectively back into the sector.
Are there likely to be other consolidations in the AREITs space?
A number of A-REITs currently have the balance sheet capacity and support to acquire other A-REITs. However, it is more likely that as the sector is now trading at a premium to net tangible assets, we will see private unlisted funds seeking listing on the ASX to take advantage of the liquidity benefits associated with listing.
Mark Wist is senior asset consultant at Atchison Consultants.
