Australia | Nov 22 2006
By Chris Shaw
Listed property trusts (LPTs) in Australia enjoyed one of their best days on record yesterday, the buying in the sector a flow through from a large private equity buyout announced in the US, where Blackstone Group launched a US$36bn bid for Equity Office, the largest office real estate investment trust (REIT) in the American market.
As Merrill Lynch notes, the buying interest in Australia was essentially a ripple effect from the solid premium Blackstone is willing to pay, having pitched its bid at an 8.5% premium to the previous market price of Equity Office.
The broker points out the deal means as much as US$20bn in cash is being returned to US investors, many of whom have a global mandate and so can look anywhere for value. This is potentially good news for the Australian LPT sector, as Macquarie points out many of the Australian companies operating in the sector are trading at prices at or below their net asset value (NAV).
JP Morgan agrees to a certain extent, pointing out the Australian sector as a whole looks somewhat expensive but it is being driven by fund flows, the Blackstone deal meaning a large amount of cash is set to be reinvested in the sector in a relatively short period of time.
Where the broker sees value is in Australian LPTs with US assets, as on its estimates the Blackstone buyout is being priced at a cap rate of 5.75-6%. This suggests the Australian stocks are somewhat undervalued on a takeout basis, though the broker prefers not to incorporate this technique into its valuation measures.
Macquarie sees similar value as it expects the discount to NAV the Australian REITs (or LPTs) are currently trading on will close as money continues to flow into the sector, as the Blackstone deal means cap rates are being compressed (the cap rate is the net operating income of a property divided by the sale price of value of a property).
As an example of the value available the broker estimates Bunnings Warehouse Property Trust (BWP) could produce an internal rate of return of 13% if bought out at a 15% premium to yesterday’s closing price, so money looking for a home should be able to find attractive alternatives in the sector in its view.
Merrill Lynch agrees, suggesting it is now only a matter of time before LPTs with significant US exposure trade at levels at or above NAV as US investors have shown a willingness to value assets on lower implied cap rates than the Australian market is willing to provide.
The broker suggests those most likely to be beneficiaries of the flow through effect of the Blackstone deal include Macquarie Office (MOF), Tishman Speyer Office (TSO) and ING Office (IOF), reflecting its view the office sector is poised for better performance given demand is improving with only moderate levels of new supply.
Macquarie agrees Macquarie Office and Tishman are likely beneficiaries, particularly given both have large enough portfolios to attract a premium. It adds a number of other stocks to the list of likely to benefit, including Macquarie Countrywide (MCW), Macquarie DDT (MDT), Macquarie Prologis (MPR) and Galileo Shopping America Trust (GSA).
Including those with primarily Australian exposure, the broker lists potential beneficiaries as Commonwealth Property Office Fund (CPA), Bunnings Warehouse, DB RREEF (DRT) and Investa Property Group (IPG).