Source : The Business Times, March 22, 2008
RECENT developments in the S-Reit market suggest that consolidation has begun and more merger and acquisition (M&A) activity is imminent, says Macquarie Capital Advisers executive director and global head of property group Antony Green.
In case there is any doubt, future M&As could turn hostile and will almost certainly grab the headlines. But Mr Green says: ‘History shows the first few deals are always friendly.’
He believes that the current state of the S-Reit market corresponds to that of the Australian market about 10 years ago.
In 1999, the number of Australian-listed property trusts (LPTs) peaked at 46, then slowly dwindled to around 26 today, with the asset pool remaining largely the same.
Consolidation, if or when it is considered by S-Reit players, will be trickier because property assets have surged in value recently, making acquisitions less likely to be yield-accretive.
Mr Green says that although yield-accretiveness ‘is one of the first tests’ when making an acquisition, ‘you have to think of total return’.
‘There is strategic merit in buying something that in several years’ time is going to create more value for you as an investor,’ he adds.
He also says: ‘With a bit of synergy, maybe a management fee waiver of some sort, a bit more or less debt, you can make it positive for both sides.’
Mr Green could, of course, be talking about Macquarie MEAG Prime Reit (MMP Reit), which recently announced a strategic review, on which he is advising.
MMP Reit could be sold in its entirety or have its underlying assets sold piecemeal.
On the attractiveness of MMP Reit, Mr Green says that while it was trading for around $1.05 a unit before the strategic review announcement, its NAV based on the underlying assets had been valued around $1.61 a unit. And at the end of the trading day on Thursday, it closed at $1.19 a unit unchanged.
For current investors, however, MMP Reit has not delivered growth.
‘A lot of S-Reits have traded on the fact that they will provide growth. MMP Reit, given its cost of capital, struggled to provide the acquisitions and the growth,’ Mr Green says.
He has no comment on the details of MMP’s strategic review, but says it is in Macquarie Group’s interest not to sell its 26 per cent independently but to seek an offer for all unitholders instead.
On consolidation of the S-Reit market and the Reit market in Asia in general, he believes this will make it more ‘efficient’. ‘Some Reits will disappear and some will go from strength to strength.’
Mr Green does not think the S-Reit market has matured yet. But the perception that S-Reits are a growth vehicle is changing. ‘Some of that gloss has come off a bit,’ he says.
‘It is not a bad thing that people realise what Reits actually are and not what they think they are supposed to be.’
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