THE move by Colonial First State Global Asset Management to launch a $520 million wholesale property fund highlights two important dynamics in the country's $279 billion property sector. Wholesale funds are muscling in on listed property trusts and foreign investors are buying Australian property with their ears pinned back.
In Colonial's case, the wholesale fund was its first in 10 years and like just about every other deal going on in Australian property, foreign investor appetite was strong.
These two important trends came out loud and strong in the 2012 annual report by research house PIR, which found that in the $279 billion listed and unlisted property trust sector, listed property trusts, or REITs, continued to represent half of sector assets under management, equating to $139 billion. But unlisted wholesale funds rose to their highest ever proportion of the sector, roughly 29 per cent, or $82 billion.
At the smaller end of the sector, the various property securities funds and mortgage/debt funds continued to decline as a percentage of the sector.
The overwhelming conclusion is that while most REITs continue to trade at a discount to their net tangible assets (NTA), the shift in interest by big investors to unlisted wholesale funds will continue on the basis that the funds have greater flexibility in sourcing capital than their listed counterparts.
To put it into perspective, REITs and unlisted wholesale funds offer a high-single-digit yield, have acceptable gearing and their cap rates have not materially fallen since the GFC.
The big difference between them is that most listed funds trade at a discount to NTA and that makes it more difficult to fund a deal through new equity compared with recycling assets or borrowing money.
In contrast, the unlisted wholesale market doesn't have such constraints and has therefore been able to raise equity. The most notable examples include the Canada Pension Plan Investment Board, which recently committed to invest $1 billion in two office-tower developments at Barangaroo in Sydney, with other wholesale investors committing a further $500 million.
Other examples include GPT Wholesale Shopping Centre Fund announcing a $100 million capital raising for July. The implication is that unlisted wholesale funds enjoy a lower cost of equity capital and greater flexibility in sourcing capital than their listed cousins, despite the latter spending the past 18 months buying back their shares.
It raises some interesting questions about REITs and whether they should be parking assets in wholesale funds rather than taking them on their balance sheet. It is a trend Westfield and GPT have started to embrace.
For the past 18 months Australian REITs have been focusing their attention on share buybacks to try to close the gap between their share price and NTA. The sector has spent close to $2 billion on buybacks and is expected to spend a further $2.5 billion in the current round of buybacks.
REITs have spent an estimated $2 billion on acquisitions, compared with $16 billion for foreign investors in joint ventures, unlisted local funds, direct property or taking up strategic positions.
Recent figures from CBRE highlight the sheer magnitude of this trend. In 2010, foreign investors accounted for 19.9 per cent of all deals larger than $5 million. At the time, CBRE noted this was ''almost twice'' their usual share of acquisitions. For the same year, REITs clocked in at 23.5 per cent.
In 2011, foreign investors accounted for 30 per cent of all deals larger than $5 million, and 37 per cent of all deals larger than $20 million - the highest level in almost 20 years. By comparison, local superannuation funds, wholesale funds, and unlisted trusts accounted for a combined 21 per cent.
For the March 2012 quarter, foreign investors accounted for 27 per cent of deals above $5 million and 43 per cent of all deals above $20 million, which was far ahead of the 26 per cent of deals attributed to local wholesale funds and 20 per cent from local private investors.
It is a trend that is starting to worry some institutional investors, concerned that REITs are missing out on some of the best properties in capital cities.
Interestingly, REITs have outperformed the overall stockmarket over the the past 12 months, with the ASX 300 REITs index up 4.86 per cent for the financial year, compared with an 11.07 per cent slump in the S&P/ASX 300 index over the same period.
It seems that the sector has well and truly bounced back since the GFC, which dragged Australian investors in the listed and unlisted property sector to hell and back, with property values plummeting, debt levels ballooning, returns crashing and, in the case of listed property trusts, share prices falling up to 80 per cent.
PIR supports the view, with leverage now down to 26 per cent, and most categories of property well on the way to sorting out a massive mess of over-engineering of their balance sheets, which got them into serious trouble with their banks.
''Deleveraged balance sheets, better capital management and a focus on operational efficiencies (reducing vacancy rates and management expenses, while incrementally boosting income) all increase our confidence in the sector as a reasonably secure long-term investment,'' the report concludes.
JPMorgan property analyst Richard Jones recently described the growth of the unlisted wholesale sector as explosive, partly benefiting from an inflow of foreign capital.
The trend is on, but if the gap between NTA and the share price of REITs continues to close, then it could further open up the sector. As PIR says: ''We live not only in a post-GFC world, but a world weighed down by a forthcoming demographic tide. Meeting these obligations will demand long-term returns in excess of the paltry yields on government debt.''
aferguson@fairfaxmedia.com.au
India's shopping malls lose bustle as economy slows down - Times of India
Asia's third-largest economy is growing at its slowest pace in nine years and sluggish consumer spending is forcing mall developers to scale back plans. It will take years for the glut of retail space conceived during headier times to be absorbed by tenants, even as India fine-tunes rules to make it easier for foreign shops to enter the country on their own, analysts say.
"We are holding back on new store openings and focusing on our existing stores," said Ramesh Tainwala, chairman of Planet Retail, which has leased shops in Phoenix Market City and is the Indian partner of global retail brands, including Body Shop, Next, Nautica and Debenhams.
"We are shutting down some of our stores in areas where rentals are too high, and with the slowdown in consumption complicating things further," he said, adding that the company is also asking landlords to renegotiate rents.Consumer spending is on track to grow just 5.7 per cent this year, compared with 24 per cent in 2010, according to Euromonitor International, a feeble pace for a domestic demand-led economy.
Nationally, retail vacancy rates are 20 percent and will likely rise to 25 per cent by 2014, according to property consultants Jones Lang LaSalle, as floor space in malls grows to 100 million square feet from 66 million now. More than 90 per cent of shopping in India is still done at unorganised one-off shops.
By comparison, Thailand's capital of Bangkok alone has 62 million square feet of mall space, of which only about 7 per cent is empty, according to a report by CB Richard Ellis.
"There are just not enough people walking in," said Akshay Khatri, who manages the Van Heusen apparel store in Phoenix Market City, which is developed by Phoenix Mills, one of India's few developers specialising in malls.
Vacant malls, though, are also to be found in China where there has been a rush to build them. The 7 million-square-foot New South China Mall in the southern manufacturing city of Dongguan - the biggest mall in the world - is mostly vacant.
EMPTY SHOPS
Of the 12 million square feet of Indian shopping centre space planned for opening in 2012, only about 60 per cent is expected to do so, according to Jones Lang LaSalle, as delayed mall projects dot India's biggest cities.
DLF, India's largest property developer, has kept its proposed 4.5 million square foot Mall of India project in Gurgaon on hold since late 2008. That mall was to have been India's largest, with 2 million square feet of retail space.
"The crazy building boom in retail real estate is not going to come back," said Kishore Bhatija, chief executive officer of InOrbit Malls, owned by developer K Raheja, which altered its plan for a 500,000 square-foot-mall in Vadodara to 400,000 square feet, and added a hotel instead.
"There is stress on the business model. It is getting a bit expensive. Real estate prices and construction costs are rising but the retail business is not growing enough to absorb this," said Bhatija, adding that breakeven on projects is lengthening, in some cases to 10 or more years from seven in 2007-2008.
In fast-growing cities like Ahmedabad, Pune and the New Delhi region, vacancy rates at malls are more than 25 percent, according to property consultants Cushman & Wakefield, putting pressure on rents.
Retail rents are down 30-40 per cent from peaks in 2008, according to ratings agency Crisil. That's especially painful for developers, when servicing loans is expensive at 12-13 per cent interest. The building boom of 2007-2008 was funded in part by cheap private equity.
Shubhranshu Pani, managing director of retail at Jones Lang LaSalle, said when the downturn in 2008/09 spurred a correction in rents there was a shift from fixed rents to revenue-linked rents, putting more risk on the developer.
"Just increasing rents will not work because at the end of the day it has to be affordable for retailers to do business," said InOrbit's Bhatija.
SLOW START
India recently allowed full foreign ownership in single brand retail, but retailers have not rushed in to set up shop on their own as sourcing rules remain a challenge. Only Sweden's Ikea, the world's biggest furniture retailer, and UK shoe chain Pavers have applied to enter under the new rules.
India may also soon revive a plan to allow in foreign supermarkets such as Wal-Mart Stores and Carrefour, which could eventually create huge anchor tenants for shopping centres.
"Will that mean an immediate expansion of shopping centres? No," said Sanjay Dutt, managing director at Cushman & Wakefield. "It will take three, four years until there is a big revival," he said.
At Phoenix Market City in Mumbai only 205 of the 255 leased stores are open.
"We have quite a lot of stores there and the current traffic is rather disappointing," said Planet Retail's Tainwala.
Reflecting some of the concerns, shares of Phoenix Mills, which has four malls across India, are down about 15.3 per cent over the past year, underperforming the wider Mumbai market .BSESN which is down about 10.7 percent.
Shishir Srivastava, CEO of Phoenix Mills, believes that once a multiplex cinema and bowling alley open in coming months and more retailers like Lancome, Esprit, and Inditex's Zara open shop, traffic will increase and monthly sales will rise from the current 770 rupees a square foot.
Monthly spending at its original mall, the popular High Street Phoenix in central Mumbai, India's largest city, is 1,500-1,600 rupees a square foot.
"It takes a while for a new shopping centre, especially one as big as this, to fill out and establish itself," Srivastava said. "Things could have been better but we are optimistic."
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