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Australian property firms a haven in wary markets

By Sonali Paul

MELBOURNE, March 31 (Reuters) - Fat banking fees, lots of merger activity and happy stockholders. Australian property companies are becoming a rare hot spot in the world of finance.

The companies are on an acquisition binge that shows no signs of slowing down, and are hungry for new capital. That makes them a goldmine for dealmakers starved for business.

"It's a very good sector for the investment banks with all the capital raisings," said fund manager Andrew Stubing, head of Deutsche Paladin's listed property trust team.

At the same time, Australian property stocks have been star performers in an otherwise dreary market and are touted as top picks for investors in search of safe havens.

"Whenever there's instability these vehicles are a very attractive place to park money," said Antony Green, J.P. Morgan Chase's head of real estate investment banking for the Asia Pacific.

The S&P/ASX 200 property index is up four percent since the start of last year against a 17 percent fall in the broader market. The move is partly driven by Australia's graying population putting money into defensive assets.

The A$45 billion Australian property sector now makes up a hefty eight percent of Australia's benchmark S&P/ASX 200 index with 28 listed retail, office and industrial property trusts, compared with a one percent weighting in the US market.

MONEY-SPINNER

Trusts are required to pay out all earnings to unit holders, so when they want to buy new properties or make acquisitions, they have to turn to the market for financing.

Australia's listed property trusts have raised between A$2 billion and A$4 billion in new capital annually over the past seven years, or an average of 10 percent of the sector's market capitalisation each year.

The sector has already raised A$860 million so far this year, according to the Australian Stock Exchange. That's big money for investment banks, which typically charge five percent of an initial public offering's value and one percent for new share issues by listed companies.

"It's certainly been rewarding for investment banks, but it's very competitive," said JP Morgan Chase's Green. "It's a capital hungry sector and investors in that sector have been well rewarded by the returns over the years."

JP Morgan Chase has been involved in three of the last six property trust capital raisings, but rival UBS Warburg has been the market leader for several years.

SHOPPING MALLS HOT

Property trusts are running out of real estate to buy in Australia, where some 70 percent of investment-grade properties are securitised, compared with 10 to 25 percent in other markets.

So the sector is hungry for offshore properties, especially US shopping malls. Australia's largest developer, Westfield, last year bought some of Rodamco North America's US malls and now is involved in a hostile $1.7 billion bid for Taubman Centers Inc.

Malls are coveted because they are rarely put up for sale, unlike industrial sites or offices. They also offer good opportunities for smart property managers to add value by securing an attractive mix of tenants.

Australia's regional shopping centres are large and face little competition because it's hard to get zoning approvals. So property trusts like to hold on to them.

"It's getting harder and harder to get your hands on premium grade assets because it's a mature market," said Macquarie Equities analyst Rob Stanton, adding offshore growth would propel the property sector to a 10 percent weighting in the S&P/ASX 200 within two or three years.

BIDDING WAR

That doesn't mean the local market is dead.

Fund managers see the four property trusts run by troubled insurer AMP Ltd's funds management arm AMP Henderson as takeover bait.

AMP Shopping Centre Trust, owner of nine coveted regional malls, recently came into play with two rivals buying stakes and driving the trust's shares up 30 percent. AMP Diversified Property Trust also became takeover bait last Friday, when developer Stockland bought a 15 percent stake.

At least three of the eight office property trusts, including Principal Office Trust and Deutsche Office Trust, are undervalued, fund managers said. "The rest of them, frankly, they'll need to be a lot cheaper for them to be in play for any sensible manager looking to buy them," said fund manager Andrew Parsons, head of real estate securities at Lend Lease.

Many property trusts have anti-takeover provisions that make them unattractive to predators. AMP Shopping Centre Trust pulled one out last week, highlighting co-ownership agreements with AMP Life that might allow AMP Life to buy back some of the trust's shopping centres if ownership changes hands.

Nevertheless, Australian property trusts announced US$3.5 billion worth of acquisitions last year, according to Thomson Financial. That's a tidy sum for merger advisers, who typically charge up to one percent of the deal's value.

Centro Properties, Mirvac Group and Stockland are expected to drive this year's activity. They can afford acquisitions as their earnings have jumped on income from residential developments or fees from unlisted property trust spin-offs, an investment banker said.

PENSION FUND DRIVER

Australia's aging population is fuelling the boom in property stocks. Rapidly growing pension funds are funneling a rising portion of their money into property.

Australian pension funds typically have between five and 10 percent of their money in real estate, compared with US pension funds' allocation of about two percent in property.

The bets on Australia's property sector have paid off, certainly when compared with overseas property stocks.

Hong Kong's property sector has fallen 35 percent and underperformed the broader Hang Seng and Singapore's property index has plunged 28 percent underperforming the broader Straits Times index.

US real estate investment trusts have fallen 15 percent since the start of last year, but outperformed the broader S&P 500 index.

Fund managers see Australian property stocks as an easy and cheap way to diversify into real estate. "Balanced and diversified funds tend to take their property exposure via listed property trusts and not owning property directly on balance sheet," said fund manager Stephen Hayes, head of property securities at Colonial First State. "It's liquid and actual transaction costs are minimal to zero."-Reuters