It’s expected a number of ASX-listed Australian real estate investment trusts may move off the bourse and into private hands this year, given many REITs are trading at below net asset values.
“I think privatisation of listed real estate assets is likely to an extent, but not to the same degree as we’ve seen in the infrastructure space, because assets aren’t quite as unique in property,” Morningstar analyst Alex Prineas says.
“There’s many more office buildings and shopping malls than there are toll roads or airports. But privatisations are likely, particularly with properties or REITs that own assets with significant development opportunities, or that have particularly unique characteristics.”
Real estate assets require significant active management. So, rather than buying assets directly or taking over REITs, private investors could buy assets using the services of property fund managers like Charter Hall and Goodman Group.
“That way, assets continue to be managed by teams that already have scale. Some of the bigger players may choose to build their own scale and property management platforms by acquiring a REIT with an inbuilt platform,” Prineas says.
“One thing that is for sure is competition will increase in the space regardless.”
Prineas says rare assets, or those that have traded at a significant discount to tangible value, are especially sought-after, with prices reflecting a degree of uncertainty in the market given shifts such as working from home and e-commerce are yet to fully play out. This will have a bearing on transactions involving listed assets next year.
“We expect some enduring structural changes and working from home was already happening before the pandemic. Long-term, there will still be a need for offices, although maybe in a different way. In the long run, office supply always adjusts to the level of demand.”
E-commerce was also a trend in place before Covid that has accelerated, which has favoured industrial and logistics property, and hampered retail. These trends will also play out in privatisations this year.
“We think there’s still great competition out there for consumer eyeballs and malls are still a good way to get in front of consumers.
“For instance, we’ve seen new electric car brands like Tesla build their brand by selling cars out of shopping malls, which has disrupted the traditional car yard. You can test drive cars from the car park,” he says.
Stockspot senior manager Marc Jocum says REITs that may have experienced some level of financial distress and are still recovering from the pandemic may be privatised.
“This could include a range of sectors such as retail and office real estate with market capitalisation trading below net asset values.”
Cost of capital is one of the main advantages of taking assets private.
For example, Unibail-Rodamco-Westfield, the operator of Westfield’s assets in Europe and North America, is perceived to have too much debt. The business could address this by selling assets in the physical market or raising equity in the listed market.
But, with the stock trading at roughly a 40 per cent discount to its physical assets, it makes more sense to sell assets in the physical market than it does to raise equity.
Jocum says privatising assets may also be a desired path to reduce the compliance and governance burden that comes with being a publicly listed entity.
“Despite the transparent pricing and liquidity, there’s always the potential volatility of daily market pricing,” he says.
Taking assets private might also make sense to address problems REITs face in raising money to fund their project pipelines, particularly if they are trading below their intrinsic value.
Privatisation also allows more leverage to be applied to real asset ownership, which can help magnify returns but comes with associated higher risks, a dynamic that played out during the GFC real estate bubble.
While there are pluses, there are also disadvantages when it comes to de-listing real estate assets. Moving into an unlisted form means less transparency, limited liquidity, the potential for redemption freezes and infrequent valuations that can lead to time lags in returns.
Prineas says a thinning out of management may be another disadvantage.
“But in terms of the actual returns, it’s arguable acquirers can potentially take a more long-term view. So they may not need to be worried about quarterly earnings, and the optics of things in the media. That can be an advantage.”
There are other red flags to watch for, Jocum says.
“While privatised REITs can be an attractive asset class to invest in, there needs to be greater transparency and better pricing mechanisms to facilitate an efficient, fair and accurate market.”
“Failure to do this can create some significant issues. For example, there is potential for superannuation executives and trustees to take advantage of arbitrage delays in revaluation of unlisted assets, which we believe is an inherent conflict of interest.”
Super funds are, however, likely to be some of the most active buyers of listed real estate assets as they seek to divert their investment strategy from publicly listed markets into private assets such as direct real estate. This strategy allows them to access the illiquidity premium most unlisted assets attract.
“Many superannuation funds currently only have between 5 per cent to 10 per cent of their assets invested in property. They are looking to increase this to boost the return and yield profile fuelled by a low interest rate environment,” Jocum says.
“Super funds like the idea of assets with longer durations that have a long weighted average lease expiry that aligns with their long-term investing framework and positive cash flow profile, given the majority of superannuation assets are in the accumulation phase.”
Some may choose to invest in a consortium to compete with private equity firms for assets.
Private equity firms such as Blackstone and Brookfield are likely to be active players that already have form taking assets private. For instance, the Investa Office Fund was delisted in December 2018 after Blackstone acquired it.
Over the next year, it’s expected a number of players with strong purchasing power and low costs of capital may look to acquire assets, fuelling public-to-private activity in real assets in 2022.