The "will they, won't they" move on Investa Office Fund by its largest shareholder, Cromwell Corp, has thrown the spotlight on to the real estate investment trust sector, prompting speculation of a fresh round of mergers and acquisition activity in the coming year.
It comes with only 29 more days to the end of 2016, which has been a turbulent year for the Australian REIT (A-REIT) sector.
Adrian Harrington, the head of funds management at Folkestone, said the extent of the recent sell-off was not surprising given the level to which bond yields fell and A-REIT prices rose. The dramatic bond sell-off over a short period has affected many yield-sensitive investments, and A-REITs have not been immune.
"The question investors need to ask is whether the rapid rise in bonds will continue and A-REIT prices fall further, or has the pendulum swung too far, too quickly?," Mr Harrington said
"The A-REIT sector will remain captive to the gyrations of capital markets in the short term. Clearly, if bond yields continue to rise further there could be additional price risk."
But Mr Harrington said the recent sell-off in the A-REIT sector had created some attractive buying opportunities.
Analysts said the news that a deal was offered by Cromwell for Investa, valued at about $2.7 billion, then rejected, did not really surprise the market.
Cromwell bought a 9.8 per cent interest in Investa Office in mid-April for $4.24 a unit, which helped sink the then long-running DEXUS offer.
Now Cromwell has showed its hand with a non-exclusive, conditional, non-binding all-cash offer at $4.45, being a 5.7 per cent premium to net tangible asset backing of $4.23 and the 30-day volume weighted average price (VWAP) of $4.21.
The proposal was subject to a 40-day due diligence period and Foreign Investment Review Board approval as Cromwell was being backed by its associate and 25 per cent stakeholder, the South African Redefine Properties.
But Investa Office's board notified Paul Weightman's Cromwell last Tuesday it wasn't considering the proposal any further, and disclosed later that day the Investa Commercial Property Fund, as the manager of the listed fund, had already acquired Morgan Stanley's 8.9 per cent of Investa Office Fund at $4.23.
Brokers say the merry dance has opened the doors to more mergers and acquisitions and share buybacks with the compressing yield market.
One of the latest moves has been Centuria Capital Group's acquisition of the management platform of 360 Capital Office Fund (TOF) and 360 Capital Industrial Fund (TIX) for a total $101.5 million. As part of the co-investment strategy, Centuria also is proposing to acquire a 19.99 per cent stake in the 360 office fund and a 15.6 per cent stake in the industrial fund for a total of $115.8 million.
Macquarie Equities says that, given there are limited organic growth opportunities, low cost of capital, albeit rising cost of equity in the last three months, and relative inability to compete in direct markets for assets, "we expect more mergers and acquisitions in the A-REIT space".
The analysts said a recent comparable example considered was the tie-up of Charter Hall Retail REIT (CQR) in which the rival Shopping Centres Australia has bought a 4.9 per cent. Charter Hall, as manager of the retail REIT, has subsequently increased its co-investment stake it to 17.69 per cent – up from 16 per cent.
CLSA's analysts said that, with A-REITs continuing to lag equities, they expect some may seek to buy back stock if their share prices continue to lag or approach NTA, in lieu of acquisitions, takeovers or other capital management initiatives.
"We believe GPT, Mirvac and Vicinity Centres are most likely to buy back stock over the next 12 months, given pricing, balance sheet capacity and circumstances but also could include other potential candidates of DEXUS Property and Investa Office Fund," CLSA says.
