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Australia REITs eye overseas assets

SYDNEY: Australian property firms and pension funds, armed with a multi-billion dollar war chest, are poised to go on a shopping spree, eyeing distressed real estate targets from the United States to across Asia.

Money is plentiful and credit is cheap and there is no shortage of potential targets following the seizure in U.S. real estate markets in recent years.

Australian real estate companies were among the first to tap stock markets for fresh capital after their heavy borrowing and currency hedging strategy backfired in late 2007, triggering a massive retreat of property firms like Centro Properties Group from overseas.

Now, the country's top 12 real estate investment trusts (REITs) such as Goodman Group have a total A$19 billion (US$17.3 billion) in spare liquidity plus the cash retained from having trimmed dividend payouts.

REITS are funds which invest in property and pay most of the rent to shareholders as dividends. They appeal to investors who want regular dividends, but higher than yields on safer government bonds, and offer capital gains if property prices rise.

"I think the major wave of restructuring and asset sales is over," said Dan Fasulo, managing director at Real Capital Analytics. "We're about to turn a corner and you could see some Australian investors being in more of a position to acquire some of the assets over the next 12 months."

The REITS are likely to be joined in the overseas foray by Australia's pension funds and real estate firms, as well as The Future Fund, a sovereign fund that oversees about A$64 billion.

Australia has a compulsory pension scheme, which collects about A$70 billion of fresh contributions yearly and needs to be invested to support the country's ageing population.

Australian property firms are not new to overseas property ownership and were among the biggest owners of U.S. real estate in recent years, surpassing German and Middle Eastern investors in 2007.

The timing could be right as global property markets are nearing the bottom, while property prices are low and yields high. In the United States, property yields are 500 basis points above 10-year U.S. Treasuries, about twice the gap in Australia.

"If you want to borrow and buy property in the U.S., now is the time," said Simon Marais, managing director for Orbis Investment Management, noting very low funding costs. Marais bets on Australian REITs that have U.S. market exposure to outperform.

GOING OVERSEAS

Early signs of renewed interest overseas include Sydney-based Westfield Group, the world's largest shopping mall owner, setting its sights on failed U.S. retailer General Growth.

Westfield is tightlipped about a deal, and the future of General Growth looks uncertain with many suitors around, but Westfield has said it is on the lookout for acquisitions.

Australia's Future Fund has reportedly committed to put $1 billion into Canada's Brookfield Asset Management vulture fund that will target distressed property debt and troubled property firms.

Japan is also drawing interest from Australian players such as Future Fund, Queensland Investment Corporation, Australia's largest institutional fund managers, and AMP Capital, the investment arm of top pension manager AMP.

"Asset management groups that are under distress would be a high target for AMP and others," said Hong Kong-based Reid Mackay, executive director for CB Richard Ellis, who lived in Japan for seven years.

Mackay added that B to B-plus grade office buildings in central Tokyo are on their radar, and acquisitions would likely take place this year.

Some REITs are looking for development opportunities elsewhere in Asia.

Lend Lease Corp, which last month launched a US$720 million rights issue, is seeking joint-venture partners to develop and manage retail assets in China, while Goodman plans a USA$10 billion development pipeline for the next five years, with a focus on Asia and Europe.

Analysts say Dexus, a diversified property group with U.S. assets, may be next.

"Driven by the more positive valuation sentiment in the U.S. markets, we sense a distinct shift in the attitudes of A-REITs with U.S. exposure," Citigroup said in a report. "DXS may well acquire more U.S. industrial assets in the short term as it repositions its portfolio."

STRUGGLING FOR GROWTH

For sure, there are Australian property players still suffering from failed overseas investments. Any new investments will face scrutiny and require a new scheme to deliver safe and stable returns, analysts said.

REITs are also struggling for growth after their massive equity raisings, diluting earnings per share.

Australian REITS' gearing is around 30 percent, about in line with global peers, but they are under pressure to put their money to work.

Their earnings growth is expected to drop 14 percent this year, compared with a 1.9 percent rise in Hong Kong REITs and a 1.9 percent slip for Singapore REITs, according to UBS.

The REITs are less competitive, offering a dividend yield of 5-6 percent, not far off what investors can get by putting their money in Australian bank accounts.

Fasulo of Real Capital Analytics said Australian firms need to step up to the plate soon as cross-border sales are picking up globally and the pace is likely to accelerate with about $100 billion of equity on the property hunt globally.

"If you multiply that by debt, almost $300 billion could be coming into the commercial property this year." he said.

"Some of these groups are going to be making a mistake if they wait on the sidelines for too long." - Reuters

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