Brian Gaynor: Hopeful signs in listed property sector

The listed property sector, which is going through a long-overdue resurgence, has been in the headlines with the proposed restructuring of Macquarie Goodman Property Trust and AMP's purchase of 9.6 per cent of Capital Properties.

These and other recent developments, particularly the reduction in management fees, are welcome but there is still a long way to go before the sector is fully transparent and attractive to a wider range of investors.

Macquarie Goodman Property (MGP) Trust, formerly known as Colonial First State Property Trust, was established on April 23, 1999 with 145 million units. On the same day, the trust issued a prospectus for the offer of 100 million units to the public and 45 million units to the Colonial group at $1 each.

Following the completion of the issue it bought 14 buildings for $196 million with 11 of these acquired from the Colonial group of companies for $136 million.

The issue was disappointing for a number of reasons, including:

* Public interest was low and Colonial ended up with 91.9 million units instead of 45 million units;

* Net earnings were well below prospectus forecasts but the management fees were higher than anticipated;

* The unit price slumped to a low of 81 cents.

Three years after the issue, the 14 original buildings, which had cost $196 million, were worth $196.1 million.

When the Australia-based Colonial First State Property acquired the management company of Kiwi Income Property Trust there was widespread speculation that Colonial's two New Zealand listed trusts would merge.

But Angus McNaughton, the chief executive of Kiwi's management company, didn't like the quality of his sister trust's portfolio and at the end of 2003 Colonial Australia announced it was selling its interests in the namesake New Zealand trust to Macquarie Goodman.

The main conditions of this agreement were as follows:

* Macquarie Goodman acquired the trust's management company from Colonial for $5.75 million;

* Macquarie Goodman also bought 20 per cent of the trust from the Colonial group at 95.21 cents per unit (Colonial sold a further 30.3 per cent to institutions at 94 cents per unit);

* Nine core buildings of the New Zealand-listed trust were pooled with four New Zealand properties owned by Macquarie Goodman Industrial Trust, an ASX-listed entity. The NZX-listed trust was granted 47 per cent of the pooled portfolio and the ASX trust 53-per cent;

* The New Zealand trust changed its name from Colonial First State Property Trust to Macquarie Goodman Property Trust.

In June 2004, the NZX trust paid the ASX trust $8.2 million to give it 50 per cent of the pooled portfolio.

Earlier this week, Macquarie Goodman Property Trust announced it was buying, subject to shareholder approval, a number of properties from its Australian associate, including the 50 per cent of the pooled portfolio it did not own plus a number of other buildings and sites.

The nine properties contributed by the NZ-listed trust to the pooled portfolio were originally bought from Colonial for $136.8 million in 1999. Last year they were sold to the pooled portfolio for $133.2 million and are now being bought back for $146.4 million, giving the clear impression that Colonial sold out to New Zealand investors at the top of the market and the Australian trust is now trying to do the same.

Macquarie Goodman Property Trust will pay the Australian trust $304.3 million - $224.3 million in cash and $80 million in the form of MGP units at $1.09 each.

As part of this week's announcement, MGP revealed that its management company would reduce its base fee from 0.7 per cent of gross assets to 0.5 per cent for gross assets up to $500 million and 0.4 per cent after that.

In addition there will be a performance fee, which will be calculated as 10 per cent of the amount by which unit holders' sharemarket returns exceed the returns of MGP's New Zealand-listed property peer group.

The fee reduction is a welcome initiative, although Macquarie's four listed Australian property trusts charge a maximum base fee of 0.45 per cent of gross assets.

A positive feature of the new fee structure is that any deficit arising from underperformance relative to the benchmark will be carried forward to subsequent periods. Thus, any deficit must be remedied before a performance fee is paid.

Unfortunately, MGP's fee structure is more complicated than this. The trust pays a management fee to the management company but also pays a property services fee to another Macquarie company.

The services fee is based on a percentage of gross rental income (1.5 per cent to 3 per cent), leasing commissions (13 per cent to 19 per cent of the average annual rental), rent review fees and property acquisition and disposal fees (0.75 per cent to 2 per cent of the transaction price).

The disclosure regarding service fees is very low in New Zealand and it is difficult to know to what extent these fees exceed the cost of the services provided. The only evidence we have are filings at the Companies Office showing that Macquarie's property services company is far more profitable than its management company.

Why can't we have more transparency on all the fees paid to management companies and their associates?

The other big property event this week was AMP's purchase of a 9.6 per cent stake in Capital Properties at $1.35 a share, which raised its holding to 10.4 per cent.

AMP, together with Colonial, ING and Macquarie Goodman, effectively controls the New Zealand listed property sector. It is hard to tell what it is up to with Capital Properties.

But the move puts further pressure on Angus McNaughton and Kiwi Income Property Trust, as AMP can block any attempt by Kiwi to acquire 100 per cent of Capital Properties.

Kiwi may also be powerless to stop the Wellington-based company's ill-conceived plan to sell its management contract to an outside party.

McNaughton may not be impressed with the quality of Macquarie Goodman Property Trust's property portfolio, but the execution and communications of John Dakin, chief executive of MGP's management company, is far superior.

When MGP announced its restructuring this week it had the full 96-page Explanatory Memorandum, including the Deloitte independent appraisal report, printed and ready for distribution to shareholders.

Dakin also pre-empted the management fee issue by announcing a big base fee cut and a new performance fee incentive scheme.

Meanwhile, McNaughton has been on the back foot since he acquired 19.9 per cent of Capital Properties on November 19.

He took more than two months to announce that the trust wouldn't have to pay a management fee on the Capital Properties holding and a promised revaluation of Kiwi's portfolio, which was due to be released in February, has yet to appear.

McNaughton's next big self-imposed deadline is a review of Kiwi's management fee structure by March 31.

Kiwi unit holders will not be happy unless McNaughton's new base and incentive fee structure matches Dakin's.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.