Listed property sector 'starved for cash'

The $6.5 billion listed property sector could need to raise $415 million cash or sell property worth $615 million, according to a Macquarie report.

Falling property values, weaker capitalisation rates and the need to adhere to debt-to-equity ratios and banking covenants meant the sector was starved for cash.

Macquarie Private Wealth issued a 39-page report sub-headed "Cap in hand", showing how trust managers might need to take fast action to redress a number of problems with the sector which owns properties with a book value of $6.5 billion.

Kiwi Income Property Trust's $50 million placement and AMP NZ Office Trust's $201 million rights issue are evidence of the sector's need for money and the report tipped more action soon.

"The real estate investment trusts reported an average 9.9 per cent fall in property values in the year to March 31 mainly due to softer cap rates. If asset prices fall a further 10 per cent, we estimate the sector needs to either raise $415 million of equity (15 per cent of market cap) or sell $615 million of assets (10 per cent of total) - or a mix of both - to reduce gearing to the low end of target ranges. We believe the recapitalisations process will keep the sector depressed for the next six to 18 months," the report predicted.

Excessive debt had become a nightmare for the trusts and a rush to reduce leveraging would be the sector's theme for some time, it said.

AMP, Kiwi Income and Goodman Property Trust would either need to raise cash or sell properties to improve balance sheet strength.

Goodman and Kiwi Income were Macquarie's top picks in the six vehicles studied which included AMP, ING Property Trust, ING Medical Properties and the only company, Property for Industry (PFI).

Kiwi Income, first to play the equity-raising card, could tolerate a 20 per cent asset value drop before breaching bank covenants but Macquarie predicted even a 5 per cent drop would spark a move.

"Given the trust's assets are relatively large and illiquid office towers and retail shopping centres, cash to recapitalise will probably need to come from a further equity raising," the report said.

Goodman's quality portfolio, low lease expiry profile and exposure to the industrial sector made it the most attractive real estate investment trust (REIT), Macquarie said.

Kiwi Income's ability to trade at above-average yields went in its favour although Macquarie fretted about its high retail sector exposure and cited Sylvia Park.

ING Property Trust exhibited the greatest risk around its capital structure, going into the downturn as the most highly geared REIT. Managers had been de-gearing it for the last six months by selling assets. In March, it announced it was quitting three properties for $22.3 million.

But it was not out of the woods, trading at a 46 per cent discount to net tangible assets and a 26 per cent discount to valuation, the report said.

Goodman, which has sold cheaper properties for $51 million in the last six months, was picked as the single best stock although 11 per cent of its assets were its huge land bank and the report noted the poor development outlook as the recession intensifies.

But this Queen St-headquartered trust offered the best buying.

"Of the large REITs, we think Goodman is in the best position to reduce gearing by selling assets and hence avoid raising equity. Goodman has $119 million of assets worth less than $30 million each, the price bracket where demand for commercial property remains strong," the report said.

Goodman would sell bare land and some small liquid office assets where it could not add much long-term value. AMP needed to refinance $242.5 million of debt by October, said the report which was written just before the $201 million renounceable rights issue was announced. It was in the worst position of the sector because all of its buildings were highly expensive, except 3 The Terrace, worth $10.4 million.

"We are aware of only one office tower with a value above $30 million having been sold over the past year, being the recent $64 million sale of the Maritime building in Wellington. In our view, if APT needs to reduce gearing, the only realistic option in the current environment is to raise equity," Macquarie said.

AMP and PFI are the only two vehicles not paying out 100 per cent of earnings. PFI sliced this back to 97 per cent in its 2008 result and Macquarie predicted others would follow.

TRUST ACCOUNTS

Listed property trusts:
* Real estate assets of $6.5 billion.
* Market capitalisation of $2.7 billion.
* Liabilities of $2.8 billion.
* Trading at 27 per cent discounts to net tangible assets.