Going global

The past few years have seen a number of private equity-backed REIT privatizations in the US. As opportunistic investors increasingly move overseas, could the public-toprivate trend spread to the UK? By Dave Keating

Earlier this year, when The Blackstone Group acquired Equity Office Properties for $39 billion (€30 billion), the colossal deal was the largest example yet in private equity-backed takeovers of public real estate investment trusts. Just a month before the Equity Office deal was first announced in November—before the bidding war broke out between Vornado and Blackstone—a joint venture between The Blackstone Group and Brookfield Properties acquired Trizec Properties in a deal valued at $7.2 billion. And at the end of May of this year, Tishman Speyer and Lehman Brothers announced a $22 billion bid for multi-family REIT Archstone-Smith. All told, 15 percent of US REITs were delisted in the past 12 months, according to news reports.

In the US, REITs have been around since 1960, but the structure really took off in 1986 after new legislation permitting internal management was passed. Twenty years later, of course, most of the talk around US REITs has little to do with their tax advantages and much more to do with which company will be acquired next. Though a modest increase in valuations may suggest the trend is slowing down, the tide still seems to be flowing toward privatization.

This has sparked some speculation across the pond in the UK, where the REIT vehicle was just introduced at the beginning of the year. Due to overriding market factors, the share prices of UK companies that converted to REIT status have fallen in recent months—making them potentially attractive acquisition targets for private real estate funds.

“2006 was a stellar year for UK quoted property companies,” says Mike Bryant, managing director of real estate public markets for GE Real Estate UK. “In terms of the share price performance, shares were up 40 to 45 percent across the board. A lot of that was due to the euphoria connected to the impending [REIT] legislation that became effective on the 1st of January. But 2007 has been a very different year for shares in the quoted sector. Now we have the situation where the funds are at a 13 percent discount to its spot [net asset value]. Whereas six months ago, most shares were trading at a premium.”

In addition to discounted REIT shares in the UK, the A$4.7-billion ($5.3 billion) bid by Morgan Stanley for Australian REIT Investa Properties in May has led analysts there to predict that further M&A activity is probable in Australia (see sidebar).

Going global
Public-to-private transactions are nothing new in Europe. At the beginning of the decade, there was a wide variety of privatizations and quasi-public-to-private deals, many of them financed with private equity real estate capital. Yet in recent years, the trend has been relatively limited outside of the US—in fact, in Europe and Asia, the trend has actually been reversed, with public listings dominating take-privates. Though this is primarily due to the spread of REIT vehicles worldwide, the public markets in places like Europe, REITs notwithstanding, have proved very attractive to real estate companies. Fortress' flotation of its German residential portfolio Gagfah, for instance, illustrated the public appetite for real estate.

But could this public-to-private trend really spread globally? According to UK financial services firm AME Capital, there are 2,000 companies under REIT status in over 60 countries worldwide, with the US accounting for just 24 percent of that number. According to the firm, Japanese REITS had the most successful return rates globally for the 12-month period to April 2007, at 51 percent, followed by Singapore and France at 50 percent and 44 percent, respectively.

“The underlying property market in the UK may be slowing down, but on the Continent it is still booming,” says JP Morgan analyst Harm Meijer. “This has been reflected in equity prices. Continental property companies are trading at a premium to NAV of around 20 percent at the moment.”

Meijer says some merger activity between Continental publicly traded real estate companies may be possible in the next year. The proposed merger between French companies Unibail and Rodamco, which would create Europe's largest REIT, is one such example. But because of strong share prices in Europe and East Asia, any private equity acquisitions of REITs are unlikely given their current stock price.

However, in the Anglophone world, REITs have not been doing so well. With the exception of Canada, whose 33 REIT vehicles have performed relatively well in the last year, valuations in Australia, New Zealand, the US and the UK have remained low. In the UK, many analysts are saying that a private equity buyout of a UK REIT is inevitable in the next year, as long as valuations don't improve.

Hammerson, the FTSE 100-listed office and retail REIT, has been the subject of especially fervent speculation about the possibility of an acquisition. Over the past six months, its shares have seen dramatic ups and downs on rumors that it could be offered a takeover bid from private equity funds, including KKR and Morgan Stanley Real Estate.

“Hammerson is probably the most attractive to private equity,” says Meijer. “It has a fantastic development pipeline for the coming ten years.”

David Brown, a partner in real estate and investment management for Deloitte & Touche, says that many companies such as Hammerson are being eyed because much of their real estate value isn't being factored into the share price. Similar arguments have been heard in the US, where the arbitrage between public valuations of property and their value in the private markets have driven much of the takeover activity.

“Each REIT is going to be composed of its own specific portfolio, and not all the value is showing up in the stock price at the moment,” says Brown. “Therefore, there is definitely an upside for a buyer.”

IN THE CROSSHAIRSA selection of UK REITs that are possible takeover candidates

Company Market cap (bn) 1-year return Focus Appeal
Hammerson £4.8 33.8% Retail, office Strong pipeline, French exposure
Land Securities £7.7 8.7% Retail, London office Good share price, strong London office market
Liberty International £4.4 8.5% Shopping centers High quality, many subsidiaries
British Land £7.7 19.4% Retail, office Many retail warehouses
Slough Estates £3.7 30.8% Industrial, business parks Sites throughout Europe, specialist focus

GOING PRIVATE DOWN UNDERMorgan Stanley's bid for Australia's Investa Properties may only be the tip of the iceberg for private fund acquisitions by private equity firms in the country.

When Morgan Stanley bid A$4.7 billion ($3.9 billion; €3 billion) for Australian REIT Investa Properties in May, analysts quickly sat up and took notice. the other likely candidates include the ING and Macquarie property trusts, as well as Abacus Property Group, Stockland and Mirvac Real Estate.
Investa, Australia's largest listed office company, has A$4 billion worth of property. Morgan Stanley's offer of A$3.08 per share sent the stock 15 percent higher and pushed the listed property trust index up over 4 percent. At this point, it looks unlikely that another bidder will emerge for Investa and the company appears ready to accept the offer. But, by most accounts, this isn't the end of the road for public-toprivates in Australia. To the contrary, analysts are predicting this is only the first of many such offers. GE Real Estate's Mike Bryant notes: “In Australia, which is a very mature sector, distribution yields are materially higher than they are elsewhere, such as the UK, which presumably makes them quite attractive to some of the buyers relative to elsewhere.” Australia's 5 to 6 percent yield on property assets is probably more likely to attract global investors than UK REITs, he adds.
According to Reuters, Macquarie property analyst Callum Bramah told clients in a note that the Investa offer will lead to higher valuations across the sector, and numerous analysts have predicted that all Australian listed property trusts are now in play. Just last month, Brookfield Asset Management made a A$4.2 billion bid for Multiplex, the Australian developer behind London's new Wembley Stadium. Some of The fundraising of some US private equity firms has also done much to feed speculation of a coming public-to-private boom in Australia. Morgan Stanley recently announced it had raised the biggest property fund ever, an $8 billion fund which will target Australia, Europe and the Asian markets. In addition, Blackstone has up to $30 billion in buying capacity in the global real estate sector and has been reported to have an appetite for Australian listed property trusts.