Deals roll on for Charter Hall, Goodman, Centuria Capital after market rout

Sydney’s big names commercial property giants are ready to do deals and buy assets. Picture: Destination NSW

Property fund managers faced a brutal summer, caught in the market sell-off which stripped billions from their lofty sharemarket valuations. The biggest players in commercial real estate looked exposed as the tide turned.

But their rise is far from over and deal-making is rolling on, with big names like Goodman, Charter Hall and Centuria Capital hoping to use this earnings season to show their expansion is back on track.

The fund-focused companies – which have been sector stars due to their outsized earnings growth – are now hungry for new assets and believe that conditions are ripe for them, with Centuria upgrading ahead of results and Charter Hall and Goodman boosting forecasts late last year.

Centuria upgraded as its assets under management hit $20.2bn, a 16 per cent lift, as it locked in the benefits of buying the Primewest fund business and forged deeper into new sectors like healthcare property and agricultural real estate.

Centuria joint chief executive John McBain cited the company’s “ability to source quality real estate investments in a repeated fashion, together with deliberate corporate acquisitions” for accelerating growth.

The company was a winner in the pandemic thanks to holdings including suburban offices and industrial assets, small shopping centres and bulky goods centres, and has also pushed into debt funds.

Centuria Capital Group CEO John McBain. Picture: Hollie Adams

Meanwhile, the acquisitive Charter Hall began the year with a major corporate play, making a $1.29bn bid for office and industrial landlord Irongate, which is backed by Dutch pension fund PGGM.

The group has secured options over a 19 per cent stake in the target, which was assembled by rival fund manager 360 Capital. That company will make a lucrative exit, taking key office assets which will turn its listed real estate fund into a traditional trust, and also upgrading.

Meanwhile, industrial property heavyweight Goodman is charging towards running a $70bn global funds empire on the back of the e-commerce boom.

It recently said it expected operating earnings per share growth to hit more than 15 per cent.

But the spectre of rising global rates has cast a shadow over the sector, driving the market selldown in January. Some are making expensive acquisitions in the direct market or missing out on some deals.

But the top operators have flagged they see more opportunities in the market, with the best of them hoping to thrive as the focus shifts to boosting income from the assets they control.

UBS analyst Grant McCasker says that property fund stocks, which traded on high price to earnings multiples, were hit in the January sell-off. He points out the vehicles they run have low levels of hedging and are being caught by rising bond rates, which could restrain them after a period in which they have relied on low-cost floating rate debt.

McCasker warns that some listed trusts controlled by property fund managers now don’t have a low enough cost of capital to grow at the rapid pace they once did.

But he says more substantial merger and acquisition activity and their capacity to raise unlisted funds could change this dynamic.

Despite Charter Hall’s takeover of the $1.7bn ALE Property Group and its move on Irongate, he says “material” privatisations are yet to occur. “The earnings story is still very positive. But the days of excess funds growth are probably over,” McCasker says.

The sharemarket sell-off came ahead of interest rate hikes expected later this year. Some analysts believe that most share price falls will come before any rises.

They point to the powerful long-term drivers for property funds, including rising superannuation and the shift by pension funds into alternative areas such as commercial real estate.

CLSA analyst James Druce says that even if asset values are flat, “the input story continues to remain robust”. ”From a growth perspective, we still see pretty robust growth coming out of these funds names,” he says.

JPMorgan analysts led by Richard Jones have also identified opportunities in property fund companies, calling out Charter Hall after it was sold off in the wake of buying a stake in small-cap shares manager Paradice.

“We believe Charter Hall is oversold post the Paradice transaction and is poised to deliver strong assets under management and earnings-per-security growth for the next few years,” they wrote.

Goodman was “a high-quality business with material built-up profits and a development workbook that is growing strongly and underpinned by global e-commerce demand”.

JPMorgan also says Centuria is well positioned for growth in assets under management after buying fund businesses including Primewest, Augusta and Heathley.

An aerial view of the Sydney CBD. Picture: John Feder

It said HomeCo had shifted its business model from a passive REIT to a capital-light fund manager. The group’s purchase of the Brett Blundy-backed Aventus via its shopping centre fund will also lift assets to close to $5.8bn, with JPMorgan saying it is “hard to ignore the company’s ability to source company-changing transactions”.

Some veteran investors are troubled by the structures that funds managers use to run property vehicles.

Resolution Capital’s Andrew Parsons noted it was “disappointing” to witness the rise of externally managed A-REITs. “We strongly believe this is a retrograde trend for an industry which had substantially cleaned up its act following the GFC and the flaws then made clear,” he wrote.

He hopes the growth of externally-run funds is curtailed. “Thankfully these vehicles are relatively small, and we hope, if only for the sake of the reputation of the industry, this remains the case,” he said.

But analysts see some price upside in fund groups.

Citi analysts led by Suraj Nebhani have a positive view of fund managers, citing their strong performance fee outlook as well as expectations of rising asset values. Goodman and Charter Hall are typically conservative in providing initial guidance, he notes.

“We believe the environment continues to be positive for fund managers, which could drive upside surprise to guidance for both names,” he wrote.

And many more big real estate players have flagged ambitions to grow in funds, partly to lighten the load on their own balance sheets as they undertake ever larger projects.

Dexus tempted superannuation fund Cbus to take a one-third interest in Perth’s $1.3bn Jandakot Airport and Mercer has put $100m into its opportunity fund.

Stockland chief Tarun Gupta has flagged more capital partnerships and is already working with JPMorgan Asset Management in logistics.

GPT also struck up an $800m logistics partnership with QuadReal Property.

Rival Mirvac has a strong roster of capital partners and last year teamed with British investor M&G Real Estate to buy a half-stake of Sydney‘s blue-chip EY Centre and ever-active Singaporean investment giant GIC has also formed a $750m joint venture with shopping centre owner SCA Property.

It seems there’s plenty of life in the funds management game yet.