Growthpoint, Investa moves to spark merger flurry

This is happening at a time investors are seeking efficiency and scale to achieve earnings growth as it becomes increasingly difficult to buy real assets on the market, according to analysts.

There are likely to be two or three takeover bids in addition to GMF and IOF, says Nick Collishaw, chief executive of Centuria Capital’s listed funds.

“All the small-cap stocks will be under threat,” Collishaw says, noting that Centuria continually reviews opportunities.

The number of smaller property floats this cycle rivalled that of the early to mid-90s, which was later followed by a period of consolidation, he says.

Last week, Growthpoint won four weeks of exclusive due diligence to bring forward its pursuit of GMF after submitting a sweetened offer of $2.41 per unit, valuing the office fund at $309.8 million.

All the small-cap stocks will be under threat

“I think there will be more in the smaller space (of A-REITs), as people try to get scale, especially on some that are trading below NTA (net tangible assets) or underperforming,” says CLSA analyst Sholto Maconochie.

“It’s also hard to secure assets on the market, with lots of competition in the direct market. I think companies will still look at their cost of capital, and they will look at acquisitions,” he adds.

Investors would see that the rationale behind Growthpoint’s pursuit of GMF, including cost savings and portfolio scale, applied to other potential takeover targets, particularly in the small end of the market, according to Winston Sammut, managing director of Folkestone Maxim Asset Management.

“If we’ve seen the valuations that are taking place with GMF, there could be some upside in the Centuria fund as well,” he says.

It also made sense for 360 Capital Industrial Fund to look at Industria REIT, in which 360 Capital already owned nearly 14%, or for Ingenia Communities Group and Gateway Life Style to merge, Sammut says.

If you have the right ownership structure and a well-performing management team, they will be very well-placed to benefit from consolidation opportunities that will arise

Another trust that might disappear is Carindale Property Trust, in which Scentre Group held 50%, Sammut says. Scentre says in its half-year results announcement that it will increase its investment in CDP gradually.

However, it is not easy for mergers and acquisitions to succeed.

Dexus failed to win the unitholder vote for its $2.5 billion bid for IOF after Cromwell Property Group jumped in to buy a 10% blocking stake.

Bryce Mitchelson, managing director of Arena REIT, believes more M&A will happen over time. He sees M&A as “a great market-efficiency mechanism”.

“If you have the right ownership structure and a well-performing management team, they will be very well-placed to benefit from consolidation opportunities that will arise,” he says.

It is more likely that externally managed REITs would be overtaken by internalised ones, he adds.

– with Turi Condon

This article originally appeared on www.theaustralian.com.au/property.