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REITS back in the ring for raisings as investors chase yield bump

This article originally appeared in The Australian.

Property floats and raisings are storming back with more than $1bn of equity raised in a spate of deal-making in recent weeks as real estate investors rush to the surging sector.

The big drivers are investors chasing alternatives to the low rates on bank deposits and a switch by property companies into defensive areas like convenience retail, healthcare and warehouses, where prices have jumped.

In the latest play, property company Real Asset Management raised $357m for a new essential services fund, focused on neighbourhood shopping centres and medical assets, with both areas tipped to grow.

Just a week earlier a Centuria Capital fund raised $300m to buy eight warehouses and Industria REIT tapped the market for $350m as it bought assets including a slice of Perth’s Jandakot Airport.

The new RAM Essential Services Property Fund will list this month with a market capitalisation of $521.1m after completing a bookbuild last Wednesday.

Market players are tipping more raisings as vendors look to clear the billions of dollars worth of office towers and shopping centres that are on the market, with even large retail landlords making plays for properties as they benefit from the Covid reopening trade.

Morgan Stanley’s chairman of investment banking, Australia, Tim Church, said that more capital was coming from retail networks as listed real estate could generate yields of 4 to 5 per cent.

“REITs (real estate investment trusts) are a good yield play in a near zero rate environment. We’re seeing enormous support in the raisings and the IPOs from the retail investors,” he said.

“I think there is so much capital raising activity because there’s a very big demand equation coming out of the retail networks and we’re starting to see improved flows into the property security funds.”

Property companies that listed smaller trusts early in the property cycle have also grown them into major players, with Mr Church citing Charter Hall and Centuria as setting up funds, with HomeCo now also listing retail and health trusts.

“The two asset classes that are really enjoying their time in the sun at the moment are logistics and healthcare,” he said.

Some of the recent raisings are trading below their issue prices but Credit Suisse head of real estate investment banking, Australia, Rahul Bharara, said in general the stockmarket was receptive to REIT raisings supported by appropriate use of proceeds.

“In an environment where inflation is front of mind, investors are supporting REITs that provide income certainty, embedded growth and will benefit from increased replacement costs,” he said.

“In the present low-return environment, differentiated opportunities that offer a yield supported by visible growth and strong ESG credentials are hard to ignore.”

The most recent offer, the RAMS fund, got up after increasing the size of its portfolio. It is pitched as giving investors stable and secure income, with the potential for both income and capital growth via owning a defensive portfolio of medical and essential retail real estate.

It will initially own 33 properties worth $706.3m and the expected investment yield for investors is 5.7 per cent. But that is expected to grow as both areas are taking off and the properties have in-built growth opportunities via development.

RAM Australia chief executive Scott Kelly said the listed fund would give investors an exposure to medical real estate, an asset class that is just emerging on the ASX, as well as essential retail assets, both of which are supported by favourable longer term trends.

“The strong defensive income profile of the fund was highlighted by strong tenant cash collections during the Covid crisis which severely impacted non-essential sectors,” he said.

“The fund will be actively managed and grow through both additional investments in medical space and the low-risk development pipeline.”

Mr Kelly said the fund specialised in “boring” assets and had been buying non-discretionary retail centres for years. They now suited investor requirements more than ever.

“In a post-Covid environment with record low interest rates and an ageing population, people are just desperately yearning for yield,” he said.

He said the pandemic brought existing trends to the fore and he saw the opportunity for growth. “We believe there’s a massive investor base that wants that within their portfolios,” he said.

RAM head of real estate Will Gray predicted that the boom in small centres had years to run as more capital tried to get into the area, and the medical side would also grow.

“I think that the healthcare space is going to continue to attract a lot of demand,” he said, noting investors were rebalancing out of CBD office and larger retail assets.

Credit Suisse and UBS underwrote the offer while Ord Minnett and E&P Corporate Advisory are joint lead managers.

UBS analysts Grant McCasker and Tom Bodor expect to see small cap REITs buoyed by getting into global indices, taking advantage of their improved cost of capital to raise for acquisitions.

Centuria’s office fund exploited its recent strong performance to acquire two assets for $273m with a $200m equity raising. HomeCo’s daily needs trust used its improved cost of capital to accretively acquire six assets.

“We anticipate this to be a common trend in the fiscal 2022 year where REITs use their improved cost of capital to grow portfolios. Despite favourable cost of capital, accretive transactions remain difficult. The funds from operations guidance announced at results provides a buffer to dilutive equity raisings,” the UBS analysts said.

BTIG director, real estate and income stocks, Phil Montgomerie said with reporting season finished he expected A-REITs to come to market for capital to fund asset acquisitions for growth but has questioned whether it is worth investors participating in some offers.

“The demand for capital is being promoted heavily by the investment banks and the A-REITs via the need for growth via acquisition. Even though debt is still hugely accretive and cheaper versus equity, equity is preferred,” he said.

“Some because of the fees growth being externalised structures and some because management teams still think with an externalised management structure mentality. After 12 years post-GFC, debt remains a dirty word to A-REIT management teams.”