'Stapling' of REITs creates riskier investment approach: RBA seminar paper

The decision to "staple" the management and the assets of Australian listed property trusts in one vehicle in the lead-up to the GFC created a sector more likely to make riskier investments, US academics have argued in an RBA discussions paper.

In a paper titled Securitization and the Commercial Property Cycle, Tim Riddiough from the University of Wisconsin Madison and Frank Packer from the Bank for International Settlements note that Australia’s listed property sector (A-REITs) was among a number of countries including the UK, US and Canada that have been "significantly more volatile than the benchmark market indices".

The benchmark S&P/ASX300 A-REIT Accumulation Index  produced an annual return of -55.3%  in 2008 in the wake of GFC as investors abandoned the A-REIT sector.

The report by Riddiough and Packer notes that there was both a dramatic increase in the proportion of office properties incorporated into Australian real estate investment trusts (A-REITs) in the years leading up to the GFC as well as even more dramatic rise in the number of trusts that were "stapled" – where asset management is carried out by an entity within the overall REIT structure.

The ASX describes a stapled security “where the trust that holds the assets and the company that manages those assets are bound together through one vehicle”.

The stapling of listed property trusts in Australia allowed them to “take on more property development risk than under a traditional limited property trust (LPT) model”, the paper argues.

According to the paper, between 2000 and 2005 the degree of securitization of office markets via REITS increased markedly rising from around 5% in 2000 to over 35% in 2005.

Then from between 2004 and 2007, “stapled” REITs grew from 29% to over 75% of overall A-REIT capitalisations.

Examples of stapled A-REITs include Westfield, Westfield Retail Trust, Mirvac, Charter Hall Group and Stockland.

A full breakdown of which A-REITs are stapled can be found on the ASX website.

The report notes that only Australia among the listed Asia-Pacific countries has significant internal management, in large part due to the introduction of stapled REITS.

It says that external managed REITs are viewed as “significantly less informationally opaque” than internally managed REITs.

“And given the prevalence of the external REIT structure in Asia, it appears that in the case of these countries, the benefits of external advisorship outweigh the agency costs.”

The report also reveals that Australia has the highest proportion of securitised office assets in the world, with the latest estimate of around 19% of its office market securitised via REITs.

However it notes – and reflecting the deleveraging which has occurred since the GFC – that this number is itself “well below 32% scored earlier before the bust in prime real estate markets during of the global financial crisis”.

The report reveals that US dominates the international REIT landscape, with nearly 180 listed REITs amounting to $455 billion or more than half of total global REIT market capitalisation

Far behind that, yet well above any other country, Australia has 57 listed REITs with $82 billion market capitalisation, occupying 10% of total REIT market capitalisation.

Australia first REIT –  shopping centre and industrial property group GPT –  was listed in 1971.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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