A-REITs recovering from foreign investment gambles

Elevated gearing in A-REITs such as Macquarie Countrywide and ING Industrial Fund and the exuberant entry into foreign markets by A-REITs such as the Centro Properties Group and Valad Property Group caused significant damage to many A-REIT balance sheets. These imprudent strategies led all four of these A-REITs to be taken over or sold into other entities.

The expansion into foreign markets was designed to capture growth opportunities outside Australia in addition to the benefits of diversification into markets with fundamentally different underlying economic and social drivers. The low cost of debt capital in those overseas markets had encouraged acquisitions of assets and portfolios of assets. The A-REITs bought into markets that were characterised by rising asset values, and when debt availability dried up, asset values dropped substantially. A-REITs were then forced to raise equity to restore basic lending covenants and asset sales were effected to restore balance to balance sheets.

The poor outcome for the A-REITs that did not implement this strategy appropriately damaged the investor sentiment which had supported their price growth in the mid-2000s, as noted in Figure 1.

The 70% price drop across the board between October 2007 and March 2009 was testament to the damage caused by the unavailability of credit in the strategies implemented over the four years prior. In the two and a half years since that time there has been 35% price recovery as A-REITs regain ground, but they remain 59% below their 2007 peak. A-REITs such as Mirvac, Multiplex and GPT progressively withdrew from overseas markets signalling a shift in focus back to the domestic market. Westfield and Goodman Group remain substantially invested in overseas markets as a core part of their investment strategies.

The lessons learnt from recent experience include the importance of understanding property and its risks in overseas locations in its local context, as property is priced in accordance with local conditions. Associating with local partners who demonstrate aligned investment philosophies is also a critical criterion for successful overseas investment.

Mark Wist is senior asset consultant at Atchison Consultants.