Stockland tipped to accept Frasers offer

Expectations are rising that Stockland will accept the Frasers Centrepoint $2.6 billion offer for rival Australand, and use the cash raised from its 19.9 per cent stake to increase its greenfield developments.
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This comes as the 2014 financial year reporting season for real estate investment trusts is due to start in three weeks. Traditionally, Australand is the first REIT to report, followed closely by Stockland.

Broking analysts expect the reporting season to clarify the office market conditions, to the extent of rental incentives and vacancy outlooks.

This comes in the context of the many REITs that own older properties that could now be realistically sold for residential conversions.

In the past, these older properties with low rents and high incentives, have been a drag on the earnings outlooks.

The potential to sell for redevelopment will decrease the vacancy rate outlook for the sector and boost the quality of REIT portfolios.

Already, most of the REITs have announced their final distributions for the 2014 year, which came in at market expectations, reflecting the stable market conditions of the six months ending June 30.

The REIT sector has been one of the better performers as the trusts offer higher yields in a low interest rate environment.

According to analysts at Bank of America Merrill Lynch, the average distribution per unit rate of 5.3 per cent is 175 basis points ahead of the 10-year bond yield of 3.54 per cent, which is broadly in line with the long-term average.

”The sector offers an implied total return of 6.9 per cent on our estimates,” analysts said.

But the high amount of corporate activity in the past year among REITs will also see a change in the structure of some REITs in the coming months, as the new owners look to rationalise portfolios and place some of the assets into new wholesale funds.

That is the expectation if Frasers is successful with its off-market, all-cash takeover offer for 100 per cent of Australand at $4.48 per security.

Analysts say they are expecting Frasers to put some of Australand’s industrial assets into a separate fund.

Morningstar analyst Tony Sherlock said he did not believe the competing bidder, Stockland, would raise its predominantly scrip-based offer of 1.124 Stockland securities for each Australand security, implying a notional value of $4.41 per Australand security.

”We consider the Frasers offer to be compelling, at a 21.7 per cent premium to Australand’s forecast net tangible assets,” he said.

Frasers’ offer closes on August 7.

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