Australian Real Estate Investment Trusts (A-REITs), with their highly specific governance and tax structures, require legal advice that truly understands their operating environment. Traditionally seen as a relatively safe (if not particularly exciting) investment in a balanced portfolio, they initially focussed on collecting rent to ensure a steady income for unit holders, protected against inflation by built-in ratcheted rental review mechanisms and the capital growth of the underlying assets.
With share prices booming, however, A-REITs came under increased pressure to produce higher returns, sparking new business strategies including the stapling of securities, the development of third party funds management and property development businesses, and the acquisition of overseas properties. While domestic stabilised assets with a reliable income stream continued to be the life blood of the A-REITs, higher prices had to be paid and borrowing increased. The funding of distributions from yet more borrowing based on capital revaluations in an inflated market was never going to be sustainable.
As a result, many A-REITs found themselves over-geared when the GFC hit. Trading sometimes at a massive discount to the value of their net tangible assets (NTA), most had to embark on a program of capital raising, and to find sources of lending outside the four major Australian banks upon which they had traditionally relied. There was also a general retreat from foreign markets.
Today, with low global interest rates, a falling Australian dollar and a mature, well-regulated and transparent market, Australian property is once again a popular investment option, particularly for foreign buyers. Many A-REITs are now trading at a substantial premium to NTA.
Lessons have been learned from the GFC and also from the late 1980s when an over-supply of property led to fire sales and a collapse in values. There is no longer the speculative building that once took place. Investors and lenders look for legally binding pre-commitments from tenants before construction commences.
The A-REITs still face issues, particularly if there is a rise in interest rates or bond yields, or further reductions in demand for space in a subdued economy. In the office sector, changing working practices present their own challenges with hot desking, paperless offices and down-sizing all reducing demand for space. New developments (particularly in Sydney), despite the pre-commitments already in place, still have space to fill. Vacancy levels in Perth and Brisbane are relatively high. Large incentives are required to attract new tenants at the face rentals necessary to maintain capital values and funding. Alternative strategies, such as conversion to residential apartments, will need to be considered for lower grade stock as tenants move to the newer, better buildings.
Each sector, be it office, industrial, infrastructure, healthcare or retail, faces its own particular demands and requires specialist expertise to make the most of the opportunities available. Our team understands the complexities of the business environment in which A-REITs operate. Borne from long-standing experience advising some of Australia’s largest investment trusts, we are able to deliver prompt and cost-effective legal advice and services tailored to meet the particular needs of our clients.
Our Real Estate & Construction, Corporate Governance and Finance teams work closely together to provide solutions and minimise risk. We pride ourselves on providing a cradle to grave service offering from acquisition to disposal with everything in between, whether it is the on-selling of electricity to tenants or advising on redevelopments and refurbishments.