DEVELOPING A PROPERTY SYNDICATION PERFORMANCE INDEX

Transcription

1 Pacific Rim Real Estate Society (PRRES) Conference 2001 Adelaide, January 2001 DEVELOPING A PROPERTY SYNDICATION PERFORMANCE INDEX GRAEME NEWELL* and PETER ACHEAMPONG Property Group, University of Western Sydney Richmond NSW 2753 Australia * Contact author for all enquiries Phone: Fax: g.newell@uws.edu.au Keywords: Property syndication, Austock exempt property market, performance analysis, MCS property syndicates, Australian Property Exchange.

2 INTRODUCTION Property syndication has become an increasingly popular form of property investment in Australia in recent years. The property syndication market is currently approximately $3.5 billion, with over 35 major property fund managers being actively involved in 180 property syndicates. This includes MCS Property ($658 million), Centro Properties ($378 million), Abacus ($288 million), Landmark ($198 million), Challenger International ($160 million), Macquarie Bank ($156 million), Oxley ($149 million), Waltus ($147 million) and York Capital ($146 million). With property syndicates accounting for 12.3% of property investment in Australia in (Property Investment Research, 1999), Table 1 presents a profile of property syndication in Australia at June 2000 (Property Investment Research, 2000a). Key features in this profile include: * average level of debt (49%), compared to 30% for LPTs * average number of properties per syndicate (1.6), compared to 17 for LPTs * average number of investors per syndicate (261), compared to more than 8,000 for LPTs * average assets per syndicate ($19.2 million), compared to more than $800 million for LPTs. Similarly Table 2 presents the property syndication portfolio diversification profile at June 2000 (Property Investment Research, 2000b). Retail property (48.1%) and office property (23.5%) dominate the property types, with NSW (38.3%) and Queensland (30.1%) dominating the geographic regions. Importantly, property syndication now provides an investment product which hopefully performs more like direct property. This is in marked contrast to the illiquid nature of direct property, and to property trusts which are more highly correlated to stockmarket performance (r =.68) than direct property performance (r = -.15) (Property Council of Australia, 2000). Designed for fixed term property investment, property syndication offers tax advantages and significant flexibility under the recently introduced Managed Investments Act (Mann and Mitchell, 1998) and proposed Australian Property Exchange (Bentley, 2000). As shown in Table 3, recent property industry surveys of property investor sentiment (Jones Lang Lasalle, 2000) have found property syndication to be a highly rated property investment vehicle in Australia over December December This has been a consistent trend over previous equivalent investor sentiment surveys by Jones Lang Lasalle in the last four years. Key property syndication issues for investors in these surveys have been tax treatment, diversification benefits, volatility, gearing, risk management and direct property substitutability for property syndicates. A major boost for property syndication occurred in November 1998, with the introduction of the Austock exempt property market ( Similar to the Australian 2

3 Stock Exchange, Austock has provided the basis for a viable secondary market for trading in property syndicate units and an alternate exit strategy for property investors. There are currently ten (10) MCS retail property syndicates on the Austock exempt property market. Similarly, the establishment of the Australian Direct Property Investment Association (ADPIA) in 1998 and the proposed Australian Property Exchange are crucial factors for the ongoing development of property syndicates in Australia (Bentley, 2000). The main forms of property investment in Australia (i.e. direct property and property trusts) are mature and established markets, accounting for $300 billion (direct property) and $35 billion (property trusts). This has seen direct property and property trusts being the dominant focus for property investment research in recent years. In contrast, property syndication is currently a smaller market ($3.5 billion) with negligible research available. All research to date on property syndication has only been descriptive, focusing on tax considerations (Mann and Mitchell, 1998), valuation implications (McMahon, 1998), finance implications (Fife, 1997) and general structural characteristics (Bentley, 1998, 2000; Brenchley, 1998; Kavanagh, 1997; Upton, 1998, 1999). While both direct property and property trusts in Australia have reliable and international standard investment performance benchmarks to assist in investment decision-making; namely: direct property: Property Council of Australia indices: (Property Council of Australia, 2000) property trusts: UBS Warburg indices (UBS Warburg, 2000) no such equivalent investment performance benchmarks are available for property syndication. A major contributing factor to property syndication performance benchmarks not currently being available is the lack of active trading of property syndicate units on the Austock exempt property market. Over December June 1999, only 1.6% of property syndicate units were traded annually, compared to 40% traded annually for the more frequently traded property trust shares on the Australian Stock Exchange (Upton, 1999). While the level of trading of property syndicates on the Austock exempt property market has increased in 2000, the absolute levels of trading remain low. Given the recent significant developments with property syndication in Australia, it is important that property syndication performance indicators are developed to enable the effective comparison of the property syndicate sector with the other asset classes, including direct property and property trusts. As such, the purpose of this paper is to: (i) use the Austock exempt property market trading history for property syndicates to develop a property syndication performance index over December May

4 (ii) evaluate the investment performance of property syndicates compared to the other major asset classes over December May METHODOLOGY Property syndication data The Austock exempt property market trading database provided all necessary property syndication data over December May This property syndication trading database contains all trading details on sale trade price, volume of trade and date of trade on a daily basis for all property syndications traded by Austock on the exempt property market. At June 2000, ten (10) MCS retail property syndicates (or direct property investments (DPIs)) were traded on the Austock exempt property market, namely: * MCS1: John Martin's car park and retail plaza * MCS2: Nepean Square shopping centre * MCS3: Hills shopping centre * MCS4: Coles and Kmart shopping centre * MCS5: Melbourne-Brisbane retail and bulky goods * MCS6: 1998 retail portfolio * MCS7: 1998 national retail portfolio * MCS7UT: 1998 national retail portfolio * MCS8: 1999 retail portfolio (#1) * MCS8UT: 1999 retail portfolio (#1), with further details regarding these property syndicates given in Table 4 (Perry, 2000). Share price information was utilised to form price return indices for the property syndication sector. Related investment performance indicators To enable a comparative performance analysis of property syndication against alternate asset classes, the following asset performance series will also be assessed over December May 2000: office, retail, industrial property (Property Council of Australia, 2000) office, retail, industrial property trusts (UBS Warburg, 2000) shares (All Ordinaries) (UBS Warburg, 2000). 4

5 RESULTS AND DISCUSSION Performance of Aus tock exempt property market In using the Austock exempt property market to develop a property syndication performance index, it is important to recognise the following current limitations: only 10 of available property syndicates are traded on the Austock exempt property market. each of property syndicates traded are from MCS and are only in the retail sector trading is only available since December 1998 units are not actively traded (see Table 5), with these infrequent and limited transactions raising liquidity and "staleness" issues. Development of property syndication index Based on initial market capitalisation for each of the property syndicates, daily trading activity resulted in adjusted market capitalisations for each of the property syndicates as per: 28 Dec.l May 2000: MCS1 - MCS6 (six syndicates) 14 Sept May 2000: MCS1 - MCS8/8UT (ten syndicates). Daily price returns were calculated for each property syndicate, with a daily weighted average return calculated for a "composite" property syndicate over 28 Dec May Indices were then cons tructed for each property syndicate and the "composite" property syndicate. Performance of property syndication index Figure 1 presents the composite property syndicate index over Dec May Ongoing development of property syndication index A number of key issues need to be addressed to ensure the ongoing development of this property syndication index that will result in a representative and reliable performance index to more effectively reflect the true value of the underlying property syndicates. These include: (1) establishing more property syndicates trading on the Austock exempt property market to ensure a more representative and diverse cross-sector of property syndicate managers, property types and geographic locations. The proposed Australian Property Exchange, involving up to 100 property syndicates, is essential in this regard. 5

6 (2) increasing the level and frequency of trading (both buyers and sellers) on the Austock exempt property market to avoid problems in index construction with a lack of frequent trading. Since May 2000, an additional 42 trades involving 1,070,000 units have occurred, involving only 0.4% of units traded. (3) increased investor awareness of trading of property syndicates (via ADPIA). (4) increased role by institution investors (eg: Westpac, Macquarie). The above initia tives, particularly the Australian Property Exchange, should see enhanced liquidity and an effective exit strategy for investors in property syndicates. The resulting impact will be more reliable index performance measures for property syndicates. REFERENCES Bassett, G. et al Kalman filter estimation for valuing non-trading securities. Review of Quantitative Finance and Accounting 1: Bentley, C Growth in property syndication. Property Australia 13(3): Bentley, C Direct property and the holy grail. Property Australia 14(3): Brenchley, H Challenges in the commercial sector. Australian Property Journal 35(4): Fife, A Syndication of equity for real estate investment. The Valuer and Land Economist 34(5): Jokivualle, E Measuring true stock index value in the presence of infrequent trading. Journal of Financial and Quantitative Analysis 30: Jones Lang Lasalle Survey of investor sentiment. JLL: Sydney (miscellaneous copies). Kavanagh, J Syndicates: favoured option for wary investors. Property Australia 11(11): Mann, G. and Mitchell, P Property syndication. Property Australia 13(2): McMahon, G Property syndicates. Australian Property Journal 35: Perry, D Australian exempt property market in MCS direct property investments. Austock: Melbourne. Property Council of Australia Investment Performance Index: June PCA: Sydney. 6

7 Property Investment Research Annual Listed Property Trust Review PIR: Melbourne. Property Investment Research. 2000a. Directory of Australian property funds and managers. PIR: Melbourne. Property Investment Research. 2000b. Property syndicate reports. PIR: Melbourne (miscellaneous copies). UBS Warburg UBS Warburg Indices: June UBSW: Sydney (miscellaneous copies). Upton, D Syndicates and beyond. Australian Property Journal 35(4): Upton, D Trading in the exempt market. Property Australia 13(11):8-9. devaprsypindpap.doc rpd6 gnjm 7

8 Table 1: Profile of property syndication funds managers: June 2000 Property syndicate Manager Total assets ($M) Number of syndicates Number of properties Level of debt (%) Average number of investors per syndicate Average assets per syndicate MCS Property $658M % 976 $65.8M Centro Properties $378M % 1575 $94.4M Abacus $288M % 571 $26.2M Landmark $198M % 128 $11.6M Challenger International $160M % 507 $31.9M Macquarie Bank $156M % 562 $26.0M Oxley $149M % 209 $37.2M Waltus $147M % 619 $24.5M York Capital $146M % 445 $36.5M Property Funds Australia $145M % 594 $48.3M Paladin $101M % 297 $33.7M Heathley $87M % 146 $29.0M Specific Property Services $75M 6 7 6% 56 $12.5M Peet and Company $70M % 191 $5.9M Quantum $67M % 12 $6.7M Teys McMahon $59M % 69 $6.5M Westpoint $59M % 88 $14.7M NHLS $57M % 33 $8.1M Aust-Asia $52M % 13 $8.6M Austgrowth $51M % 52 $5.6M Lachlan REIT $47M % 143 $11.7M Cromwell $42M % 124 $10.6M McLaughlins $42M % 15 $4.7M Millennium $41M % 121 $13.7M Cameron Property $34M % 26 $34.0M Glenmont Properties $34M % 115 $16.9M Forest Place $25M 2 2 0% 21 $12.5M Warne $21M 1 1 0% 130 $21.0M GPS Moody $18M % 100 $18.1M Domain Property $16M % 120 $15.9M LM Investment $8M % 16 $1.6M Pacific East Coast $7M % 49 $2.2M Sunraysia $7M 1 1 0% 62 $6.8M MDRN Investments $6M % 38 $3.1M Hall Chadwick $4M 1 1 9% 34 $4.3M Epic Property $4M % 60 $3.9M TOTAL $3,456M % 261 $19.2M 8

9 Table 2: Property syndication portfolio diversification: June 2000 Portfolio Diversification Category Percentage of Properties Percentage of total assets Property type Retail 27.5% 48.1% Office 22.9% 23.5% Industrial 24.6% 9.8% Diversified/mixed use 10.4% 9.0% Residential development 6.1% 3.8% Retirement 4.3% 2.3% Other 4.3% 3.6% Geographic region NSW 25.0% 38.3% Queensland 37.1% 30.1% Victoria 25.0% 17.9% ACT 3.8% 5.1% Western Aust. 4.5% 5.0% South Aust. 2.3% 1.9% Tasmania 2.3% 1.7% 9

10 Table 3: Property investor preferences: December December 2000* Period Direct property LPTs ULPTs Property Syndicates Dec % 80% 80% 81% June % 95% 93% 100% Dec % 86% 64% 76% June % 79% 91% 88% Dec % 86% 73% 94% June % 82% 87% 97% Dec % 96% 70% 74% June % 100% 100% 100% Dec % 100% 94% 92% * : values represent percentage of investors surveyed who intend buying or holding specific property investment in subsequent 12 months. 10

11 Table 4: Details of MCS property syndicates traded on Austock exempt property market: June 2000 Property syndicate Description of properties Equity Debt Total funds Austock listing Establishment term MCS1 MCS2 MCS3 MCS4 MCS5 MCS6 John Martin's carpark and retail plaza in Adelaide, SA Nepean Square shopping centre in Penrith, NSW Hills shopping centre in Seven Hills, NSW Five shopping centres in four states (WA, Vic, SA, Tas) Shopping centre in Melbourne and showroom in Brisbane Shopping centres, hotels/taverns in three states $14.5M $16.0M $30.5M Dec Nov. 2002* $16.6M $18.8M $35.4M Dec.1998 Feb $15.9M $19.6M $35.5M Dec May 2002 $26.8M $37.5M $64.3M Dec Dec $39.0M $38.1M $77.1M Dec June 2004 $39.0M $32.5M $71.5M Dec Aug MCS7/MCS7UT Five shopping centres in four states $69.0M $68.5M $137.5M Sept Oct MCS8/MCS8UT Three shopping centres in two states $32.5M $31.3M $63.8M Sept April 2007 * : extended from July 2000

12 Table 5: Summary of Austock exempt property market performance: Dec May 2000 Performance indicator MCS1 MCS2 MCS3 MCS4 MCS5 MCS6 MCS7/7UT MCS8/8UT TOTAL Number of trades Number of units traded Total number of units Percentage of units traded 759K 295K 550K 294K 1,045K 380K 802K 52K 4,177K 14.5M 16.6M 15.9M 26.8M 39M 39M 69M 32.5M 253.3M 5.2% 1.8% 3.5% 1.1% 2.7% 1.0% 1.2% 0.2% 1.6% 12