By Brian Gaynor
It is difficult to get excited about Colonial First State Property Trust, which is now open for public subscription.
Listed property trusts have had a chequered history in New Zealand. The good ones offer a high income yield and modest capital growth. The poor performing ones, particularly Kiwi Development Trust and Newmarket Property Trust, have caused a great deal of distress for investors.
Listed property trusts are very different to limited liability companies and because of this they are hard to turn around when they fail to perform. This could be particularly true of Colonial Property because of its capital structure and the composition of the trust's management company.
Colonial Property Trust is issuing 145 million units at $1.00 each. Colonial Group will subscribe for 45 million units (31 per cent) and the remaining 100 million units are being offered to the public. As the Colonial Group is underwriting the public issue, it will end up with more than 31 per cent if the issue is undersubscribed.
The $145 million raised, together with $51 million of debt, will be used to purchase 14 properties for $196 million. Eleven of these buildings are being purchased from the Colonial Group for a total cost of $136 million. The vendor could not sell these properties in one package in the current environment.
The portfolio is a mixture of relatively low quality office, retail and industrial properties in Auckland, Wellington and Christchurch. None of the trust's eight Auckland office buildings are in the high rental CBD area; they are mainly in the lower rental CBD fringe. This area has not prospered in recent years although it would pick up if Asian investors returned to Auckland.
One of the features of the trust is that it is over-rented by approximately 15 per cent. This means that, on average, rentals agreed a number of years ago now exceed current market rentals by this amount.
Unless rentals improve, the trust will have to accept lower rents when these over-rented leases expire.
Over-renting is not unusual. AMP NZ Office Trust was over-rented by 17 per cent at the end of its June 1998 year. The difference between the two trusts is that AMP, which has a high quality portfolio of mainly prime CBD properties, may find it easier to reduce its over-renting than Colonial.
Another concern is that Colonial could be a seller of units, particularly if it ends up with more than 45 million units. AMP has set a precedent in this regard by continuing to slowly reduce its holding in AMP NZ Office Trust.
Colonial has stated that it will remain a substantial unitholder but it has been unwilling to pledge that it will not sell any units after listing.
Colonial has a good reputation and its listed property trusts are highly rated in Australia, but if the new trust fails to perform, unit holders will find it difficult to remove the management company.
The trust's management company is owned by the Colonial Group and all its directors are executives of Colonial. As unitholders have no independent directors representing them on the management company, and the trust has no directors of its own, it will be hard to make changes if the trust fails to perform.
The management company can be removed if 75 per cent of a trust's unitholders vote in favour, but as Colonial will maintain a significant shareholding this change will be almost impossible to achieve.
Trusts have a number of other characteristics which are disadvantageous to investors. These include:
* They generally have a lower level of disclosure than limited liability companies.
* There is no requirement to hold an annual meeting.
* It is more difficult to use trusts as back door listings if they fail to fulfil their original objectives.
Shareholders of the failed property company CBD New Zealand are now facing a more interesting future because the company is being used as a listing vehicle for Graeme Wong's Southern Capital.
Of the six listed property trusts, AMP NZ Office and Kiwi Income Property offer the best combination of low risk, high income and reasonable growth prospects.
AMP has eight quality buildings in Auckland and Wellington and has exceeded its prospectus income distribution forecasts. The trust offers an attractive and relatively secure income yield.
Kiwi Income is more entrepreneurial than either AMP or Colonial but unit holders will not wish to have any more Kiwi Development Trusts dumped on them.
Kiwi Development Trust, which is building the $207 million Royal SunAlliance Centre in Shortland Street, seems to be substantially undervalued. This is an illusion because further calls of $1.05 per unit at the end of next month and $1.20 in May 2000 will continue to depress the unit price, at least in the short term.
National Property Trust is well run with a portfolio of six properties in Wellington and the South Island. The trust received a major set back in March when its proposed merger with Newmarket Property Trust was rejected.
Newmarket Property Trust unitholders voted against the proposed merger following strong opposition from stockbroker Eion Edgar. Mr Edgar has predicted a bright future for Newmarket yet the unit price is now 20 per cent below its theoretical post-merger price. Unit holders continue to await developments which will justify Mr Edgar's optimistic projections.
Newmarket high income yield is not sustainable as its earnings will fall sharply when Sovereign's income guarantee ends on 30 June 2000.
Finally, there is little reason to recommend Colonial First State Property Trust. AMP NZ Office Trust and Kiwi Income Property Trust have proven track records, better quality buildings and comparable income yields. There is also a reasonable possibility that investors will be able to purchase Colonial Property units below the $1.00 issue price once the trust is listed on the stock exchange.