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DEXUS Funds Management LimitedABN 24 060 920 783Australian Financial Services Licence Holder
Pacific Rim Real Estate Society 2009
The Australian REIT Market – Evolution & the Way Forward
20th January 2009Peter StudleyHead of ResearchDEXUS Property Group (DXS)
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Agenda
Evolution
Lessons learnt
The way forward
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DEXUS Property Group – example A-REIT
ASX Listed AREIT – Mkt Cap A$2.8 bn*
Owner, manager, developer
Assets under management: A$15 bn**
– Direct property portfolio: A$9 bn
– Third party funds: A$6 bn
1st in office / 3rd in industrial
Leading 3rd party funds management
Market leader in sustainability
Artist’s impression Space 1 Bligh, Sydney
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*As at December 2008, **As at June 2008
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DEXUS profile – example of REIT income
$5m
96% of income is derived from stable property income
Diversified Asset Base Stable Operating Income
205 properties
As at 30 June 2008
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0
500
1000
1500
2000
2500
3000
Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10
S&P/ASX A-REIT Price Index Dec-79=500 & 3 year rolling average
1970s-80s
GPT listed in 1971Stockland (via Darling) 1972Westfield 1979 DEXUS (via NMPT) in 1984
Low gearing <10%Core, in local marketsAll passive rental income
By 1989 there were11 LPTswith mkt cap > than $100m
History of A-REITS: the 1970-80’s
Source: DEXUS Research, IRESS, S&P/ASX A-REIT price index (prior to 1979 GPT price index)
Start up and early progress
1970s-80s
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History of A-REITS: the 1990’s
0
20
40
60
80
100
120
140
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
0
10
20
30
40
50
60Market Capitalisation # of Constituents
1990s
MCap $bn
Growth phase1990-94 credit squeeze saw real estate in hands of banks, then listedLiquidity crisis in unlisted property vehicles saw retail money go to listedGovernment privatisation & corporate restructures added to listed stockNew superannuation laws stimulated demand for high yield products All externally managed All passive rental incomeMarket cap quadrupled
Source: UBS, DEXUS Research
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History of A-REITS: the 2000’s
0
20
40
60
80
100
120
140
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
0
10
20
30
40
50
60Market Capitalisation # of Constituents
2000s
MCap $bn
Consolidation phase 1999 Managed Investments Act – Single Responsible entity replaced external Trustee……stimulated M&A Activity –Consolidation from 51 to 26 LPT’sManagement internalised –GPT, Westfield, Goodman, DEXUSDrive for growth led to ‘stapling’ – allowed development & other activitySale of assets to wholesale fundsEquity capital de-listed Investa & Multiplex
Source: UBS, DEXUS Research
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Growth fuelled by higher risk revenue streams
96%83%
0%
20%
40%
60%
80%
100%
2000 2008
OtherDevelopmentManagement feesRent
Source: UBS, DEXUS Research
A-REIT income split
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Offshore assets held in A-REITs
0
40
80
120
160
1996 1998 2000 2002 2004 2006 2008
Domestic assets Offshore assets$ billionIn 2008, 41% offshore
Overseas expansion driven by:Strength of capital inflows to sectorLack of domestic stock given high levels of securitisationSeeking growth and diversification
Source: DEXUS Research, UBS
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0%
20%
40%
60%
80%
100%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
%
Per cent of market capitalisation classified as stapled
Source: UBS, DEXUS Research
Internal management - AREITs
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0%
10%
20%
30%
40%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Historical debt to assets, A-REIT sector
Source: UBS, DEXUS Research
Debt levels increased, but are now easing
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0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Global REIT beta
Source: UBS Research
Listed property has become more equity-like
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Investor base changing
42%29%
30%
20%
15%
12%
7%
9%
6%
30%
0%
20%
40%
60%
80%
100%
2002 2008
PSF's Equities Retail Strategic Offshore
Passive capital replaced by less loyal global capital eg hedge funds
Source: UBS Research
Investors in A-REITs
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Rapid evolution – short term
Credit crunch, equity market sell off and economic slowdown
Lack of liquidity in capital and asset markets constrains activity
Immediate focus on core business, particularly domestic
Debt reduction, including by asset sales & capital raising
Re-adjusting distributions to better reflect cash or rental income
Likely improvement in pricing as cost of capital issues ease
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Pricing reflects the risk of debt
0%
20%
40%
60%
80%
20% 30% 40% 50% 60%% Gearing
% Gearing vs distribution yield FY09
Source: UBS, DEXUS Property Group Research
Gearing% Yield%Best third 32 8
Worst third 50 40+
(UBS data)
Rule of thirdsDistributions
suspended or uncertain
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Lessons learnt...
Management rather than property has underperformed
Global mis-pricing of risk (all asset classes)
High leverage in rising interest rate environment
Levered IRR’s vs unlevered
Over-valuation of development and 3rd Party FM earnings
Over-valuation of corporate assets
Strategic vs non strategic international expansion
Distribution of non-cash earnings
In some cases, focus on fees not value
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The way forward – long term issues
Domestic vs international portfolios
Asset managers vs fund managers vs developers
Big vs boutique
Passive REIT’s vs active PropCo’s
Sector specialisation vs diversification
Capital markets favour earnings growth; yet…
Structuring and developing for growth creates volatility
Do investors/analysts price this risk properly- poor record so far?
Protective mechanisms for M&A activity on passive vehicles
Role of large sovereign wealth funds and pension funds
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Disclaimer
This presentation is issued by DEXUS Funds Management Limited (DXFM) in its capacity as responsible entity of DEXUS Property Group (ASX: DXS). It is not an offer of securities for subscription or sale and is not financial product advice.
Information in this presentation including, without limitation, any forward looking statements or opinions (the Information) may be subject to change without notice. To the extent permitted by law, DXFM and DXS, and their officers, employees and advisers do not make any representation or warranty, express or implied, as to the currency, accuracy, reliability or completeness of the Information and disclaim all responsibility and liability for it (including, without limitation, liability for negligence). Actual results may differ materially from those predicted or implied by any forward looking statements for a range of reasons outside the control of the relevant parties.
The information contained in this presentation should not be considered to be comprehensive or to comprise all the information which a DXS unitholder or potential investor may require in order to determine whether to deal in DXS stapled securities. This presentation does not take into account the financial situation, investment objectives and particular needs of any particular person.
The repayment and performance of an investment in DXS is not guaranteed by DXFM or any of its related bodies corporate or any other person or organisation. This investment is subject to investment risk, including possible delays in repayment and loss of income and principal invested.