Hedge funds step up asset chase

Date: Wednesday, July 6, 2011
Author: Carolyn Cummins, The Sydney Morning Herald

HEDGE funds are expected to play a larger role in the real estate investment trust sector as they look to capitalise on the discount between asset values and unit prices.

Charter Hall Office REIT is in the frame as the US hedge fund Orange Capital and the ''concerned unit holders'' Point Lobos Capital and Luxor Capital try to oust the trust's manager.

As a result, Charter Hall Office ended the 2011 financial year as the best-performing trust. Its discount to net tangible assets (NTA) has fallen from a negative 43 per cent to a negative 15 per cent.

Orange Capital and the associated hedge funds have called for a meeting on July 27 to replace the manager of the fund, Charter Hall Group, with Moss Capital and Fortius Funds Management.

It is then Orange's intention to sell the fund's US and Australian office assets.

Charter Hall Group is already selling the US assets and suggestions are that it could look to privatise the Australian assets into a new fund.

Scott Courtney, a property analyst at Morningstar, said the Charter Hall Office fund shot the lights out by gaining more than 39.6 per cent in its unit price over the year to June 30.

Mr Courtney said the increase came after a move by a consortium of hedge funds looking to take advantage of trusts trading at significant discounts to NTA.

''Should the trust survive, we expect more modest returns next year,'' he said.

Property analysts at Morgan Stanley said even if the Orange vote failed, it would not necessarily be the end-game for the ''concerned unit holders''.

''Of course, it's not the best outcome, and it's far easier to drive your agenda if you're in the driving seat, but the hedge funds can still wait, take the proceeds from the US sale and angle for the best outcome for the Australian portfolio,'' the Morgan Stanley team said in a note to clients.

''Orange Capital believes there is strong buying interest and if that's correct, and while it may take a little longer, they can still benefit from the upside in a potential sale or privatisation of the fund.''

Mr Courtney said with cashed-up institutional buyers, hedge funds and private equity parties chasing assets, the listed property sector had been seen as an easy target.

''The attraction has been discounts to NTA that much of the sector has been trading at over the last year.''