By a staff reporter

The demand for home loans fell against expectations for the fourth consecutive month in January, according to the Australian Bureau of Statistics.

ABS data showed the number of home loans granted in January dropped a seasonally adjusted 1.5 per cent to 44,383.

The result compares to a downwardly revised 45, 075 in December.

Economists had expected the number of housing finance commitments to lift by 0.2 per cent.

Total housing finance by value rose 2.4 per cent in December, seasonally adjusted, to $21.485 billion.

Economist says data improves chance of rate cut

The chances of more interest rate cuts have improved after the fall in home loan approvals, a leading economist says.

JP Morgan economist Tom Kennedy says it was the fourth consecutive month that approvals fell and was a sign the Reserve Bank of Australia needed to cut the cash rate further.

"That could suggest that consumers are still pretty apprehensive in acquiring new debt even though the RBA has delivered significant easing over the past 18 months," he said.

"I definitely think it supports the bias for the RBA to maintain a dovish tone and for rates to go lower."

The RBA cut the cash rate 1.75 percentage points between November 2011 and December 2012, bringing it to its current level of three per cent.

It's a housing recovery Glenn, but not as we know it.

Australians are changing the way they live and the property industry must adapt to survive.

In an insightful speech to the Australian Institute of Building last night, the Reserve Bank’s assistant governor (economic), Christopher Kent, gave an update on recent developments in the housing market while also highlighting some fundamental changes in the property landscape over the past decade.

Pouring equal measures of cold water on housing bulls and housing bears, Kent said the bank’s liaison with the housing industry suggested there had been a welcome pick up in demand for new housing. But the market remains “relatively subdued”.

Nationwide, house prices have risen about 4 per cent over the past year, but remain below their peak of October 2010. Melbourne and Brisbane remain particular weak spots, their property parties having ended somewhat later than Sydney’s did in the early 2000s.

But while prices are picking up, debt appetite remains suppressed.

Housing credit extended to owner occupiers is growing more slowly than credit to investors, partly because existing borrowers are choosing to pay down their mortgages faster. Housing credit is now growing in line with incomes growth at about 4.5 per cent.

And long may we expect this to continue.

Borrowers' adjustment to the new era of low inflation and low interest rates, which pushed house prices up sharply in previous cycles, now appears to have “run its course”, according to Kent.

And so we must expect a more subdued outlook for house prices than in the past decades.

Tellingly, turnover in the market remains historically low. About one in 25 homes are now changing hands each year, compared to one in 12 during the early 2000s.

If it turns out this lower turnover is more the historic norm, this would have massive implications for the real estate industry.

According to Kent: “If that is right, it means that those who make a living from turnover – real estate agents being the most obvious example – are unlikely to see a return to the easier days of the first half of the previous decade.”

So while we may expect a cyclical upswing in property construction and prices in response to the Reserve Banks’ radical low interest rate medicine, there are structural forces at play.

Perhaps the most interesting, highlighted by Kent, is the trend towards apartment living.

Of the pick up in dwelling approvals over the past few years, almost all the strength has been in units and apartments. The building of new detached homes remains in the doldrums.

Kent identifies three major drivers of this shift.

First, the long-run ramp up in land prices, relative to incomes, is forcing new home buyers to economise on space. Apartments deliver this.

Second, the increasing level of congestion on capital city roads and public transport routes is imposing a cost on those choose to live on the fringe. As urban infrastructure fails to keep pace with a growing population, Australians are seeking to avoid the cost of congestion by living closer to where they work. And despite the best intentions of urban planners to create multi-centric cities, the relative success of our professional and finance industries, which tend to be located in central business districts, and relative decline of our manufacturing industries located in outer areas, is driving jobs, and commuters, inwards.

Third, there does appear to be a preference shift, particularly among younger Australians, towards living closer to the inner city, with all the access to infrastructure, shops and entertainment that inner cities provide.

The great outward migration of our cities to the suburbs appears to be reversing. 

Australians, it seems, are no longer living on the edge.

And this, again, has implications for the property industry.

“If this is a durable, structural change in the market, it will have important implications for builders and developers, particularly those whose business model is focused on detached housing.”

What Kent is talking about, albeit in central-banker-eese, is the death of the suburban McMansion.

Australians have tested the limits of their love affair with housing. While housing construction can be expected to pick up from recent lows, we are not on the cusp of the next boom.

The lower turnover of houses, which Kent speculates may be permanent, also puts an end to the renovations and alterations frenzy which usually accompanies the decision to sell.

Bad news, again, for the tradespeople, building materials suppliers and furniture retailers who make a living feeding this renovating boom.

So while the green shoots of recovery in the housing sector are there, the headwinds will remain for some time to come.

The Reserve Bank is hoping to engineer a housing and consumption-led recovery to drive the economy forward as the mining boom runs down.

Structural forces at play in the housing market suggest it may have to keep interest rates lower for longer than it would have previously to achieve such an outcome.

By a staff reporter

Stockland Ltd has announced a $115 million redevelopment of its Hervey Bay Shopping Centre in Queensland.

The development, due to start next month, will more than double the size of the site and is expected to be completed by mid-to-late 2014.

The redevelopment will increase the size of the Hervey Bay centre from 15,600 square metres to over 36,000 square metres.

It will add an additional 70 speciality stores to the centre, taking its total number of retailers to more than 110, as well as a 500-seat food court.

Stockland group executive John Schroder said Hervey Bay was one of several of the group's centres earmarked for redevelopment, which is expected to deliver average incremental total development returns of between 13 per cent and 14 per cent.

The group said the redevelopment demonstrated its commitment to enhancing returns by enhancing centres in key growth corridors.

“It follows our investment of $900 million to successfully redevelop our shopping centres in Merrylands, Townsville and Shellharbour,” Stockland managing director and CEO Mark Steinert said.

Stockland said Hervey Bay will remain open for business during the 18-month construction project.

The project is expected to generate over 250 local jobs during construction and more than 600 new retail jobs when it is complete.

The NSW state government is set to release an ambitious plan that would see Sydney set its highest targets yet for the construction of new homes and for job creation, according to The Australian Financial Review.

The state's government is set to release a 20-year Draft Metropolitan Strategy Plan to govern Sydney's growth while at the same time releasing a new Land Release Policy aimed at ensuring that new residential and commercial land is made available in the metropolitan area to facilitate the planned growth.

The plan calls for 545,000 new homes to be built to house 1.3 million people in the region by 2033, and marks a population growth target that is 17 per cent higher than the previous Labor government's target, released in 2010.

The strategy would require the NSW construction sector to build an average of 27,250 new homes and units a year, which is nearly 90 per cent more homes and units than the sector has built in any 12 month period over the last five years, the AFR reported.  

By a staff reporter

Housing affordability surged in the December quarter, buoyed by earnings growth, interest rate cuts and weak price developments, saccording to a leading survey.

The HIA-CBA housing affordability index increased by 5.5 per cent in the December quarter, representing an 18.4 per cent advance on the same period in the previous year.

“This is the eighth consecutive quarter of increase in the index, bringing it close to levels not seen since the depths of the GFC during 2009,” HIA senior economist Shane Garrett said.

“For regional areas, affordability is at levels last seen during the early 2000s decade.

"Affordability is on the increase in every part of the country.

“This has been driven by the weakness of price developments as well as the two cash rate reductions effected by the RBA in the final quarter."

Mr Garrett said continued growth in earnings has also served to make housing more affordable.

By a staff reporter

Charter Hall Retail Group Ltd has offloaded another United States asset as it moves to shore up its presence in the Australian market.

The retail investment group has dissolved its last US joint venture with Regency Centers and sold three properties it received on exiting the venture to a US-based private investor for $49 million.

The $11 million profit from the sale will be reinvested in acquisitions in Australia.

Charter Hall's exit from its last joint venture with Regency means its Australian portfolio now comprises 93 per cent of its net tangible assets.

 “The sale is in line with the REIT’s stated strategy of selling down its offshore assets and reinvesting back into the Australian market," fund manager Scott Dundas said.

"The REIT now has only three small wholly owned assets remaining in the United States, all of which are being marketed for sale."

At the 1615 AEDT official market close the group's shares were flat at $3.93, against a broader benchmark rise of 0.16 per cent.

By a staff reporter

Volatile consumer spending and competition from online rivals is prompting commercial landlords to reprioritise tenants that focus on non-discretionary offerings while giving them leverage in lease negotiations, according to Federation Centres chief executive Steven Sewell.

Retailers, most recently Myer's Bernie Brookes, have suggested that the challenging sales environment is allowing them to pressure landlords to reduce rents on their retail spaces.

But in an interview with Business Spectator's KGB, Mr Sewell said landlords have just as much leverage in lease negotiations, as Federation looks to prioritise tenants who sell non-discretionary products that have fared better against weak consumer confidence and online competition.

“You have to divide it between what we call discretionary and non-discretionary retail,” he said.

“And in the case of department stores which very much fall into the discretionary category — so with principal categories of cosmetics and fashion and high-end fashion — very much what we're seeing is the businesses are needing to sort out their product mix, their pricing point and their service offer.”

Federation — which recently rebranded itself from its old name of Centro Retail Australia — has in some cases been forcibly switching retailers so that properties are anchored as much as possible by tenants that focus on non-discretionary offerings.

“Supermarkets and national brand supermarkets are the lifeblood of our portfolio,” Mr Sewell said. “Anything that we see can generate traffic, increase sales productivity for our retailers, we see will have a flow-on benefit to the rest of the retailers within the shopping centre.”

He said larger department chains have been narrowing their product offerings and consequently reducing their store sizes, allowing property owners to repurpose existing retail space while reducing the rental price tag for tenants without hurting the rent-per-square-metre rate.

“It's very much a case-by-case discussion,” he said.

“What is the catchment? What's their plan and what's their spread and their offer within that catchment? Does the demographic need or want a department store-type tenancy and therefore can we make the deal work?”

Mr Sewell added that Federation's decision to rebrand was related to a desire to distance the company from past events.

“When we looked at the transformation of the business from a balance sheet perspective and from a corporate objective perspective, when we got to the second half of last year we realised we were a different organisation and we were also keen to obviously put the past behind us and present a different face to the market.”

By a staff reporter

Westfield Group Ltd has entered into a series of joint venture deals with O’Connor Capital Partners for a portfolio of six United States shopping malls.

In a statement to the Australian Securities Exchange, Westfield said it stood to gain almost $US700 million in net proceeds from the move.

“This agreement carries on the group’s strategy of introducing joint venture partners into our assets globally as well as disposing of non-core assets,”  Westfield Group co-chief executive officer Peter Lowy said.

O’Connor’s investment will represent a 49.9 per cent interest in the portfolio of Florida centres, which has a gross value of $US1.283 billion. The price paid by O’Connor is equal to the Group’s book value.

Westfield said it would remain as property, leasing and development manager on terms consistent with the group’s other joint ventures. 

Federation Centres chief executive Steven Sewell tells Business Spectator's Alan Kohler, Robert Gottliebsen & Stephen Bartholomeusz:

– He has no plans to buy new properties but is focused solely on organically growing properties in its existing portfolio and reinvesting back into them.

– The group’s retail market, based on nondiscretionary items and with only 11 per cent of income linked to apparel, is a different category than that affected by the internet.

– He sees 'great opportunity' to spend on developments but is cautious in the current retail environment.

– Federation Centres has been forcibly switching retailers in its centres in order to boost foot traffic.

– Financial markets, and the group’s desire diversify funding sources with local and overseas bonds and debt issuances, drove Federation Centres' rebranding.

Alan Kohler: Steven, welcome to Business Spectator. It seems to me that the way the business started off as Jennings Properties and became Centro in 1991 and then twenty years later became Federation Centres, it was actually a symbol of its times. In the 2000s it was a high geared, complicated structure, high growth and now you’ve turned it into a lower geared, simple structure for yield which in both cases reflects the times and what people want. Is that how you see it too?

Steven Sewell: I think even more than that it really is a case of back to the future, where what was created out of Jennings Property Trust in 1986 was simple, Australian investment grade properties, income producing, high yielding and in fact what we’ve taken the company back to is exactly that, a big balance sheet owning investment vehicle where basically more than 90 per cent of our income is produced from income producing shopping centres in Australia.

AK: And what about you and Andrew Scott, the guy who built up Centro. At a personal level how do you think you differ from him?

SS: Well, as you say, I think Andrew managed the business for what was appropriate at the time. And I think there was a need or a push towards global diversification of the asset base through the mid 2000s. He went to North America, was looking to move into Europe and it was very much encouraged at the time by investors and the banks.  Now, I think, at the time I was in another fund doing exactly the same type of strategy, but through the latter part of 2000 into the GFC I think investors are very much now focused on looking for best of breed operators within a particular local market.

AK: Are you saying that Andrew would have done what you’re doing if Andrew was running Federation Centres now?

SS: Well, I hope he would have because I think it’s proving to be very successful and certainly very much embraced by both domestic and offshore investors.  And again what we are doing is not a complicated formula. You know, it is basically back to the first principles of shopping centre management for maximising income and capital growth.

Stephen Bartholomeusz: As part of this ‘back to the future’ strategy you’ve had to sell interest in some of your best properties.

SS: Yes.

SB: Is that something that you would have done by choice or has it simply been forced on you by the balance sheet?

SS: No.  We took a decision that with the equity that we had invested in the properties and the balance sheet – the way it was structured – that the best way for us to materially improve the return on invested capital was to look at selling stakes in assets, non controlling but joint ownership stakes, but contracting back to our partners to provide the services. So therefore we retain a stake, we share in the upside, the income and capital growth, but importantly from a business point of view we get to leverage off our national platform and provide the services to our partners.

SB: So, you get management income on a smaller capital base.

SS: Management income plus also development fees as we use the capital that we’ve equitised from those stakes and invest it back into those investments. So, we get to enhance the asset value and our partner will pay us for that service for their 50 per cent interest in the assets.

AK: So, you should you do it for more of the properties.

SS: Well, we’re in the situation that our balance sheet leverage will be down around 25 per cent once we settle the ISPT transaction in July and we’ll have an undrawn debt facility at that point of probably just on $1 billion dollars. So, it’s a question of how much equity… And it really is a ‘sources and uses of equity’ equation for us.

RG: Now, your partners are superannuation funds?

SS: A combination of high net worth individuals, three private – Stan Perron from Perth, Sam Tarascio from the Salta group here in Melbourne and Bob Ell from Sydney who we own with Tuggeranong in the ACT.  The ISPT deal is the industry super fund transaction that we’ve just announced and that will settle in July.

RG: And what will they do?

SS: Well, they’re jointly owning five properties with us. They’ve bought an interest in five properties right across the country in every state.

RG: And what’s the Challenger deal?

SS: Out of the Perron transaction that we settled last year, basically we had a number of parties come to the surface. Stan Perron, you might recall, transacted extremely quickly on that transaction and a lot of parties were left wondering what had happened, so we had a number of enduring discussions ongoing after the Perron transaction. ISPT was one and we’ve been able to conclude a deal with them. Challenger was another one. Challenger also just across Christmas purchased the Paradise Centre from us on the Gold Coast and have contracted back to us as a third party manager to provide all the services. 

So, out of that transaction they’ve asked us, are there other assets that we’re buying out of the syndicate business that they could take a half ownership interest in. I believe they have mandates with funds from offshore looking to invest in shopping centres in Australia. So therefore they’re the asset manager; we’re the property manager.

RG: So, these centres will come out of the old syndicates – private investors and syndicates.

SS: That’s right. So, that was a part of the legacy Centro business. You’ll remember Julius Colman sold the business to Andrew many years ago and that business grew and grew – and in fact twelve months ago had $2.5 billion of assets in the syndication business across 25 syndicates. 

We’ve since reduced that to about $1.5 billion of assets today by bringing most of them onto our balance sheet or some selling out the door, such as Paradise Centre on the Gold Coast. And we’ve got a strategy of taking $1.5 billion down to about three $300 million by a combination again of bringing the assets on our balance sheet using our undrawn debt facility and cash or selling them out to the open market.

AK: I mean obviously with these assets, what you’re finding is that these are great assets for long-term investors such as super funds, annuity style retirement and private individuals who just want to have stable investments.

SS: It’s a return situation, so you…

AK: And so, can you see a time when it’s not actually that rational for a structure like yours to own these properties, being a listed company, and that what you should be doing is managing them for the long-term owners of the assets?

SS: Well, not really.  I mean we’re a real estate investment trust for public investors in the stock and, you know, with our current earnings yield of about 6.5 per cent, dividend yield at 5.5 per cent with growth, we think we offer a very attractive investment proposition both to domestic investors as the chase for yield, as the cash rate collapses and the chase for yield intensifies, and particularly for offshore investors.

Robert Gottliebsen: We had Bernie Brookes here a week ago and he said ‘I’m going to get my lease costs down, in some cases 50 per cent, other cases 10-15 per cent’. We have David Jones’ chief executive saying ‘I’ll pull out of a centre if the lease doesn’t come down’ and he’s going to get his down. Are we now into a new era where the retailers with their marketing ability and their databases now have leverage over shopping centres that they simply didn’t have before?

SS: I think you have to divide it between what we call discretionary and nondiscretionary retail. And in the case of department stores, which very much fall into the discretionary category – so with principal categories of cosmetics and fashion and high end fashion – very much what we’re seeing is the businesses are needing to sort out their product mix, their pricing point and their service offer.  In the case of Myer, for example, we only have four Myer department stores in our business. Two of them in Sydney actually are way too big. The footprint is over 20,000 square metres. Now, I think if Bernie was here he would say our ideal size…

RG: Where are these centres?

SS: Bankstown and Roselands, the two regional malls in Western Sydney.

RG: OK.

SS: And I think you’re looking at a situation where the success of their business recently has been in a footprint of about 12,000 or 14,000 square metres. So, we agree with Bernie that we think we’d like to reduce the footprint of those stores and we’re in discussions on doing exactly that and that will pro rata bring down his rent bill for those stores.  Because at the end of the day, whether it doesn’t work for him because of profitability or it doesn’t work for us because of sales per square metre traffic generation for the shopping centre, it very much is of mutual benefit for us to fix that location.

RG: But he may want you to not only have less space, but he’ll say to you ‘I’m going to pay less per square foot’.

SS: Sure. And I think at the end of the day, that’s the commercial negotiation and what works for us with the space that we’ve got available, what works for the retailer. We’ve actually had in our business, in our portfolio – and it was before my time – two department stores exit two of our shopping centres. We had David Jones move out of Toombul in Brisbane. We had Myer move out of Tuggeranong in the ACT. Now, we’ve been able to backfill both those large tenancies with discount department stores, mini major type retailers who have done enormously well. And the shopping centres have actually gone on to do enormously well since those department stores have left. So, that was a case where it wasn’t working for the department store and it really wasn’t working for the shopping centre.

RG: So, you’re going to say to Bernie, leave. If you’re not prepared to pay a fair price…

SS: No, no. I think it’s very much a case by case discussion. What is the catchment? What’s their plan and what’s their spread and their offer within that catchment? Does the demographic need or want a department store type tenancy and therefore can we make the deal work?

AK: You’ve actually been forcibly switching a few of your retailers, haven’t you?

SS: We have. And I think, you know, at the end of the day, we keep coming back to first principles – and this is my discussion about discretionary and nondiscretionary.  For our portfolio, in particular, supermarkets and national brand supermarkets are the lifeblood of our portfolio. So Coles, Woolworths. Where we can introduce Aldi to great benefit, to great traffic generation, or a specialist grocer like Thomas Dux, the Woolworths brand, or another specialist grocer, anything that we see can generate traffic, increase sales productivity for our retailers we see will have a flow on benefit to the rest of the retailers within the shopping centre.

AK: Just give us some examples of where you’ve done that, what switches you’ve made that have worked for you.

SS: We’ve got an example very recently at The Glen, our major regional shopping centre here in Melbourne. We had a Best & Less tenancy that was generating less than $2 million dollars annual sales.  We’ve replaced them with a JB Hi-Fi tenancy, a brand new JB Hi-Fi tenancy, that opened in December last year and has generated over $6 million dollars sales in its first month of trade. So, we’re very much pleased that they’ve been able to reinvigorate the space and just in the last couple of weeks Kathmandu, a brand new tenancy, has opened next door to JB Hi-Fi. We think we could get between $20 million and $30 million of sales out of the two tenancies side by side, but there’s enormous traffic and enormous appeal to the local market to come to the centre. And obviously that traffic generation has benefits for the rest of the retailers in the shopping centre.

SB: Steven, one of the remarkable things about your business is that despite all the turmoil and trauma at the corporate level, the portfolio itself has actually held up pretty well.

SS: Yes.

SB: What do you attribute that to? You’ve got nearly a 100 per cent occupancy – 99.5 per cent occupancy – and no net operating incomes rising. How is it that those businesses have performed so well and there’s been no capital spend on them?

SS: Quality of the location. I mean Centro at its peak in Australia owned or managed over a 130 shopping centres. We now have about 70 properties. So, effectively the portfolio has been distilled to the properties that we really like and we believe are in some of the best locations around the country. So infield suburban, mature demographics and in some areas with very high population growth, such as Cranbourne.

We own the property in the middle of Cranbourne, which we’ve just lodged a DA to spend over a $100 million dollars to expand because we’ve got 6 per cent population growth in the Cranbourne catchment area.  Mandurah, south of Perth, is one of the highest growth corridors in Australia we happen to own the major regional shopping centre in the middle of Mandurah.  So, it is more a case that the portfolio absolutely did maintain very high metrics, operating metrics, through a period of corporate distraction, but that gets to the quality and I think also the strength of the anchor tenants and the supermarkets that we do have.

SB: Given it’s been capital constrained for almost a half a decade, presumably there’s a lot of upside in the development potential of the portfolio.

SS: Well, we see that there is great opportunity to spend on developments, but we’re being very cautious about it. You know, with the retail environment as it is, particularly consumer confidence being fairly soft at the moment, we think now is not the time to be making grandiose statements or, you know, splashing money around.  So we’re being very measured. 

For most of the projects that we do across the country the genesis will be a discussion or a transaction with a supermarket where they either refurbish or expand or we can introduce something like an Aldi to a shopping centre and that will lead the development pipeline. But the fortunate place that we are in is because of the four or five years of administration or corporate distraction, the portfolio is very well positioned for the current retail environment.

RG: Woolworths and Coles, particularly Woolworths, have opened a lot of new stores.

SS: Yes.

RG: Have you had a share of that market or are you looking to get into that market?

SS: No. Because what we’ve understood is that the new stores that are being opened typically are in the residential growth corridors around Australia, so they’re where the population is expanding, whether it be to southwest Sydney, whether it be out to the north and west of Victoria, so they’re very much in new growth corridors and they tend to be small scale neighbourhood shopping centres that service those areas. To give you an example, in Cranbourne, while we’ve been on ice effectively for five years, population growth has been continuing at around 6 per cent, there have been 13 neighbourhood shopping centres, supermarket anchored shopping centres, open within the primary and secondary catchment of our shopping centre at Cranbourne.  Now, the lettable area per head of population has not changed materially because the population growth has been so strong for that period.

RG: But that might affect your shopping centres?

SS: Well, it does at the margin but we believe that you know, there’s a place for everybody.  Supermarkets are expert at working out where they can put supermarkets in order to capture the income and the spend.  As long as you see positive movement in retail spend and demand, the retailers are the best ones to work out.

RG: It sounds like the old service station boom, all these little shopping centres being set up with supermarkets around them.

SS: Well, the fortunate thing we have in Australia is quite a controlled planning regime around the country where there are activity centres and the government very much controls what land is designated to be shopping centre or retail development and what land is meant to be residential.  So I think it’s not as easily as what, I would say, you categorise as the service station boom, but it very much is led by population and residential growth corridors.

AK: Are you also trying to derisk your portfolio from the Internet?

SS: Well, because we have such a small proportion of rent linked to apparel and we only have five department store tenancies across the whole…

AK: What proportion is it to apparel?

SS: About 11 per cent of the whole portfolio’s income is apparel and even that statistic, while 11 per cent, some people would say still is a risk. The apparel that exists in our shopping centres, because they are supermarket anchored shopping centres, I would categorise more as commodity type apparel.  So, it’s children’s wear.  It’s underwear.  You wouldn’t go to one of our shopping centres typically to buy, you know, a fancy outfit for a formal. So, you know, it is a different market. And I think you have to look at the fact that our sales growth at the moment is positive across all of our categories, which I think goes to the heart of the fact that we do offer a more nondiscretionary type retail offer than would necessarily be impacted by online retail.

SB: Steven, you said earlier that the portfolio has almost halved.  As your balance sheet capacity continues to open up, can you see a time when you actually start growing that portfolio again?

SS: Our greatest use of the capital that we’ve got available and our plan, our sole plan, is to acquire the assets that we’ve identified from the syndicate business and to organically grow the properties that we have in the portfolio to reinvest back into the properties that we have on the balance sheet today. So, we do not have a strategy of acquiring additional properties. And we think because we’ve had so many years in administration that we have a growth profile that will continue for many, many years to come and certainly keep us pretty busy.

SB: Apart from the balance sheet I assume that after that long period of trauma there would have been an issue of talent. Have you restocked?

SS: We have. We’ve brought in some of the corporate activities in the business that had been neglected or minimised during the period of distraction, so people and culture, remuneration, performance management, corporate communications, media relations, investor relations and also development activity. 

You know, the business basically put a clamp on development activity. We now have a very large team across three hubs in Perth, Melbourne and Sydney of development managers and financial analysts to support that level of activity. So, we’ve refreshed the team, but effectively we reorientated the organisation’s structure to what the objectives are of the company: as I said, to redevelop and spend money and grow the income of the existing properties that we have.

SB: And you’ve rebranded. I assume it wasn’t directed at your customers because Centro out there in the suburbs is not a bad name. Financial markets I assume were the driving force.

SS: It was certainly a factor. When we looked at the transformation of the business from a balance sheet perspective and from a corporate objective perspective, when we got to the second half of last year we realised that we were a different organisation and we were also keen to obviously put the past behind us and present a different face to the market. We were also, with the balance sheet strength that we have, looking to issue bonds and debt into the domestic market as well as offshore to diversify our funding sources. And our clear advice was to rebrand the company and move away from the old branding of Centro.

RG: You’ve got a negotiation with David Jones?

SS: We do.

RG: And they’re threatening to leave. Do you think they will?

SS: They’ve got only one store.  It’s at The Glen. 

RG: Yes.

SS: We were interested in their categorisation that the demographics were less than robust or some sort of terminology. On our assessment the demographics of The Glen are actually quite healthy. In fact, when we look at the population growth, the income and the retail spend in the catchment – in fact the retail spend in the catchment around The Glen on our assessment, independent assessment, is nearly 6 per cent higher than the Australian average.  What we are aware of is that a number of other landlords around The Glen are looking to attract David Jones to come in as a tenancy, so I suspect there’s some negotiating, posturing in their categorisation of The Glen as a store.

RG: So therefore they only want you to lower the rental price. That’s what that’s about. And will you do that?

SS: Well, I think that for us the negotiation is that we would love David Jones to stay. It’s a great store at The Glen. The Glen is in a very strategic, advantageous position at the junction of two major streets. It has very convenient car parking. It has a multi-level, high quality mall and is anchored by David Jones, as well as discount department stores. Now, we are in discussions with the David Jones company about refurbishing, repositioning and re-energising their store, which has not had a lot of money spent on it for a long period. And we’d very much like them to stay, but again that’s a commercial negotiation with the company.

RG: But will you reduce the price?

SS: Well, I think if they wanted to reduce the footprint, we’d look at reducing the rental, of course.  We’d also be willing to contribute to refurbishment of their store and repositioning of their store as we will contribute to the redevelopment of the property.  And certainly the local council, the Monash City Council, is very supportive about our potential introduction of hotel operations on the site, serviced apartments. We’ve actually moved out of our office tenancy and we were 180 people in our office tenancy. MYOB are fitting out at the moment to put nearly 500 people into the office tenancy. The actual location is moving very substantially.

RG: Do you think Myer will take it?

AK: I think that’s a no, Bob.

(Laughter)

SS: Well, that’s of course the alternative – or other users that would like to come into The Glen. And we do have a lot of other retailers that see that as a very prime location.

AK: We’ll leave it there.  Thanks very much, Steven.

SS: Thank you.

The Lowys are continuing to pursue their new ‘’capital light’’ model of retail property ownership. For slightly different reasons, Federation Centres, the old Centro Property group, is pursuing a similar strategy.

Westfield Group announced another joint venturing of one of its portfolios of US malls today, this time selling a 49.9 per cent interest in six regional malls in Florida to O’Connor Capital Partners. The sale, at book value, will release about $US700 million of net proceeds to Westfield.

The deal follows last month’s sale of a 45 per cent interest in a portfolio of 12 centres in the US to Canada Pension Plan Investment Board, which released about $US1.8 billion of net cash.

Those joint ventures, and a more aggressive approach to selling non-strategic retail centres, are part of a new strategy the Lowy family has adopted in the wake of the financial crisis. The biggest structural change was the spinning out of half the group’s core Australian retail portfolio in a new vehicle, Westfield Retail Trust.

By selling large interests in its portfolios to third parties, Westfield extracts big lumps of capital from its property holdings while continuing to generate management and development income from the full portfolio, getting a leveraged income return from the reduced capital employed. It can use the cash to either maintain its buyback program, leverage returns further and/or fund its development program.

While it is conceivable that the strategy is influenced by the cyclical and structural pressures on retail property – Westfield has acknowledged the pressure on speciality store rents from tough retail conditions and the encroachment of online retailers – the recycling of capital tied up in mature portfolios has a strong financial logic to it.

Federation Centre has raised more than $1 billion by selling interests in some of its best retail centres to third party investors, the Perron family in Western Australia and the industry fund property specialist, ISPT. It is also negotiating with Challenger, having already sold one property to it while retaining the management rights.

Arguably, having emerged from a horrible five-year period when the old Centro group was in the hands of banks and hedge funds and being assailed by class action litigants, the only way for the group to free up capital to invest back into assets that had been capital-constrained over that period was to sell assets to generate cash.

As Federation Centre’s Steven Sewell explained in his KGB Interview, however, the philosophy behind the deals with the Perron group and ISPT was very similar to Westfield’s.

‘’We took a decision with the equity we had invested in the properties, and the balance sheet the way it was structured, that the best way for us to materially improve the return on invested capital was to look at selling stakes in the assets, non-controlling but joint ownership stakes,’’ he said.

‘’So therefore we retain a stake, we share in the upside – the income and capital growth – but, importantly from a business point of view, we get to leverage off our national platform and provide the services to our partners.’’ Those services generate management income and development fees.

The other significant aspect of the joint ventures – particular for Federation Centres given the latent value available from reinvesting capital in developing its existing portfolio – is that the partners share the cost of development.

The obvious question, and one Sewell was posed, is that if joint ventures are such a good idea why not turn Federation Centres into a pure management company by selling all the properties to the pension funds and wealthy individuals looking for long-term stable cash flows and capital growth.

His response was that the real estate investment trust structure of Federation Centres – and other property trusts – was an attractive proposition for domestic and offshore investors chasing yield as the returns on other yield-generating investments collapsed amid record low central bank cash rates.

In fact, what Westfield and Federation Centres are doing is satisfying the needs of two very different types of investors.

There are some investors – big pension funds with defined benefit liabilities or industry and other super funds with long term liabilities – who want and are able to invest significant sums directly in property.

There are others, including retail investors and smaller institutions, which don’t have the financial capacity, or perhaps don’t have a mandate, for large-scale investment in unlisted assets.

Even some institutions with big direct property portfolios hold listed real estate investment trust securities because they don’t necessarily move in tandem with the underlying physical property markets.

In the pre-crisis environment the real estate investment trusts supercharged their returns to investors with financial leverage – debt. That turned out to be not such a good idea, particularly for Federation Centres.

In the post-crisis environment the Lowys have pioneered a different, less risky form of leverage by introducing partners to share the risk and returns from established centres while maintaining the management income from those centres and leveraging the returns on the reduced capital employed.

That’s a strategy that seems to work for them but is particularly attractive, because of its difficult and capital-short recent history, for Federation Centres.

By a staff reporter

UGL Ltd will undergo a corporate review, encompassing a detailed audit of its management structure that could see significant changes to the group's executive team, including Richard Leupen's position as chief executive officer.

In a statement to the Australian Securities Exchange, UGL said the review was prompted by significant growth in UGL’s property business, which now represents close to 50 per cent of the company’s earnings.

"The board of directors has resolved to undertake a review of the optimal corporate structure under which UGL’s engineering, operations and maintenance and property businesses should operate," the group said.

Chairman of the UGL board Trevor Rowe said the board has agreed that current CEO Richard Leupen will deliver the review and execute its recommendations and outcomes.

"At the conclusion of the review, if the board determines that a change to the current corporate structure is required, it is intended that Richard will continue in his role for a short time beyond the current end date of his contract on 31 March 2014 to complete the work," Mr Lowe said.

"Following the conclusion of the review, we will provide an update on the programme the board is undertaking to ensure the orderly transition of management, including the criteria for assessing both internal and external candidates for CEO succession.”

However, UGL cautioned there are a number of significant issues to be considered and as such, there is no assurance that the review will result in a change to the current corporate structure.

Goldman Sachs has been appointed to assist in the review

By a staff reporter

UGL Ltd shares have soared after the group announced it might demerge its property and engineering divisions as part of a sweeping corporate review that could also see major changes to the group's executive team.

At 1110 AEDT shares in the group jumped 8.7 per cent to $10.25 after hitting highs of $10.29 in early trade, against a benchmark fall of 0.69 per cent.

In a statement to the Australian Securities Exchange, UGL said the review was prompted by significant growth in its property business, which now represents close to 50 per cent of earnings.

"Various alternatives from maintaining the current corporate structure, reviewing a potential structural separation or demerger of the company, as well as UGL’s M&A strategy will be considered," UGL Chairman Trevor Rowe said.

"The board of directors has resolved to undertake a review of the optimal corporate structure under which UGL’s engineering, operations and maintenance and property businesses should operate."

Chief executive officer Richard Leupen will deliver the review, which will also include a detailed audit of UGL's management structure and could see Mr Leupen replaced.

"At the conclusion of the review, if the board determines that a change to the current corporate structure is required, it is intended that Richard will continue in his role for a short time beyond the current end date of his contract on 31 March 2014 to complete the work," Mr Lowe said.

"Following the conclusion of the review, we will provide an update on the programme the board is undertaking to ensure the orderly transition of management, including the criteria for assessing both internal and external candidates for CEO succession.”

However, UGL cautioned there were a number of significant issues to be considered so there was no assurance that the review wiould result in structural changes.

Goldman Sachs has been appointed to assist in the review.

House prices are surging and the rate at which prices are increasing is, if anything, accelerating. This should not only kill off the remaining iota of hope for a further interest rate cut, but it could see the Reserve Bank of Australia move to a bias to hike interest rates before year end.

According to RPData, house prices in the five major cities have risen a stonking 1.4 per cent so far in March (annualised pace of close to 20 per cent) and are now are up a solid 2.7 per cent year-to-date in 2013 (annualised pace of 12 per cent). It seems uncontroversial to be thinking, given this strength, that house prices will rise 10 per cent this year. The risk is building that the rise could be significantly more.

And when house prices pick up in Australia, they usually have a year where the rise is 15 to 20 per cent. With interest rates as low as they are now, the unemployment rate anchored at a remarkably low rate and real wages registering solid gains, there is no reason why there shouldn’t be a rise well above 10 per cent by year end.

It is important to again take account of the fact that there have been several years of weak housing construction, while at the same time there is still strong population growth. These dynamics of low supply and high demand are underpinning prices. With rents also relatively high and borrowing costs low, the motivation for people to buy is strong.

The base from which the current bullish outlook for house prices comes is important to recall. House prices fell moderately in 2011 and 2012 – the peak to trough decline during this time was around 7 per cent. This means that the first part of the current price rebound is only recapturing these losses. This translates to a picture where even with a 10 per cent rise in 2013, the rolling three-year gain will be a trifling 3 per cent per annum. This context is important for hosing down the house price bubble proponents or those who are taken with a phobia every time they see house prices tick higher. 

This fundamental background to house price changes makes it hard for the Australian house price bears to hold their ever erroneous view.

Another guide to the buoyancy on the housing market is the high level for auction clearance rates, particularly in Sydney and Melbourne. Since the start of the year, the auction clearance rates have generally been between 65 and 75 per cent, a success rate that is indicative of buoyant prices. This time it looks to be no different.

Also supporting house prices is the jump in wealth that has been delivered via the stock market surge since the middle of 2012.  The ASX has lifted around 25 per cent from the low point, which has added some $300 billion to the stock market’s capitalisation and simultaneously, boosted wealth that can be transferred to house prices. The correlation between household wealth and financial well-being and then house prices remains strong.

Further house prices gains are ahead and prices should remain strong at least until the Reserve Bank not only moves to a bias to tighten interest rates, but when it has hiked at least a couple of times.

While general inflation is low, the eurozone continues to provide headwinds and the Australian dollar is so high, those rate hikes are likely to be later rather than sooner. 

If the interest rate futures market is to be believed, interest rate hikes are not even on the agenda until well into 2014 and even then, no economists – even the headline grabbers – are forecasting even a 1 percentage point cumulative hiking scenario through to the end of 2014.

These market forecasts and the economists will inevitably be wrong and will be repriced, but interest rate hikes in the near term, say out six to nine months, are unlikely. 

It will take an unexpectedly hawkish stance for the Reserve Bank to arrest what is increasingly likely to be the next Australian house price boom, which looks to have started as 2012 came to a close.

One of the key bellwethers of the Australian dwelling  market, inner Sydney apartments, has turned dramatically. This big change has implications for Australian interest rates.

Suddenly, local buyers who have been dormant in the market are now clambering to buy because they think there is a profit to be made.

In less than three months the market price of a bottom of the range Meriton inner-Sydney apartment has risen 6 per cent from about $500,000 to around $530,000.

The Chinese, who were dominating the inner-city apartment market are still important buyers, but much less so than before. According to Meriton’s Harry Triguboff, local buyers have jumped from 15 to 40 per cent of the market.

What is happening in inner Sydney apartments underlines what Stephen Koukoulas concluded last week: that the days of interest rate reductions are coming to a close because what is happening in inner Sydney is being duplicated to a lesser degree in many other dwelling markets (Architects of a housing fortune, March 27).

Another rate reduction is unlikely today but remains on the Reserve Bank agenda. However, there is a danger that a rate cut may cause the enthusiastic profit-linked buying to become frenzied.

With the benefit of hindsight, it’s now clear that the Reserve Bank should have reduced rates much more quickly when it had the chance. By keeping official rates too high for too long, it boosted the Australian dollar. Now if speculation of steady to higher rates lifts the dollar further, Reserve Bank Governor Glenn Stevens will have to choose between an even higher dollar or the danger rampant housing speculation.

Given the long-term inflationary effects of an inner-city apartment frenzy he will probably choose the higher dollar.

By a staff reporter

The value of Australian homes continued to push higher in March, rising for the third consecutive month, according to a leading survey.

The RP Data-Rismark Home Value Index showed an average increase of home prices in the month of 1.3 per cent.

Year-on-year, the average home value lifted 2.4 per cent.

Perth recorded the highest level of growth over the month with house values surging 3.4 per cent, while Hobart and Darwin also booked solid gains, rising 2.5 per cent and 2.4 per cent respectively.

Adelaide was the only capital city that failed to record a rise, finishing the month flat.

In Sydney house prices rose 1.5  per cent in the month, while Melbourne grew 0.8 per cent and Brisbane increased 0.9 per cent.

Canberra added 0.4 per cent.

AAP

Property prices in Perth have reached record highs, with the average house in the West Australian capital now selling for $510,000.

David Airey, president of the Real Estate Institute of WA (REIWA), said there had been a two per cent increase on the median price from the December quarter, beating the previous record of $505,000 set in March 2010.

Data for the March quarter indicated while the proportion of house sales in Perth under $500,000 had fallen there was a marked increase in sales between $500,000 and $1 million.

The state's Office of State Revenue revealed in February the median purchase price for first home buyers was $425,000.

Last week, Australian Bureau of Statistics figures showed Perth had four of Australia's five most advantaged suburbs, with people flocking to the booming state in record numbers.

Macquarie Bank Ltd has significantly bolstered the number of staff charged with working alongside mortgage brokers as it looks to expand its mortgage business, according to The Australian Financial Review.

The bank has reportedly increased the number of business development managers working with brokers nationally from 13 to 21 in recent months.

Such a move is crucial to Macquarie's efforts to expand its mortgage business, as it lacks its own internal distribution network to sell mortgages.

Macquarie also reportedly raised the upfront commission paid to brokers to 0.65 of a percentage point, up 0.05 of a percentage point.

The bank has targeted cheap mortgage pricing as its primary avenue for boosting its home loans business, the AFR added.

In a sign that home insurance costs are set to rise further, Insurance Australia Group (IAG) says it expects its home insurance portfolio to rise by double-digit percentages for 2014-15, according to The Australian Financial Review.

The forecast from the chief executive of IAG's Australia Direct business, Andy Cornish, comes as IAG reported that home insurance premiums have been raised for at least 20 per cent of its customers in New South Wales.

“In FY14, I'm still expecting to see double-digit growth increases in home, much less in motor [which will be] low single digits,” Mr Cornish said, according to the AFR.

“But I think it will be less extreme – some people have seen routine price increases of 20, 30 per cent or more [in home cover]. I would see that it would be closer to 10 per cent.”

IAG reported a tripling of net profit to $461 million during the six months to December, thanks largely to fast-climbing premiums and a limited amount of weather-related damage.  

The federal government's significant investor programme has sparked interest from Chinese industrialists in investment bank Moelis & Co's $500 million property fund, according to The Australian Financial Review.

Although the programme, which allows investors access to visas for a minimum sum of $5 million, has not led to a flood of wealthy immigrants, the advisory firm's joint managing director in Australia, Andrew Martin, said the slowly developing Chinese investor relationships are likely to spread into other investment vehicles.

He told the newspaper that attracting Chinese millionaires to Australian investment schemes requires time-consuming relationship-building, but that once established those relationships produce interest in a range of investment vehicles.

“A lot of the business in China is referral so if you can gain the confidence of one family they tend to invest alongside their family members and associates,” Mr Martin told the AFR.

Mr Martin added that the visa programme could eventually produce a $20 billion dollar annual windfall for the Australian economy.