Kramont Realty Trust's announcement in late December that it will merge with Australia-based Centro Properties Ltd. in a $1.3 billion deal shows the growing influence of Australian investment on U.S. retail real estate. Centro is the third major Australian institutio — along with giant Westfield Group and newcomer Macquarie Bank — to create a beachhead in the U.S.
The firms have employed different structures for investing within the U.S., but all tap into Australia's ballooning limited property trust market. Under Australian law, employers are required to contribute to employee pension funds, many of which invest in real estate. Those contributions are set to increase in coming years. As a result, limited property trusts — Australia's versions of REITs — have been voraciously buying up real estate in Australia and abroad. Down Under, there isn't a lot of commercial real estate that isn't already in the hands of LPTs, which is forcing the funds to be more aggressive internationally.
“The LPTs are hunting for yield and really looking for acquisition opportunities to make their money work,” says James Fetgetter, chief executive of the Association of Foreign Investors in Real Estate, based in Washington D.C. “This is clearly a country that is going to provide an increasing amount of capital to the U.S. There's no reason for that to stop.”
Australian firms have spent more than $3 billion on U.S. retail assets in the past two years, according to Real Capital Analytics, and that doesn't take into account mergers such as the Centro/Kramont deal. Centro is making its investment through an entity called Centro Watt America REIT III LLC. That entity will be merged with Kramont. In addition, other affiliates of Centro will be merged into Kramont Operating Partnership LP and Montgomery CV Realty LP. Kramont owns 93 neighborhood and community centers with a combined 12.6 million square feet.
Centro previously had a small presence in the U.S. through ownership of 14 shopping centers in California with a total 3.1 million square feet of space and three power centers in Atlanta with a total 691,000 square feet. Centro's strategy has been to form a series of REITs. The first REIT owns the California portfolio. The second owns the Atlanta centers. And the third was formed for the Kramont deal.
Macquarie Bank has followed a different track. It has formed a series of limited property trusts through joint ventures with U.S. REITs. It has arrangements with Regency Centers and Developers Diversified Realty Corp. in retail. In fact, just days before Centro's announcement, Macquarie DDR added two centers to its portfolio. Macquarie DDR Trust is an Australian limited property trust whose assets were all transferred from DDR's portfolio. The relationship lets DDR retain management and a small ownership stake of the centers. Macquarie, in exchange for capital raised in Australia, gets majority stakes in the centers and cashes in on the properties' juicy yields. DDR has used that capital to help fund acquisition and development. Macquarie DDR Trust's portfolio includes 25 community centers containing more than 12 million square feet of space and worth more than $1 billion.
The pioneer for Aussie investment in the U.S. retail sector is Westfield Group, which has its own model. Rather than chopping its portfolio into smaller companies, Westfield combined all its worldwide holdings into a single entity earlier this year. Westfield Group, with holdings around the globe, is now an $18 billion giant. And unlike the other two, it has opted to play in the regional mall sector rather than in smaller properties. All three — Centro, Westfield and Macquarie — have an ever-increasing pool of capital and are likely to be aggressive buyers in 2005. Behind them are 27 limited property trusts in Australia. So others may follow suit.