Corporate property when to own when to lease

Tuesday, 01 February 2000

Garry Rothwell FAICD photo
Garry Rothwell FAICD
general manager, Westpac Property Portfolio

    Australian corporations who focus on shareholder wealth creation know that considerable capital can be tied up in property, and this property is often outside the corporation's main activity or expertise.

    In recent years many corporations, as well as the State and Commonwealth Governments, have divested several billion dollars worth of property to new owners. In many cases the divesting corporation then leased back the property. What is interesting is that a number of those decisions have eroded shareholder value. The decision to own or lease property can significantly affect a corporation's share price - making the wrong choice will damage shareholder wealth.

    In our experience, many property acquisition and divestment decisions are made with insufficiently rigorous analysis. Common reasons to divest property include:

    * "Property ownership is outside our core business".

    * "We can use the capital freed up from a property sale to reinvest in our main business."

    * "By selling this property, we can book a tidy profit this year."

    Conversely, common reasons to buy or retain property include:

    * "We must have control over our head office/factory/warehouses."

    * "A good property is always a good long term investment for the shareholders."

    * "Our balance sheet is strong, so we don't need to realise assets for cash."

    Unfortunately none of the reasons listed above to either retain or sell property is valid on a stand-alone basis. To make the right decision on property ownership, a company needs to ask one central question: "Given that we need to use this property in our core business, will our shareholders be richer if we own or if we lease the asset?"

    There are also a number of market constraints that further complicate the issue for corporates making own or lease decisions. These constraints include:

    * Property trusts are nearing their gearing constraints therefore limiting the market for significant asset disposal.

    * Low interest rates have lead to lower rental yields which have resulted in property trusts and securitised vehicles showing dilution in their investment returns

    * There is a lack of new building supply, particularly in markets such as the Melbourne CBD office market, and

    * The Australian property market is one of the most securitised markets in the world with the majority of property assets held by long-term investors.

    Westpac's Corporate Finance Property Group understands market constraints and investor needs and our approach to your property portfolio is always based on reaching the outcome that makes your shareholders as wealthy as possible. Arthur Psaltis, head of the Corporate Finance Property group suggests that in many cases, this will involve a partial or full property portfolio divestment. In at least as many cases, however, a corporation will find that continued property retention or a new purchase is the best shareholder wealth outcome. We have developed detailed and objective analytic tools to help you with these decisions.

    Westpac's Corporate Finance Property Group is well placed to assist corporations in making the right property decisions. Our Corporate Finance team possesses considerable property and capital markets experience and expertise. As part of Westpac Banking Corporation, we draw on 183 years of experience as a major property lender, owner, investor, and manager. We also draw on Westpac's experience and success in the Australian capital markets, where we are a leader in raising funds for property development and ownership.

    To arrange a meeting to discuss your property issues please contact Arthur Psaltis, on (02) 9284 8593 or e-mail


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