Keppel Australian JV Blocks Starwood’s A$485M Bid for Office REIT

Keppel Capital has set up a partnership with the sponsor of an A$688 million ($464.8 million) Australian office REIT that will allow the Temasek-backed asset manager to dig deeper into Australia’s metropolitan office market, according to a disclosure to the Singapore stock exchange, while frustrating a buyout bid by investor Barry Sternlicht’s Starwood Capital.

The real estate fund management division of Keppel Corporation has agreed to take a 50 percent stake in a joint venture that will acquire the manager of ASX-listed Australian Unity Office Fund (AOF) for A$400,000, with the Singaporean firm describing the deal as an opportunity to gain greater access to Australian real estate.

The transaction, which sets up a joint venture between the REIT’s sponsor, health insurance group Australian Unity, and Keppel Capital to control the listed trust’s responsible entity, effectively blocks a A$485 million ($326 million) hostile takeover bid by Starwood Capital of Australian Unity’s commercial property REIT

Deepening Keppel’s Australia Footprint

Keppel Corporation said in its exchange notice that its asset management arm has entered into a shareholders’ deed with Australian Unity Limited to form a 50:50 joint venture company formally known as Australian Unity Keppel Capital Pty Ltd to establish funds targeting office property in Australia.

“Our partnership with Australian Unity marks a significant milestone for Keppel Capital as we seek to deepen our Australian footprint,” said Keppel Capital’s CEO, Christina Tan, adding that Australian real estate “continues to be an attractive asset class, generating attractive income returns in a low yield environment.”

Keppel noted that both the joint venture and the REIT manager, AUIREL, will be associated companies the Temasek-backed group upon formation of the JV and completion of the acquisition.

Keppel did not mention any intent to invest in units in Australian Unity Office Fund, nor did the Singapore firm reveal any interest in equity in the listed trust.

The Singaporean group has been active in the Australian market over the past several years, including paying A$347.8 million in 2017 to buy a half-stake in a Melbourne office tower. However, a 2018 attempt by Keppel Capital to establish an A$1 billion retail fund with Australia’s Vicinity Centres has yet to bear fruit.

Keppel REIT now has an existing portfolio of five Australian office assets across metropolitan markets in Australia with a combined value of $1.2 billion as of a December 2018.

SG Firm Buys Half of REIT Manager, Gets One Board Seat

“We welcome Keppel Capital as a shareholder of AUIREL,” said Peter Day, independent chairman of AUIREL. “We note that AOF will remain an ASX-listed REIT, and the change in AUIREL’s ownership will not change AOF’s strategy, management agreements and governance structure, including the composition of the AUIREL Board which will continue to comprise a majority of independent directors, other than Keppel Capital being entitled to appoint a director to AUIREL.”

The health insurance group, which invests in property through its Australian Unity Investment Real Estate unit, said in a separate statement that the formation of the joint venture was unrelated to Starwood’s 29 January offer of A$2.98 per unit of the REIT and was the result of “a number of months of confidential detailed discussion and negotiation between Australian Unity and Keppel Capital”.

Australian Unity noted in a company announcement regarding the change of AUIREL’s ownership that Starwood’s intended offer was subject to a number of conditions including that a change of control would not occur, which would now not be satisfied.

Aussie Investment Fund Finds White Knight

Keppel has emerged as a white knight after several prior efforts by Starwood to buy out the REIT, with the most recent attempt prior to last month coming in 2018.

A separate takeover bid by Australian property investment houses Charter Hall and Abacus was stymied just over two months ago when the A$495 million offer was rejected by a minority of unitholders including Melbourne-based multi-family office Hume Partners.

Australian Unity issued a statement following the scuttled bid saying that it was not working in concert with Hume Partners.

Gaining Control of a A$668M REIT

Publicly listed on the Australian Stock Exchange in 2016, the REIT consists of nine office assets with a combined net lettable area of 107,668 square metres (1.2 million square feet) in Australian cities including Melbourne, Parramatta, Brisbane, and Sydney.

With a portfolio value of A$668 million, the properties generate a passing annual rental income less expenses of A$58 million.

The portfolio’s occupancy rate was 95.3 percent as of 30 June last year with a weighted average lease to expiry of 3.5 years and a weighted capitalisation rate of 6.2 percent.