AMP Office restructuring still disappointing: Tyson

By Jenny Ruth

Tuesday 28th September 2010

AMP Office Trust's restructuring proposal is an improvement on the status quo but is still disappointing, says Craig Tyson at ING New Zealand.

AMP proposes to change the trust's fee structure from the current flat 0.65% of total assets with no performance fee to 0.55% of total assets for the first $1 billion of total assets, dropping to 0.45% thereafter plus a fee for outperforming other property investment vehicles.

The performance fee will be 10% of the amount of outperformance, reset every two years but Tyson says a more appropriate reset period, given the underlying cycle of the trust's prime office buildings, would be five years.

"Given the nature of the fund, it could shoot the lights our for two years and then do very badly for a number of years," Tyson says.

The base fees could also be significantly lower, he says.

Goodman Property Trust, regarded as having the best management structure in the sector before Rural Equities, National Property Trust and DNZ Property Fund internalised their management contracts, currently charges 0.5% of total assets up to $500 million and 0.4% thereafter.

An independent report by Korda Mentha on the restructuring proposal says if the AMP trust was managed under Goodman's fee structure, its annual base management fee would bee $1.2 million, or 16%, lower than under the proposed changes.

If the AMP trust adopted Property for Industry's fee structure, its annual base management fee would be $1.8 million, or 24%, lower, Korda Mentha says. AMP Haumi Management manages the AMP trust while AMP Capital Investors manages PFI.

Tyson says the new structure still incentivises the manager to buy assets regardless of how they affect returns to investors.

The proposal also includes turning the trust into a company which would have a majority of independent directors, although the management contract would still be external.

Tyson says while he would have preferred management to be internalised, he wasn't expecting that to happen. "It's far too profitable for AMP. They don't want to sell it."

Buffy Gill, an analyst at Goldman Sachs & Partners New Zealand, says while most of the proposed changes are "pretty positive," a five-year reset period for the performance fee would have been better than two years.

When the office market recovers, the AMP trust is likely to benefit the most because of being a pure prime office buildings vehicle, Gill says.

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