THE flurry of bids for Australia's property trusts is changing the nature of the sector.

Fund managers' fees are under pressure, with many having to move to performance-related fees as trusts begin to migrate into the hands of external managers.

The usually subdued A50bn sector has been busy in recent months, culminating this week in AMP Shopping Centre Trust's recommendation that its unitholders accept a A1,4bn all-cash bid from Westfield Trust, Australia's largest shopping centre developer and part of one of the world's biggest retail property groups.

Stockland, the Australian property developer, made an agreed A1,6bn offer for AMP Diversified Property Trust, while Investa Property Group made a hostile A1,52bn tilt at Principal Office Fund.

Analysts say the sector is in "a period of cannibalisation", with earnings stability and a favourable outlook for listed property trust profits driving the interest. The sector rose 5,03% last month, with the flurry of activity pushing the Australian stock exchange's property trust index to a record high.

In the year to the end of May, listed property trusts outperformed the S&P/ASX 200 by 22,5%. But, the consolidation has seen a move towards so-called "stapled" businesses, which combine a trust and a company.

The management of the trust is undertaken by the company a move away from traditional or "externally managed" trusts. Stockland is one such stapled business: it has a trust owning real estate investment products, but it also has a business involved in hotel development.

"So, it benefits from both sides of the market it has a stable cash flow smoothing out the volatility attached to the other side of the business, yet it has reasonably good yields as well as potential for it to experience real growth," said John Garimort, director of research at Property Investment Research in Melbourne.

Analysts said these trusts traded at lower yields than traditional trusts, and could also raise cheaper capital by gearing up for takeovers.

An externally managed trust is typified by Westfield Trust, which owns investment-grade real estate and gets its returns from the properties' rents.

Andrew Stubing of Deutsche Asset Management said this move away from externally managed trusts meant fund managers were having to fight for business.

Fund managers, used to taking about 60 basis points of funds under management, are now cutting base fees to about 40 basis points and adding a performance-linked component. "This is triggering a reduction in the fees for managing property trusts and making the market more aggressive," Stubing said.

Jun 25 2003 08:22:24:000AM Anna Fifield Business Day 1st Edition