GPT’s office holdings and new Melbourne tower questioned normally staid AGM

GPT Group is going deeper into funds management but it was the diversified property trust’s office exposure which fired up investors on Thursday.

GPT Group chief executive Russell Proutt.

Shareholder activist David Kingston has again questioned the performance of diversified property trust the GPT Group as it seeks to shift from a focus on being a landlord and into an investment management operation.

Mr Kingston used the company’s annual meeting to air concerns that the company’s record as an owner of office towers had meant it had taken heavy losses, and to quiz it about a Melbourne development its main wholesale fund was undertaking.

The former Rothschild investment banker has become a regular at meetings of major property companies, questioning their strategy and capital allocation and bringing his boardroom experience to the normally staid public forums.

He and son Charlie Kingston, both of K Capital, have been a presence at meetings held by companies, ranging from shopping centre owner the Scentre Group, to property funds managers Charter Hall and HMC Capital. The investment veteran last year even queried whether GPT was going too “woke” at the expense of its shareholders.

K Capital chairman David Kingston.

David Kingston questioned whether GPT would receive sufficient returns from the development of Melbourne’s 51 Flinders Street, that will become home to communications firm WPP. He also pressed GPT on its shift from its passive ownership style and into development and funds management.

Mr Kingston said the shift from direct balance-sheet property holdings to co-investments was positive. But he said that a lot of real estate investment trusts had failed to deliver high enough returns over the longer term.

“In my view, most developments, particularly office developments, destroy a lot of dollars on poorly assessed new development projects,” he said.

Mr Kingston said that, on the whiteboard, returns could seem okay but once construction costs, timeline overruns, holding costs, management costs, rent and fit-out incentives were taken into account then returns are often very poor.

He said that GPT seemed to be showing discipline by selling offices and weak projects, and had a strong reputation for good governance.

Inside the redeveloped Queen and Collins Tower in Melbourne.

Mr Kingston said that after “nasty” writedowns on offices over the past two years, GPT’s assets were now at realistic levels, but he said “the big challenge is to consistently deliver total securityholder returns, which requires not just distributions annually, but also capital growth, which has been absent in the last 10 years”.

He also queried the real returns from offices once incentives of about 35 per cent were taken into account, along with the shift to work from home and artificial intelligence.

GPT chairman Vickki McFadden agreed that real estate investment trusts were trading at a discount for net tangible assets. But she said the company was trying to get the value recognised “for our funds management and investment management platform going forward”.

She said that nobody predicted the arrival of Covid-19 or the work-from-home scenario that had caused large tenants in particular to reconsider their needs.

“We also know that the office sector in particular is very cyclical, and that cycle is dictated both by supply, demand and then cap rates, driven by interest rates that have an impact on valuation,” she said.

Ms McFadden said the Flinders Street development was in a premium part of the Melbourne CBD and would not be a loss maker. She expressed confidence in GPT chief executive Russell Proutt but declined to specify returns the company expects.

GPT chairman Vickki McFadden. Picture: John Feder

“I’m not going to put out a forecast or a target … we are not in a position to do that but I am confident that the GPT team can, with this refreshed strategy, deliver an enhanced return and value to our securityholders,” she said.

Ms McFadden said there would be a shift in the capital mix away from assets mainly being on balance sheet to investments with aligned capital partners.

She said that the timing of the shift would be up to market conditions, the willingness of capital partners, and the property cycle.

“We are seeing really green shoots of that capital appetite based on the performance of our asset management capabilities and performance,” Ms McFadden said.

Originally published as GPT’s office holdings and new Melbourne tower questioned normally staid AGM