The Bledisloe Group has built a strong suite of brands across Australia and New Zealand to emerge as New Zealand’s largest provider of funeral services and as one of the top three operators in several key Australian markets. It will be acquired by InvoCare Limited (ASX code: IVC) for A$114 million.

Jon Schahinger, Managing Director of ING Private Equity Access Limited (ING PEAL) commented that the sale was a great example of a classic private equity strategy – “buy and build” in a disaggregated industry.

“Propel Investments identified the funerals sector as one well suited to a buy and build strategy and acquired Bledisloe in December 2005. It subsequently grew the business organically and via acquisitions in both Australia and New Zealand. The acquisition by InvoCare represents another successful investment for Propel and ING PEAL shareholders,” said Mr Schahinger.

The acquisition will be funded through cash and escrowed shares in InvoCare and is expected to be completed by March 2011. The transaction was at a price above its recent carrying value and should result in Propel achieving a 3.3 times return on its investment.

ING PEAL is expecting to receive more than $2.5 million.

In other portfolio news, a venture capital investment of private equity manager CM Capital, Piedmont Pharmaceuticals (www.piedmontpharma.com), has signed a major, long-term deal with Bayer Animal Health for its chewable drug delivery innovations. This will enable CM Capital 4 Fund to make its first return of cash to its investors, including ING PEAL. CM Capital will continue to own 28% of Piedmont which it is holding with expectations of significant upside potential.

More details on ING Private Equity Access Limited and its investments can be found at www.ingpeal.com.au.

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• Strong returns by listed property companies during the month were mainly driven by positive momentum in most global equity markets.
• The prospect of further quantitative easing in the US would be beneficial to property companies. Asset valuations would improve because the lower risk-free rate tends to cause capitalisation rates to have adownward bias.
• We continue to hold a positive bias to the North American and Asia-Pacific regions and a cautious stance towards property companies in Europe, which we expect to continue to lag despite the outperformance during the September quarter.

Market Review

Strong returns were generated by property companies during the quarter in virtually all major geographies. European property companies generated the highest total returns, up more than 18%, based in part on the positive response to bank stress tests in July followed by Basel III pronouncements in September, both of which were deemed to be less stringent than expected. Property companies have benefited from lower bond yields, which have improved the yield spread versus fixed-income alternatives as well as improving earnings prospects.

Macro-economic news continues to drive sentiment

Macro-economic news continues to confound investors who are seeking smooth, sustainable trends. Economic releases have been inconsistent as they appear to vacillate. As an example, US existing home sales plunged 27% in July from a month earlier to an 11-year low as demand was pushed forward from the anticipated expiration of the first-time home buyer’s tax credit, only to rebound 7.6% in August to a seasonally adjusted annual rate of 4.13 million sales.

While up nicely from the 3.84 million annualized rate in July, this remains 19 percent below the 5.10 million-unit pace in August 2009 (so good news at first glance turns out to be mixed).

One clear theme for the quarter, however, was the consistently benign nature of the review of European banks. European bank stress tests, released on July 23, were less stringent than expected as only seven of the 91 banks tested failed. Separately, the Basel III rules announced in September were more accommodating than expected as banks will have the better part of a decade to meet the new requirements. This measure has provided relief for European banks as well as industries deemed to be capital users, including property companies. Equities rallied globally on this news.

Language from the US Federal Reserve Bank (the Fed) in September indicating that it’s open to further quantitative easing also contributed to the rally during the quarter. Taken with economic growth in the Asia-Pacific (ex-Japan) region which remains robust, the case for a continued global economic recovery appears to remain intact.

The implications of potential quantitative easing

Probably the most important recent event during the quarter was the change in language from the Fed’s rate-setting Federal Open Market Committee. The Committee in its September statement made it clear that further quantitative easing is a possibility as it stated that it “is prepared to provide additional accommodation if needed to support the economic recovery.”

As background, quantitative easing has typically been in the form of the Fed expanding its balance sheet by purchasing Treasuries and potentially mortgage-backed securities in the market in an effort to reduce these “reference rates” for a variety of fixed income instruments.

The ultimate goal is to reduce the cost of private sector borrowing in order to spur economic growth. The impact on real estate companies is generally very positive both with respect to asset valuations as well as cash flow.

Asset valuations are improved since a lower risk-free rate tends to cause capitalisation rates to have a downward bias, which causes the value of an in-place cash flow to rise.

Cap rates decrease since investors are able to afford to pay more for a given level of earnings while maintaining the same spread to the cost of capital (which has gone down because debt costs have come down and possibly the cost of equity, too).

Cash flows tend to improve as the cost of borrowing becomes cheaper.

External growth (acquisitions/development) also tends to pencil out more easily as the overall cost of capital goes down.

Taken together or even separately, quantitative easing is clearly very beneficial to real estate companies.

While the Fed has not engaged in another round of quantitative easing, it has made it clear that it is ready and able to engage if and when needed. This would be positive for real estate stocks.

Low rates and high spreads improved real estate valuations

Talk of quantitative easing and fears of recession are likely to keep interest rates low in the near term. As stated previously, yield spreads for real estate companies versus fixed-income alternatives remain attractive. Even with the rally in real estate stocks in September, implied cap rates generally represent significant positive spreads to local bond yields.

For investors who expect a continuation of low yields and low returns, it is logical that real estate values have been going up and may continue to do so. In the US, the implied real estate yield on REITs is 6.5%, which implies a spread at the end of September of 90 basis points to the 5.6% yield on Baa corporate bonds (the longest duration corporate bond composite of 25-30 year paper). This remains above the
average spread, which according to data compiled by Green Street Advisors has averaged 80 basis points since 1994.

Green Street Advisors has also estimated that commercial property values in the US have risen by 25% in the last 12 months and almost 30% from the trough values in May 2009. Values are still more than 20% below the peak levels reached in late 2007.

Other markets have followed a similar trend. The following table shows real estate yields (i.e., cap rates) implied by current REIT pricing around the world, as well as the NAV premium or discount, which reflects our estimate of implied pricing versus prevailing private market valuations for comparable real estate portfolios. We currently estimate that global listed property stocks trade, on a market cap weighted average basis, at a 3% discount to private market real estate values.

Third quarter earnings season is upon us

Third quarter earnings reports should evidence continued improvement as we expect many of the themes seen during 2Q10 to continue to play out:

1. improving property fundamentals;
2. wide-open access to debt and equity capital at competitive costs;
3. increasing transaction volumes and;
4. firming property transaction yields.

If anything, we expect the “new news” to be that yields have room to compress further as a result of bond yields, which have headed lower over the past few months and the Fed which has made it clear that it would like to keep yields low over the foreseeable future.

Property companies will continue to be able to reduce their cost of capital via a lower cost of debt as refinancing improves the prospects for positive spread investing. We expect low yields to continue to underpin property values.

OUTLOOK

Improving fundamentals portend positive earnings growth in 2011

We believe real estate companies will be able to deliver modest growth in earnings in the current environment. We look for a global weighted average growth rate for property company earnings of 7% in 2011. In the meantime, the unusually wide spreads between real estate yields and bond yields suggest that real estate assets are still attractively valued. If yields remain low, then real estate values if anything are likely to improve.

The path forward

We continue to retain the view we had at the beginning of the year, but with a few caveats. We continue to hold a positive bias to the North American and Asia-Pacific regions and a cautious stance towards property companies in Europe, which we expect to continue to lag despite the outperformance during the quarter.

By property type, we remain overweight sectors which stand to benefit from an economic recovery, including the shorter lease length hotel and apartment sectors as well as certain office markets in the Asia Pacific region. We remain underweight property types which react more slowly to economic recovery including healthcare and most office markets in North America and Europe.

Our outlook remains predicated on the assumption of gradual but steady global economic growth.

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Investor sentiment in Australia is on the rise and there is a markedly more bullish attitude to Australian equities, according to the quarterly ING Investor Dashboard Sentiment Index released today. However, it seems investors are not acting on this more positive view, still favouring cash and gold deposits over shares.

The survey measures investor sentiment across 12 countries in the Asia Pacific region, focusing on changes in market sentiment, investment attitudes, investment performance and the financial situation of 3,755 investors. These factors are quantified and averaged resulting in a sentiment score. The Australian portion of the survey was conducted amongst 313 investors with liquid assets of US$100,000 or above.

Sentiment in Australia improved after plunging to a low in last quarter’s survey, scoring 135 out of 200 this quarter, well above the 113 of last quarter. However Australia is still lagging against its neighbours and was the third most negative country in the pan-Asian region behind Japan and Korea. Sentiment is also far behind some countries such as India, which was the most positive in the region with a score of 175, and financial centres like Hong Kong which scored 151.

Investors were also more bullish towards Australian equities with 84% thinking the market will either rise or remain stable. Last quarter 39% thought it would rise and 26% said it would stay the same. Investors also believe the stock market will increase by 6.42% over the next three months.

“It is encouraging that sentiment is picking up in Australia, albeit on a lag with Asia, particularly in the equity market where we are seeing an increasingly positive attitude,” said Jim McKay, head of sales for INGIM.

Cashing in

Yet despite this bullish view of equities, when it comes to deciding where to invest, cash and gold are still the favoured option. Gold scored 50 points when rated as an investment while cash deposits scored 31 and local stocks only 23.

Cash was also perceived as the best investment to take advantage of domestic interest rates and was chosen by 55% of respondents, compared to 27% selecting stocks. Similarly, cash and gold were considered the best investments to protect against the European debt crisis with 33% and 44% nominating them respectively.

When asked where they would invest on the risk/reward spectrum, there was a definite weighting towards the safer end. Low risk/return investments such as medium growth managed funds and cash were favourable for 64% of respondents and unfavourable for only 7%, compared to only 23% seeing merit in high/risk return investments like derivatives and 38% finding them unfavourable.

“It is interesting that there seems to be a disconnect between what investors are thinking and what they are doing,” said Mr McKay. “The fact that they expect the equity market to improve, yet prefer cash and gold, perhaps shows that continued volatility in the markets is still making them nervous.”

Australia robust while US economy casts shadow

Most Australians (79%) continue to predict that domestic inflation is on the rise, similar to 78% last quarter, reflecting the ongoing strength in the Australian economy.

Australians also found ways to take advantage of their strengthening currency, with many investors saying foreign currency is a good investment.

“As we all know the Australian dollar has continued strengthening, reaching almost unprecedented highs, and it is interesting to see Australians considering taking advantage of the rising Australian dollar by investing in foreign assets,” Mr McKay said.

When it comes to currency, Australians were also sceptical on the US dollar, with only 10% expecting it to appreciate and 49% expecting it to depreciate further.

In fact Australia had one of the most negative views on the US economic situation of the countries surveyed across pan-Asia, with only 27% thinking it will improve this quarter, compared to 31% last quarter. More than half, 62%, thought it would take three months or longer to recover. Thirty one percent thought US interest rates will rise and 55% thought they would stay the same next year
“With all these pressures it is not surprising investors are still attracted to safer assets, despite predicting increasing stock market strength. Yet this overly cautious attitude could cause them to miss out on opportunities. INGIM sees volatile markets creating good opportunities for quality active managers,” said Mr McKay.

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ING Investment Management (INGIM) Australia has continued to expand its push into the wholesale intermediary market with the appointment of Natalie Grey as its Northern Region Manager.

Based in Sydney, Ms Grey will be responsible for building the organisation’s presence in the financial adviser markets in New South Wales, the ACT and Queensland.

Ms Grey joins INGIM from AMP Capital Investors where she most recently held the position of state manager for New South Wales and the Australian Capital Territory. Ms Grey previously held key sales and business development roles at ABN Amro Asset Management and Commonwealth Bank.

INGIM has also announced the appointment of Lucie Douez as Business Development Manager for the Southern Region. Ms Douez will be based in INGIM’s newly established sales office in Melbourne and joins the firm from Goldman Sachs JBWere. She will report to Stuart Devlin, INGIM’s recently appointed Southern Region Manager.

Jim McKay, Head of Sales at INGIM Australia, said the appointments bolstered INGIM’s presence in the wholesale intermediary market.

“I am pleased with the progress we are making in expanding our business development and distribution teams across the regions. Plans are in place to continue to bring some new and exciting products to market in the coming months in addition to our highly rated Alpha Plus and Extended Alpha Australian Share and Global Property Securities funds,” Mr McKay said.

“The sale of ING Group’s holding in the ING Australia joint venture to ANZ Bank in late 2009 has resulted in INGIM being able to form direct relationships with the advising community for the first time. This segment of the market is a key area of focus for INGIM’s local strategy and we look forward to announcing further additions to our team as part of our plans to deliver a new servicing model for financial advisers,” he added.

These announcements form a key part of INGIM’s strategy to accelerate and grow its presence in Australia as the provider of investment management capabilities to the local market under the ING brand.

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