Bond issues and new capital sources are helping property firms to refinance, writes Alex Catalan
These are tough times for European property companies. Except in a few hotspots, markets are still clawing their way back from their 2009 slump. The economic outlook is cloudy, putting pressure on rents and prices; JPMorgan expects UK property values – and those of European shopping centres – to fall another 4% over the next 12 months.
But there is a brighter side to this picture. The cost of debt remains low and property companies have been busy re-organising and renegotiating their financing. Loan-to-value ratios have come back down (see graph). “There is a consensus in favour of companies sticking to the 30-40 LTV range, which is not that different from the historic norm,” notes Martin Allen, property analyst at Deutsche Bank.
For companies with good portfolios, good management and a convincing investment story, capital is out there. Its providers are more cautious, but encouragingly, capital flows into the sector seem to have increased this year. So far, the listed companies in EPRA’s index have raised €12.3bn, issuing equity and bonds, 78% more than in 2011 (see graph).
There are also new sources of debt and equity opening up: insurance company lenders, debt funds and private equity providers. These are harder to quantify and some are only just getting started, but they are helping property companies to wean themselves off over-dependence on banks.
In the bond markets, property companies have issued traditional corporate bonds and convertibles, US private placements and, most recently, in the UK, retail bonds (see table). The biggest chunks of the €7.9bn of bonds issued by EPRA-index companies have been in France and the UK. And, it should be noted, one company – Unibail – accounts for a third of this issuance.
Convertible bonds bonanza
Unibail, British Land and Capital Shopping Centres all issued sizeable convertible bonds in September, when good-quality product was in relatively short supply (see table below).
“Convertibles are an attractive form of debt,” says Allen. “Some property companies don’t have a window to issue equity. So using a convertible bond that might, under certain circumstances, convert to equity is one way for companies to expand their equity base, have some very cheap debt and diversify their funding away from banks.”
A new source of debt being tapped by UK companies is retail bonds marketed to the general public (see pp20-21). “The difference between the 2.25% Unibail is paying for its corporate bond and the 6% Work-space is paying on its retail bond is a measure of how big an advantage it is today to have a large company, one that the bond market likes,” notes Allen.
“The 6% on Workspace’s retail bond is not dissimilar to what it is paying on its bank debt, but it is diversifying away from banks and may be slightly longer term. So it’s still a good deal for them.”
Alex Moss, founder of advisory firm Consilia Capital, thinks companies, particularly UK REITs, will need to manage their gearing more actively than before. “Property companies have been poor at managing loan-to-value ratios on the liability side of the balance sheet,” he says.
A different financing model
“If you’re starting to look more in terms of long-term cash flow and distributions to shareholders, as opposed to immediately net- asset-value-accretive or dilutive, that leads to different financing decisions. It moves you more to the equity model and content and away from debt in the balance sheet.”
As for the equity side of the equation, the public markets are still not very keen on property companies. That said, EPRA’s European group has raised €4.3bn via share issues this year – 40% up on 2011 and the most since the rescue rights issues of 2009.
In the UK, except for London specialists, most REIT shares are still trading at double figure discounts to net asset values. Investors aren’t yet convinced that a turn in the market is nigh and need to know that money raised by REITs will be spent on the right things. For example, Capital & Counties recently raised £140m to invest in its holdings in London’s Covent Garden, including high-end residential development.
Deutsche Bank’s Allen sees potential for a “virtuous circle”, if and when UK property majors’ share prices rise to equal their net asset values.
Given the large spread between yields on good-quality properties and the UK property majors’ marginal cost of debt which Allen calculates to be 2.25% – they could issue equity to partly fund acquisitions that would boost both earnings per share and net asset values.
Since the financial crisis, investors have been looking for low gearing, and income. In an environment of economic uncertainty and very limited, if any, capital growth, we may see European companies moving towards more equity and lower gearing.