Three property pioneers join the retail bonds revolution

PHP, CLS and Workspace tap new funding source for mid-sized property firms, writes Jane Roberts

The retail bond market is a brand new source of finance for real estate and since Primary Healthcare Properties blazed the trail, successfully closing a £75m issue in July, there have been another two issues from property companies, with more lining up to enter the market.

Retail bond issues are particularly suitable for medium-sized property companies, which might find the traditional route of issuing corporate bonds too difficult or expensive to access. PHP’s issue was followed a month later with issues from CLS Holdings and then Workspace. Between them the three companies raised £197.5m.

Now St Modwen Property is carrying  out a roadshow for an issue with retail stockbrokers and wealth managers, which closes by 31 October (see news), while Quintain is rumoured to be looking and Raven Russia was recently reported to be researching this option.

As the name suggests, the debt in these issues is provided not by big institutions but by retail investors looking for good yields. They can invest relatively small amounts compared with the corporate bond market there is a £10,000 maximum denomination, but the minimum is often much smaller than that – and accrue daily interest on their notes.

Retail bonds have the additional advantage of being a liquid product, usually listed on the London Stock Exchange’s Order Book for Retail Bonds (ORB) trading platform. The entire market is still in its infancy, having been launched less than three years ago, but has been picking up pace in 2012;  more than £900m has been raised so far this year in 10 new issues.

Big increase in issuance

Investec – which was joint lead manager with Numis for Workspace’s retail bond issue and is advising St Modwen on its planned issue – says there has been a greater than 40% increase in the number of deals so far this year, compared to full  issuance for last year.

Last week the bank reported feedback from talks with the main brokers which suggested that investors are keen to see the market continue to develop.

Investors are looking for shorter durations because of concerns that interest rates will rise in three years’ time – a good yield,  deals offering possible protection from inflation (especially if more quantitative easing is announced), and credit ratings. The latter may not be a concern for many retail investors, but are required by some funds, Investec reports.

Investec also picks up on a particular demand for property. “Some of the big distributors’ in-house recommendations are to be overweight in the property sectors. Although there have been a number of deals in this sector, demand remains strong,” Investec says.

Rating is not an issue

Retail investors do not seem to have been put off by the fact that the property company issues so far have been unrated and unsecured. Richard Tice, chief executive of CLS, says that at its roadshows for investors, “we said: ‘Focus on the company and its performance, because ratings, as we’ve seen over the past few years, don’t always mean much’.”

CLS’s and Workspace’s issues had maximum loan-to-value and minimum interest cover covenants, designed to mitigate the fact that their bonds are unsecured, meaning investors rank behind senior secured lenders to the companies.


The downside for the property sector is that not everyone can tap this market. The private companies that have issued retail bonds are household names such as John Lewis. “However, if you are listed, with a good track record and story to tell and you are a mid-sized company, I think it is really relevant,” says Tice. The pricing was different for each of the property company issues: PHP’s bond pays 5.375%, CLS’s 5.5%, while Workspace’s was the most expensive, at 6%.

“We wanted to make sure it would appeal to investors and would trade well on the market at or above par,” Workspace’s finance director Graham Clemett told Real Estate Capital last month, commenting on the pricing. “We consulted with a wide range of brokers and their feedback was that this was the right sort of level. We didn’t want to price it too keenly, partly because we see this as a long-term way to raise more money in future.”

Like PHP, which collects 90% of the £32m of rental income in its 164-property portfolio from doctors’ surgeries and health centres, Workspace has a clear ‘story’ for investors; the group leases space in London to new and growing small-to-medium-sized enterprises.

However, Workspace’s cashflows are not as long-dated as PHP’s or those of CLS, so perhaps its seven-year issue needed “a coupon-kicker”. At £57.5m, the amount the company raised was at the low end of its stated £50m-£75m target range.

Neither St Modwen or Quintain can boast income profiles as strong as the first property companies to raise capital in this market, so they will have to refine their pitches to investors accordingly. As in the other bond markets, timing  is important to maximise take up from investors. St Modwen is up against another proposed issue, from the London Stock Exchange itself. According to Investec, the LSE transaction is expected to be large, at £150m-£200m.

A stronger market than a year ago

However, the bank points out that last December, Tesco and ICG were in the market at the same time and both deals were successfully placed. As a recent note, from Investec points out: “Nearly a year  on, we face the same situation of two deals potentially coming to market at the same time. We think that the market is stronger than a year ago and we continue to see demand from brokers for new issuers that will enable further diversification.”

The LSE transaction is likely to be a nine-year bond and, at an expected yield of about 4.5%, the first issue at below 5% in this market – in any sector. Even Tesco didn’t go lower than that when it raised capital for Tesco Bank and the issue opened on the ‘grey’ market at 4.5%, suggesting it was underpriced. However, supporters are convinced that, as the market evolves and matures and the variations between issues increases, so the coupon pricing will vary more too.