The Property Finance Blog

The sun is out now in Cannes, and all of a sudden everyone is more cheery. Among the people I'm meeting, the big topic of debate appears to be development - principally how you finance it. With the market coming out of the downturn, the kind of higher risk/higher reward opportunities being offered by development seem to be back on people's radars, but the trouble is, the numbers often still don't really add up unless you can bring in debt or outside finance of some sort.

With this in mind, it was heartening to see Savills pointing out that development finance is definitely back on the agenda for banks - and with some interesting names in the frame for development lending, including both Lloyds and RBS. The corporate financiers I've spoken to out here are also reporting that developers have tasked them with going out to institutions to try to find forward funding for new schemes - radical in the current market, but a return to the norm when looked at in the longer term.

£32bn of property debt to refinance in the UK in 2010? Pah, forget about it, small beer, there's an average of €155bn of debt to roll over per year for the next three years, according to CBRE's European Commercial Real Estate Debt ViewPoint. And with many banks having lent across borders during the boom years, the problem can't be viewed on a parochial basis. Loans needing to be refinanced in Poland have an effect on the UK market, if the capital needed to roll them is then unavailable for UK borrowers. Savills might have pointed to an increased number of lenders looking at the UK market, but general reduced levels of liquidity will persist across the Continent for several years yet.

Of the €970bn of debt secured against European real estate, €207bn is severely distressed according to CBRE. Secured against secondary property and at high levels of leverage, this debt is seriously underwater. Regulators last week warned that banks are likely to face continued stress due to losses on commercial property loans, and it is this €207bn slug that will cause the problems. CBRE said that banks are unlikely to instigate masses of forced sales, largely as a result of government intervention. Good news if you're a borrower trying to hang on to your assets. Bad news if you're one of the players outlined in another CBRE report, their investor survey, that thinks 2010 is the ideal time to buy.

First impressions of mipim? The sun is not really out yet, the Croisette is not really buzzing, and you have to show your badge a hell of a lot more often. I wonder why that could be?

Liberty International today announced details of its proposed demerger, which will see the company split into two specialist retail companies.
Liberty will spin off its UK shopping centres, US business and Indian investments into a new REIT, Capital Shopping Centres.
The company also announced its full year results for the second half.
Here's what the brokers think of the company's news:

JPMorgan
Liberty Int: Weaker-than-expected results and demerger confirmed. Liberty Int reported an Adj NAV of 464p vs. JPMe 503p (-7.7%), Adj EPS of 18.3p vs. 17.6p and dividend of 16.5p (vs. JPMe 6.5p). Management makes a case for future yield compression by pointing to the yield spread. We see future valuation gains indeed, but the 5.7% initial yield on UK shopping centres (purchasers' costs included) does not strike us as very attractive. Separately, the company confirmed the demerger plans today and while we were unable to find costs associated with this, the proposal makes sense in our view. Overall: we believe potential valuation gains and merger benefits are largely priced in: UW. Risks to our view are better than expected capital growth and retail sales.

Now it has been given full EU approval, the giant Irish National Asset Management Association is starting to creak into action. By the end of this month, the loans of the top 10 borrowers within the €77bn scheme are set to be transferred.

Of this figure, around €16bn of loans are secured against UK property, and questions are starting to be asked about the property these loans are secured against. There is an increasing feeling that sales are far from unlikely. A lot of the land and development loans within Ireland are secured against farmland which, following the property crash, will never be developed out. The feeling is that in order to make a profit for the Irish taxpayer, the good stuff has to be sold, and probably sold soon. The good stuff that can be found in the UK.

A little taste of the debate going on across the Irish Sea can be found in the report here, from RTE, Ireland's equivalent of the BBC. The NAMA report starts at 14.35 through the video. You can have a chuckle at my good self about a minute in.

British Land announced today it has appointed Charles Maudsley as head of its £5.3bn retail business in the UK and Europe.

Last year, he was appointed as executive director for business expansion and will continue in this role.

BL chief executive, Chris Grigg, said, "I am delighted that Charles Maudsley is taking Board level responsibility for our largest single business. He is ideally suited to the challenge of taking our Retail business to the next level. His property experience and expertise will both complement and help further develop the deep pool of retail talent which we have here at British Land."

In an analyst note today, Harm Meijer from JPMorgan said: "We believe the appointment completes British Land's Board and that the company is not actively looking for additional Board members (anymore)."

Student accommodation provider Unite Group posted full year results today.

Analysts at JPMorgan have issued their opinions on the company's performance, saying the results were "weaker than expected".

"Unite reported FY09 results that were weaker than expected, with EPRA NAV of 265p, 8.6% below our forecast of 290p. Recurring profit turned positive at £0.6m (last year £5.4m loss), but was light of our £3.8m forecast. In addition, the company remains in a transition phase in which it will aim to acquire development sites and improve recurring income, and this will take some time. In this context, market expectations look too high (Bloomberg: 5 "buy" ratings, 1 "hold", no "sells"). We remain Neutral, given the 6.7% yield on the portfolio, 3-5% expected rental growth p.a. over three years, while the company has made a start in deploying its equity issue funds, securing 900 beds for delivery 2012/13," said analyst Harm Meijer.

This column appeared in yesterday's Sunday Times warning investors to "avoid" REITs.

"This is a sector that has rallied too far too fast and eventually the underlying weakness will shine through," it says.  

http://business.timesonline.co.uk/tol/business/columnists/article7043951.ece

SEGRO this morning issued its full year results reporting an increase in vacancies across the portfolio.
The company also issued a cautious statement on the prospects for the UK industrial sector.
Vacancy rates rose from 10.9% at 30 June 2009 to 13.5% at 31 December, partly due to SEGRO's acquisition of rival Brixton.
JPMorgan analyst Osmaan Malik gave his review of the company's results, saying the outlook was in line with expectations and there was no surprise on vacancy rates.
"SEGRO reported an NAV of 362p (10% NAV discount), as the portfolio in the UK (ex-Brixton) was revalued upwards by 9.8% in 2H (+8.9% inc Brixton) - comfortably beating IPD industrial which rose 7.0% over the same period," he said.
"We believe this was partly due to reversing the underperformance in 1H.
"All eyes are on vacancy, following the acquisition of Brixton's high vacancy portfolio.
"On a like for like basis, vacancy was stable over 2H, which we anticipated, but may disappoint the market looking for a quick improvement.
"Actual vacancy increased slightly due to sales of well let assets, and the group rate stands at 13.5% inc. Brixton.
"Management's target remains the same: to reduce the Brixton vacancy from 22% currently to 15% within 3 years, which would take the group rate from 13.5% to c.12%.
"Management wants to see this then reach 10%. Management did say they see lettings momentum picking up."

Research firm Capital Economics has released its latest roundup on the UK commercial property market for the past month.
Analyst Kelvin Davidson makes the following key points:

• The economy remains subdued, with the public finances in a poor state, retail sales declining sharply in January and unemployment rising again. All of this simply reinforces our view that GDP will grow by just 1% this year, with inflation falling from around the middle of 2010 and the recent rises in bond yields also likely to be reversed.
• Market intelligence over the past month showed that respondents to the latest REITA survey expect the current downturn in rental values to continue, albeit for a shorter period than in the early 1990s. Continued rises in retail availability support that view. Admittedly, one bright spot is that office takeup, especially in Central London, has begun to improve.
• The IPD Monthly Index showed that rental values fell further in January, though the monthly decline (0.2%) was the smallest since September 2008. Indeed, consistent with strong take-up, City and West End office rental values actually increased in January. Central London office rental values are set to rise further, but we still expect the IPD all-property average to fall by about 3% this year.
• The investment market upturn continued in January, albeit at a slower pace. IPD initial yields declined by 8bps (from slightly above 7% to slightly below), a smaller fall than the average of 20bps in each of the previous four months. The fading rally in real estate equity prices supports our view that the rebound in IPD capital values will have broadly ground to a halt by the middle of 2010.
• Propertydata.com figures showed that investment market activity declined sharply in January, from £4.3bn in December to £1.1bn. However, part of that decline was due simply to normal seasonal influences. Indeed, in our view, transactions activity is more likely to be strong than weak in the coming months, as institutions spend the large capital inflows that they have received from retail investors.