August 2009 Archives

About an hour ago Songbird Estates, the listed company that owns 60% of Canary Wharf Group, announced that a group of investors, mostly existing shareholders, are backing an equity raising so that it can buy back and repay an £880m loan from Citi that is set to breach covenants.

One of the most interesting things about the deal is that one of its underwriters is CIC, the giant Chinese sovereign wealth fund that controls more than $200bn of assets, mainly US dollar reserves.

Property has long hoped that sovereign wealth would help bail it out, and the biggest beast of all is starting to flex its muscles. CIC has recently invested in Aussie firm Goodman, and also put up $800m of equity for Morgan Stanley's seventh global real estate fund. 

The biggest piece of news for the commercial property sector in the past month - according to research firm Capital Economics - is that IPD all property initial yields edged lower in July and total returns for the month were positive.
In its monthly commercial property round-up, the usually downbeat analysts at Capital Economics said the correction in capital values "is now all but over", and this would allow total returns to continue to improve in the coming months.
Despite the good news, the firm said the IPD Monthly Index showed that all-property rental values were down by almost 8% in the year to July and were likely to continue to fall this year and into 2010.
"The office sector continues to underperform, though the pace of decline in rental values in this sector has eased in the past few months," the company said.
Other property news out during the month included figures from Propertydata.com showing that investment market activity fell in July to £1.2bn, from £2.3bn in June.
But, despite the fall, Capital Economics believes that transactions have now reached a floor.
And, so as not to paint too bright a picture, the research firm added that the outlook for the occupier market remains downbeat with the Bank of England's Agents' survey showing while the pace of job losses may be easing, firms in the manufacturing and services sectors have further job cuts planned.

Some investors I spoke to worried that Segro might be 'doing a Lloyds TSB' in its takeover of rival Brixton; that is, destabilising its own balance sheet, which had recently been sured up by a rights issue, by taking on the debt of a rival that was a lot more highly leveraged.

But a quick look at Segro's interim results shows that Ian Coull and his board have played it to perfection. 

It was a green day for some listed UK property stocks yesterday with renewed takeover talk among traders.
Hammerson outperformed its peers, jumping 2%, amid speculation it could receive a takeover approach.
But the day's biggest surprise was Minerva, which saw its share price skyrocket 41% to 28.5p on rumours the company had secured a tenant for its Walbrook development currently under construction in the City.
The company has seen similar surges earlier this month on talk of a bid approach from Limitless and hopes of a debt agreement.
But, despite all the talk, traders are apparently sceptical, saying it's hard to read much into the rise as Minerva is an illiquid stock with one shareholder controlling 30% of the company.

A little tidbit of info about the Government's upcoming Asset Protection Scheme which will guarantee losses on loans for Royal Bank of Scotland and Lloyds Banking Group, including a big chunk of their combined £97bn of UK commercial property loans.

I understand that once the scheme is up and running later this year, you the borrower will never know if your loan is covered by the scheme or not. That shouldn't really make much of a difference, seeing that the bank should still be aiming to minimise its losses, and that should involve working with the borrower.

But since one investor told me earlier this year they think they had the plug pulled on them because they because their loan was heading for the APS, some people might be a bit uneasy at the thought of being part of the scheme and not knowing about it.

  After jumping ship from US investment bank Citi, property analyst Alan Carter and his team headed over to Evolution, and Carter is back with his usual witty and provocative take on the market.

Following the recent sharp rise in property shares, which has seen the FTSE/EPRA/NAREIT UK index rise 24% since the start of July, Carter entitles his latest missive "The Grand Old Duke of York". Shares have marched up to the top of the hill, so will they be marched back down again?

With yet more talk that Blackstone is in discussions to buy a 50% stake in British Land's Broadgate office complex, analysts at JPMorgan think British Land should embark on a second equity raising to go on a spending spree.

In his daily update on the property sector, analyst Harm Meijer says despite the significant interest in the rumours surrounding British Land, he thinks it would be more interesting to start a discussion about BL issuing equity.  

The past week we have seen the release of two key property indices - the CBRE Monthly Index and the IPD UK Monthly Index.

CBRE's data for July reported a capital value increase of 0.2% - the first positive move since the start of the downturn in June 2007.

IPD's index produced a very slight capital value fall of -0.1%, compared with -0.9% in June.

The data from both firms shows the continued easing in the pace of decline and that we have possibly turned a corner.

If the equity in Broadgate was valued at 30 June at £195m, why would Blackstone (or anyone else) pay £150m for a 50% stake?

Update: As well as this, there are debt repayments of £91m due over the next two years to take into account, as well as significant (£100m+++) capital expenditure on refurbishment over the next five years. That is why BL would sell, even at the trough of the market, but makes it hard for potential buyers to make the numbers stack up.

Its the classic question of what happens when an unstoppable force meets an immovable object? As EG revealed after digging through Royal Bank of Scotland's 205 page results two Fridays ago, the bank is set to offload £34bn of its UK property loans as it seeks to reduce its exposure to the sector and trim its balance sheet.

Now sources were quick to point out that the bank will keep hold of performing loans made to good customers, and that the government's Asset Protection Scheme will allow it to undertake the unwinding over the next three to five years, and minimise its own losses as it sells down loans or chooses not ro refinance positions.

  The sun is shining for the last time this summer, and sap in the City is running high, with bid rumours circulating that a supergroup comprising Lakshmi Mittal and the Abu Dhabi royal family is preparing to take down British Land for £10bn.

Shares in the company are up 4.5% to 515p (well short of the mooted 600p offer), dragging the rest of the sector higher. Likelihood of of a bid materialising, and ultimately proving successful? JP Morgan think its a bit of a silly-season special:

We are not going to say that takeovers are 100% ruled out, but this looks odd to us. The FT mentions a potential takeover bid of 600p per share for British Land, which would imply an implied net yield of 5.5%, dividend yield of 4.3% and premium to latest NAV of 51%. Not exactly a knockdown price. But also just think about it: do these companies really want to be taken over after this downturn, recent equity raisings and long history?

Analysts at JPMorgan have come up with a nifty way of gauging the health of the nation - ask cabdrivers and shopkeepers how business is going.

And they say recent talk of green shoots may be premature. Instead, they've titled their little report "Red Shoots".

Somehow I doubt that the "survey" is particularly thorough, but it still makes for interesting reading.

Analyst Harm Meijer says taxi drivers are saying that despite business usually being quiet at this time of year, it is now very quiet - or more of a "never seen this before" type of quiet.

Ratings agency Moody's spent the end of last week combing through the various commercial mortgage-backed securities debt packages, if the glut of e-mails on potential downgrades I received this morning is anything to go by.

Most interesting were a couple potential downgrades of class A bonds secured against shopping centres owned by Liberty International, including £628m of debt secured against the flagship Lakeside shopping centre in Essex.

With listed property shares having risen 60% since March lows, one of property's more bullish analysts advised investors to be on their guard today.

Nomura Real Estate downgraded its view on UK listed property companies to "Neutral" from a "Bullish" recommendation.

Analyst Mike Prew writes in is report Paper chase: Sector downgraded to Neutral that REIT shares have recovered sharply since their March lows - by about 60% - and now trade around the level of his top-of-the-market 2010 net asset value estimates.

It was a case of playing Where's Wally today at the IPD UK quarterly briefing with attendees challenged to find the one "positive" number in the Q2 results.

IPD research director Malcolm Frodsham outlined the dismal quarterly figures at this morning's seminar held at law firm Berwin Leighton Paisner's offices in EC4.

All property capital growth for the second quarter was -4.0%, bringing the 12-month change in capital values to -29.6%.

US mall giant Simon Property Group reported second quarter results on Tuesday that included a $141m charge due to the fall in value of its 6.5% stake in UK shopping centre REIT Liberty International.

Not really unexpected, seeing how UK property shares have performed this year. Of more interest are the comments made by chief executive David Simon in the post-results analyst conference, which made their way back to the UK via JP Morgan Property analyst Harm Meijer. Simon hints that a tie-up between the companies is likely, even it is not the straight takeover deal that the market anticipated last year.

"We're not giving up hope. ... We're just going to see how that evolves," he said, adding that he believes that there are elements where Simon might be able to add to what Liberty does. The worst thing for it would be to try to recoup its investment in a "not-so-intelligent way."

Tomorrow, Lloyds Banking Group, which now owns HBOS, will reveal results for the six months to 30 June, and on Friday Royal Bank of Scotland will provide updates to the market with a trading statement. JP Morgan estimates that Lloyds will reveal losses on property loans of around £4.5bn, and a survey of analysts undertaken by Bloomberg indicates that losses from bad property debts at RBS could rise as high as £6.4bn for the full year.

For the property industry, the big point of interest is what happens to loans that have already been deemed impaired, or sit on the 'watch lists' banks create. There is a hope that alongside the banks' results there will be further info on the UK government's Asset Protection Scheme, into which Lloyds and RBS are expected to put £118bn of UK property and construction loans, according to Citi - basically their entire UK property exposure. The banks are liable for the first 10% of losses on loans insured by the APS, and then after this 'first loss piece' is surpassed the Government pays for 90% of all subsequent losses.

And the industry seems worried by the scheme.