September 2009 Archives

Broker Panmure Gordon has begun regular analysis of the UK's two biggest REITs - Land Securities and British Land - advising clients sell both stocks.
Panmure said it believed British Land was now the most expensive FTSE 100 REIT, trading at a 33% premium to net asset value.
It added that Land Securities was also trading at a 22% premium to its forecast 2009-10 NAV, despite predictions of a 9% decline year-on-year.
The broker said "NAV premiums are rare and tend to be short lived in real estate" and argued that while a small premium was fair, such significant gaps as 33% and 22% respectively were not.

Despite its apocalyptic title, The Day After Tomorrow, the tenor of GVA Grimley's breakfast presentation this morning was not soley negative. The speakers present, including Vince Cable and GVA head of research Stuart Morley, predicted below trend growth for the UK and economy and the commercial property market; and there was a worrying slide which showed that new lending to property tends to trough three to four years after the peak of the market at about of third of boom-time lending. 

Six months ago the thought of commercial property total returns hitting 15% next year was ludicrous.
But, in a research note today, Capital Economics believes that such an outcome is "plausible" given the sharp rebound in investor sentiment and weight of equity ready to re-enter the market.
Property economist Kelvin Davidson said history shows that total returns can jump sharply in the first year of a recovery.
In 1974, returns plummeted to -16%, but jumped in 1975 to 11%, and returns went from -2% in 1992 to 20% in 1993.
"To be sure, while that is a plausible upside scenario it is not our central forecast, which is for total returns to be about 6% in 2010," he says.

For those of you unable to attend, here are some edited highlights of the discussion on property debt, featuring Nick Robinson, managing director of corporate banking real estate atn Lloyds Banking Group and Stephen Eighteen, head of global property restructuring at Royal Bank of Scotland.

The two banks have a combined UK property loan book of almost £100bn - how they handled the distress in these portfolios is of systemic importance for the UK market. Here's what they had to say last Wednesday.

Great Portland's news today that it had become the latest REIT to return to acquisitions with a £46m purchase in the City appears to be a "good deal" according to analyst Harm Meijer at JP Morgan.
GPE said today it had bought 90 Queen Street, London EC4, from Prudential at a net initial yield of 8.2%.
The prime office and retail asset was built in 1996 and totals 68,400 sq ft.
"We believe that Great Portland has done a very interesting purchase for a number of reasons," says Meijer.

Its safe to head back to the coast guys - the tsunami warning has been set to green again.

That is, there will be no flood of forced sales from Britain's two largest property lenders. At today's EG Investment Summit, I chaired a session featuring Nick Robinson, managing director of real estate corporate banking at Lloyds Banking Group, and Stephen Eighteen, head of global property restructuring at Royal Bank of Scotland.

With just less than £100bn of UK porperty loan, how these two banks handle their loan workouts is of systemic importance to the UK market. The key takeaway was the fact that they are doing all they can to avoid forced sales. Below are a few bullet points on what was said that supports this view - and the potential sticking points.

Liberty International's shares have taken a nose-dive this morning, falling 7%, after the company announced it would raise £300m through an equity issue.
Analysts have begun giving their opinions on the company's move, which seems to have been met with a lukewarm reception.
Evolution Securities' Harry Stokes says Liberty's placing means the company will have raised nearly £1bn in recent months, but will gain just £160m of firepower, "as only half the proceeds will be allocated to acquisitions, including further exploration of the redevelopment of the Earls Court site in West London which isn't going to begin even vaguely until after the Olympics, even if the stakeholders can agree."
"Liberty has a history of raising equity expensively (it did so in 2006) and spending it expensively (it used the proceeds to fund the purchase of Covent Garden at 4.5%)," he says.

The guys at Evolution Securities have issued their first note on three Central London REITs - Derwent London, Great Portland Estates and Shaftesbury.

Evolution's analysts say the West End property market is becoming increasingly competitive and that they are "optimistic" about the future for this market.

All three REITS have successful business models: they share a common strategy aimed at driving rents up and yields down through change of use, refurbishment or redevelopment.

And they have all put their peers to shame in terms of creation of shareholder equity since 2003.

As a result, Evolution believes an Add recommendation is justified for Derwent London and Great Portland Estates.

The stock market, the IPD index and the zeitgeist are all heading the same way at the moment; green shoots and confidence appear to be the order of the day.

But at an event hosted by CB Richard Ellis' real estate finance team this morning, Unravelling Real Estate Lending, there was a stark warning that the effects of too much leverage in the property sector have only just begun to be felt.

CBRE's real estate finance heads Philip Cropper and Robin Hubbard put forward some startling figures. By their estimate, the UK property sector needs between £150bn and £250bn of new equity to get its average loan to value back down to 60%

Analysts have begun talking about today's story that Land Securities has completed the sale of its one-third ownership of the Bullring shopping centre in Birmingham.

Evolution Securities' analyst Harry Stokes said: "Land Securities' sale of its one-third stake in Birmingham's Bullring shopping centre was first talked about around a year ago."

With more time to digest the news of British Land's sale of a 50% stake in Broadgate to Blackstone, there's been further analyst comment about the move.

JP Morgan's Harm Meijer said: "The deal values the estate at a net equivalent yield of 7.4% and a net initial yield of 7.1%, representing a 1.6% discount to the latest valuation at 31 August 2009.

"The transaction has reduced British Land's City office weighting to 21% from 31% earlier, and also reduced the group LTV to 30%.

"While we believe that British Land has not achieved the best price for the property, we remain of the view that the transaction makes good sense in a broader context. We remain OW on the stock."

Two interesting news stories today about UK reits, one expected (BL selling a 50% stake in Broadgate to Blackstone), one unexpected (LandSec poaching Rob Noel from Great Portland to run its London division).

The news hasn't really moved the share prices much, with the exception of Great Portland shares dropping 2% to 281p.

So, the Irish Treasury has unveiled details of the loans it will buy from its beleagured banks, and the haircut those banks will be forced to take on the face value of the loans.

A couple of interesting points:

The new National Asset Management Agency (NAMA) now has a UK property portfolio about the same size as British Land; €77bn of loans will be bought, with the property having a current market value of €47bn. 20% of these loans are secured by UK property, the Treasury said last night, giving it a UK portfolio of €9.4bn, or £8.3bn. NAMA is now a major player in the UK market.

A little plug for the upcoming EG Investment Summit being held next Wednesday, more details of which can be found here.

I'll be presenting a panel session featuring Nick Robinson, managing director of real estate lending at Lloyds Banking Group, and Stephen Eighteen, global head of property restructuring at Royal Bank of Scotland.

Together these two banks have about £97bn of commercial property loans, about half of total UK property debt. So essentially you have the two most importnant people in property chatting therough how their banks are dealing with their property exposure. Don't miss.

One year on from the collapse of US investment bank Lehman Brothers, and UK property values have just started to bounce back - a 0.2% rise in August, according to the IPD.

In light of the fact that for a while it looked like the financial system as we had known it might collapse, this is a remarkable turnaround. Yes, the market has plumbed the depths, as shown by a 23% drop in returns over the past 12 months. But it has also shown remarkable resilience.

But what of Lehman itself, and the property exposure that helped to kill it off ? This time a year ago the bank's last-gasp plan to rescue itself by spinning its property assets off into a $30bn global REIT was dying a death.

In the next few days, as administrator PricewaterhouseCoopers (PwC) was called in to its London office, it emerged that the bank had European assets once valued at $15bn, as well as a property fund management arm managing $8bn of equity for property investors.

The market expected a flood of forced sales from the Lehman European property book, or at the very least some juicy morsels to pick over. At the moment, with demand far outstripping supply, a few sales by PwC of prime assets would be even more welcome.

But that is not going to happen. While PwC has been marketing a portfolio of properties from nine joint ventures Lehman entered into, it is understood that none has been sold, and nothing is to be brought to market in the near future.

People seem to be getting quite excited by a story on Bloomberg regarding Royal Bank of Scotland's plans for its overseas loan book.

Just remember kids, when it comes to RBS's plans for property, you read it here first.

Or here

Or maybe here

This week, according to Dublin-based stockbroker NCB, "The Sword of Damacles" hangs over the Irish financial sector. The sword in question is an announcment on Wednesday evening of how much the Irish taxpayer will shell out for loans with a face value of around €85bn, secured against Irish and UK property.

The majority of the loans bought by the National Asset Management Agency (NAMA) will be development loans (€53bn according to NCB), but the rest (€32bn) will be investment property, €11bn of which will be found in the UK.

Now, contrary to the prevailing opinion (forced sales, depressive effect on UK values, second leg down) one source with a close link to Dublin pointed out that the NAMA could be just what the UK maket needs right now.

Shares in Workspace Group spiked 8.9% in early trading this morning amid rumours that the company could be the subject of a takeover.

On opening, the shares jumped to 27.5p, but have since come back to 25.5p.

Media reports said one trader expected the stock to reach 40p.

Yesterday was hectic in the world of commercial mortgage-backed securities. Capital & Regional, Simon Halabi, and most importantly Lehman Brothers were all in the mix.

First up, The Mall fund, managed by Capital & Regional and Aviva Investors, sought permission to buy back up to £150m of its £1.2bn bond issue to strengthen its balance sheet. The Hercules Unit Trust and Invista Foundation Property Trust both failed with similar offers, so will The Mall be able to pull it off? The bonds are trading at a higher price than six months ago, so they might have missed the boat in terms of buying them back at a nice discount.

Next up, Halabi. Companies which own six of the nine offices that form the security for a £1.45bn loan have been served with winding-up petitions by HMRC over unpaid tax. There is cash being generated by the properties available to pay the £4.8m owed to the taxman, but this cuts into the funds available for special servicer CB Richard Ellis to undertake the vital asset management needed to increase the value of the properties ahead of sale.

Comment is starting to filter through on the latest IPF Consensus Forecast report released on Friday.
Capital Economics says it suspects the latest forecasts are too pessimistic about the prospects for the next 12-18 months and too optimistic thereafter.
"The very real chance that weak bank lending holds back the economic recovery is a key reason for our subdued longer term property forecasts," said property economist Kelvin Davidson.

The always hotly anticipated Consensus Forecast survey from the Investment Property Forum (IPF) has been released and provides further evidence that the tide seems to be turning for UK commercial property.
The survey, which vets the opinions of 30 advisers, fund managers and brokers on a quarterly basis, shows that all property total return forecasts for 2009 have improved, moving up to -11.9% in the third quarter from the -15.1% reported in Q2.
It is the first time the forecast total return for 2009 has improved since data was first collected for that year in Q1 2007.
The survey predicts the industrial sector will outperform all other sectors for 2009, with retail warehouses to take the lead in 2010.
Forecasters now expect 2010 to see stronger positive total returns, in excess of the target rate of inflation, for all sectors.
Keep any eye out for a full report on the IPF Consensus Forecast in tomorrow's edition of Estates Gazette, p 40-41.

Well, one of them anyway. In the midst of losses for almost all of the big UK and global agency firms (and the leader of the pack, Savills, only making a slender £100,000 prodfit), things are looking bright for Jones Lang LaSalle, according to analyst Will Marks at JMP Securities.

In a note this week, Marks reiterates his market outperform rating on JLL, slapping a price target of $57 on the shares (18% higher than their current price) and indicating that when the market comes out of its current trough the company should prosper.

It was a gloomy day for SEGRO's shares yesterday, falling 3.9%, after broker Evolution Securities downgraded its recommendation to Reduce.
Evolution said it believed the company's share price had now factored in much of the potential good news after outperforming the UK real estate sector by 24% since the bid for Brixton was announced.
"Our Reduce recommendation reflects our opinion that the shares may underperform the wider market, but we are not advocating selling out of the name entirely," said Evolution.
"The shares' likely entry into the FTSE-100 index post the quarterly review on 9 September could provide a useful opportunity to lighten holdings."
The broker added it can see some "tough negotiations" in the next few years as tenants who are paying fairly high rents in Brixton's buildings demand reductions.
However, Evolution said SEGRO management's more "pragmatic" approach to letting vacant space should help to reduce void levels.

    In his weekly real estate market round-up, Nomura analyst Mike Prew highlighted some key themes arising from events in the past week.
Prew noted that SEGRO sparked some "rental reality" when it warned at its first half results that there was mounting insolvency pressure, with an estimated 2% of rental roll at risk from administration or liquidations.
Prew also focussed on comments by Capital & Regional founder Martin Barber on launching his Zenith Estates opportunity fund.
Barber reportedly said: "There are covered shopping centres in good towns that were owned by developers, rather than managers, and now banks have had to take charge. We're putting in equity and providing asset management."
Barber then went on to say that stability was returning to UK commercial property prices, but the market was more like 1993 (when prices rose on interest rate cuts), rather than 1995 (when rents recovered and drove a period of sustained performance).
"That is beginning to sound all too familiar," Prew said.

Among all the numbers in JP Morgan's annual European Property Handbook - ominously entitled Castles in the Sand - one in particular stood out.

According to JP Morgan's estimates, the overall UK property sector has an average loan to value ratio of 106%, and this figure would drop back only to 97% if values rise another 10%.

The collapse and unwinding of Dunedin's Industrious fund has been fascinating to watch, mainly because it is the first time that a UK CMBS structure has been broken up and the underlying assets sold off.

As you may know, Nick Leslau's new company Max Property emerged as the likely buyer in early July, and had announced a £232m purchase to the Stock Exchange before stating that a hold up had occured. It turned out that the special situations fund managed by Citi, a junior lender on the original Industrious refinanncing in 2006, had exercised its pre-emption right, and wanted to weigh up whether to buy the portfolio itself.