October 2009 Archives

I thought it might be enlightening to undertake a quick comparison of JLL and CBRE's third quarter results, which were released on Tuesday and Wednesday respectively - in spite of the fact that, whenever you try and undertake this exercise, the flaks for both sides ring up in hurry and point out how, in fact, if you look at it like this, their team is actually far better than the other.

One key similarity was the fact that Colin Dyer, chief executive of JLL, and Brett White, chief executive of CBRE, said they saw signs of recovery in most territories across the globe. The picture was far from uncertain, they said, and America could lag behind Europe and Asia, as these markets were further along in terms of the property sector's recovery. But what do the raw numbers say?

Following third quarter results today, Jones Lang LaSalle's shares dropped 7% to $47.10, mainly because  earnings per share of $0.46 were lower than the $0.58 predicted by analysts (although the $0.61 JLL made when one-offs were stripped out would have been a beat).

Nonetheless, JMP Securities' Will Marks has kept his outperform rating on the company, and maintains a share price target of $57. Here's why:

After a good 3Q, we would continue to buy JLL shares, with our price target at $57; maintain Market Outperform rating.  JLL is trading at its historical average forward multiple (15x) yet on earnings that should show considerable growth over time, with upside as sales, leasing, and asset management businesses recover and as JLL continues to grow its management services segment.  Conversations with real estate leasing and sales brokers give us comfort with our outlook.  Our 2010 EPS estimate of $3.35 compares to 2007 peak EPS of $6.77, and the $9.00 "next peak" figure published in our August 31 peak-to-peak analysis report. 

The vultures remain perched in the trees, having seen very little distressed selling of UK commercial property, according to fund management firm Clavis Walden.
"Back in early 2008 a realisation dawned on many in the property world that the global financial crisis was going to be harder than many expected, resulting in a major downturn in property values with the lending banks forcing breached loans to be repaid, flooding the market with fire sales from desperate sellers and providing a once in a lifetime feeding frenzy for vulture funds that were quickly launched," says Iain Keys, managing director at Clavis Walden.
So, has the market performed accordingly?

Just a little titbit that popped up on the Stock Exchange this afternoon. BlackRock, through its UK Absolute Alpha Fund, owns 9% of property's newest listed company, LxB Retail.

The giant US investment manager also bought into the IPO of Nick Leslau and Mike Brown's Max Property Group, to the tune of 12%.

Compared to its huge size, BlackRock has never been that into UK property, with only a £1.3bn open-ended fund to its name. But it obviously feels that backing good management teams in the listed sector is a winner.

Those looking for evidence of a new bull market in commercial real estate may be disappointed by the next key portfolio valuations.
In a sector note, Nomura Real Estate analyst Mike Prew said: "The next corporate valuation evidence is due with the September interim valuations from British Land and Land Securities (17 and 18 of November respectively) which we think will probably show flat or little changed NAVs.
"After the 'W' in valuations with write downs concentrated in the December valuation in 2007 and 2008 (with NAV transparency for fund redemptions and then rights issues), estate agents, we think, will be reluctant to chase even the top end of the market, and may require more than the two-to-three quarters of yield trends to be re-established.
"After all, not all valuation dates coincided with the nadir of the cycle."

While UK commercial property seems to be on the mend, the case is not as clear for our colleagues over in the US.
US commercial property prices fell 3% in August, according to the latest Moody's/REAL Commercial Property Price Indices.
This puts commercial property prices 32.8% below the level seen one year ago, 40.6% below that of the peak in October 2007, and 14.5% below five years ago.
Moody's said while prices had declined steadily in the past year, the rate of decline has slowed in recent months after falling by about 8% in both April and May.
Moody's analyst and co-author of the report, Connie Petruzziello said: "We can't call a bottom at this point, but it's an encouraging sign to see the deceleration in the decline."

Here's something that hasn't been stated in a long time.
In a research note today, Capital Economics says it believes UK commercial property is "undervalued".
Property economist Ed Stansfield says: "With 10-year bond yields averaging 3.65% over the past month and all-property initial yields at 7.7%, investors seem to be pricing property on the assumption that rental values in 10 years' time will be virtually unchanged from today's levels.
"While past experience suggests that this is too gloomy, it is by no means impossible.
"On balance, we feel that property is undervalued, but we do not yet feel that economic conditions merit a sharp contraction in the property/bond yield spread."

Last week, the Irish Treasury published further info on how it expects its giant bad bank, the National Asset Management Agency, to work.

Unfortunately, there wasn't much info on how the UK will be administered or affected. But it did provide a fascinating insight into how the scheme - which will buy €77bn of property loans from Irish banks - will work in practice.

Rather than have me do a second rate job, read a brilliant analysis of the pros and cons of the scheme, written by Richard Curren of the Sunday Business Post, here.  

Evolution Securities has today described the UK commercial property sector as a "bull market in a china shop".
In a sector note, analyst Harry Stokes says: "Too few
assets on the market and widespread demand at home and abroad is driving
property yields down, all within the context of a fragile economic environment.
"No one seems to agree on what happens when Quantitative Easing ends, but everyone agrees that monetary policy won't be tightened soon.
"Until then, UK real estate yields 7.2% while cash yields near zero; the UK lease structure ensures rents can't fall while the occupier remains solvent; and the weakness of Sterling ensures that the UK remains a focus for overseas investors."

The analysts at JP Morgan have issued a new note on the outlook for the property sector today saying they are now more convinced of a strong bounce in property values.
But, they hasten to add they are also more concerned about the "Carpe Diem feeling (make money now, worry later)".
Analyst Harm Meijer says his firm predicted in its September note that property would go through three phases: 1) property prices are turning the corner (consensus now), 2) valuations will jump and surprise to the upside over the next 12 months (becoming consensus) and 3) payback time will follow.

News emerged last night of what should prove to be a good hire for DTZ, in my humble opinion.

Chief executive Paul Idzik has once again raided the talent pool of his alma mata Barclays, and poached BarCap CMBS analyst Hans Vrensen to be the agency's new head of research.

Vrensen is an incredibly smart guy, and, importnatly for DTZ in this market, when it comes to the subject of property debt, he is wired into the Matrix. His appointment cannot but help the firm in terms of the expertise it can offer to clients in the complicated debt renegotiations they are no doubt currently undertaking.

We've started to see some feedback trickling through from analysts on yesterday's release of the September IPD Monthly Index.
UK commercial property values climbed 1.1% in September - the largest monthly capital growth since June 2006.
In its morning note today, Morgan Stanley said the jump did not come as a surprise as CBRE, which values over a third of the monthly IPD sample, reported a 1.3% increase in property values for September earlier this month.
"What is significant is that a change in capital values of this magnitude tends to be followed by more significant capital growth; taking all the historic monthly occurrences of +1.1% capital growth or more, the average return in the subsequent three months is +4.2%, in 6 months +7.7%, 12 months +12.6%," the broker said.
"Therefore, this could suggest a bounce - or for the bullish, a recovery - in capital values is under way.
"The Morgan Stanley research team has assumed a 10% bounce in UK capital values on average during 2010, and it now looks as though this is happening, or at least starting, earlier than expected."

An interesting little point from last night's lecture on capital raising in the public and private markets, from KBC Peel Hunt's Alex Vaughan.

He says, if you've got an IPO planned, you'd better be underway by FRIDAY at the latest. Anyone not on the road speaking to potential investors by then would be better of waiting until next year.

In general his message was that the public market is willing to look at IPOs, but you need a fantastic track record, as investoprs would rather back a secondary offering from an already existing team - and this is where the most money has been raised from the stockmarket this year.

IPD releases its Monthly Index results for September at 3pm today.
JP Morgan analyst Harm Meijer says it will be one to watch.
"Given our belief that the bounce in UK property values from June 2009 will be strong (and potential surprise the market) and the IPD index has not reported a significant gain since June yet (July: -0.13% capital growth and August 0.21%), we regard the chance high that the September valuation will show a strong positive result today. Watch it."

Research firm Capital Economics has today taken a closer look at the performance of the retail warehouse sub-sector asking why capital values in that sector have climbed first and fastest.
IPD all-property capital values rose by 0.2% in August, ending a 25-month unbroken run of falls.
Retail warehouse capital values, however, troughed in June and have since risen by 1.4% from their floor.
Capital Economics property economist Kelvin Davidson said the figures fit with a view that retail warehouse yields rose disproportionately during the correction.
But, he says: "The key point, however, is that the case for expecting the
outperformance of retail warehouses to be sustained is weak.

So, a panel discussion on the retail property market hosted this week by Noble Group decided that retailers are not being as hard on landlords as they could be, and that the window of opportunity for negotiating knock-down rents will last until around the middle of next year.

I'm sure some of you out there might disagree, but that's the nature of the landlord/tenants relationship, and it was ever thus. Below are some more findings from the round-table discussion:

When will the chase for space resume?
The consensus was that retailers look set to benefit from the current environment well into next year. But for those looking to grow, the dearth of new space is likely to become a problem, be it for John Lewis, Debenhams or the value/discount retailers. The value retailers have carved out former Woolworths space this year, and that should feed some demand next year as well. Once that supply is removed from the market the paucity of remaining shopping centre developments in the pipeline (Cardiff, Aberdeen, Stratford, New Change) will lead to a relatively static growth in space and it feels like demand could well outstrip supply and the balance of power could shift back towards landlords.

After releasing its global private equity fundraising figures for the third quarter last week, research firm Preqin has today delved deeper into the figures to focus on the real estate sector.
Private equity real estate funds raised $4.9bn (£3bn) in the third quarter - the lowest quarterly fundraising total since Q3 2003, when 17 funds raised $3.2bn.
The total raised in the third quarter equals just 48% of the total raised in Q2 and just 12% of the $40.5bn raised at the same time last year.
Preqin said there were 46 private equity real estate funds which had been abandoned or put on hold so far this year, compared with 27 in 2008.

Yesterday, Savills released research reporting a sharp rise in the number of lenders willing to lend against UK commercial property.
Today, we are beginning to see some industry reaction to that research.
The Savills data showed that there are currently 23 lenders willing to advance commercial property loans of at least £20m. This compares with just 12 lenders in the agent's March survey.
Today, research firm Capital Economics commented on the data saying it "clearly adds to the case for expecting a short-term rally in the market".
"But the facts remain that lenders are still highly exposed to commercial property and tenant defaults remain a concern," according to property economist Kelvin Davidson.
"Accordingly, we doubt that property lending is about to boom again."

The same interesting proposition arose from two separate meetings I had today, and that's close enough to a trend for me to share with you.

It centred (inevitably) on the issue of property sales initiated from banks. Leaving aside for a second whether these sales are at distressed prices, take it as read that banks will have to conduct some sales, even if they only drip through over the next five years.

Charlie Foster from Oriel Securities makes some salient points in relation to the proposal by retailer Blacks Leisure to seek a company voluntary agreement which would allow it to reduce its overall rental payments. Below are some of the highlights of his note from this morning:

·         The news highlights the risk to landlords of tenants being unable to maintain current rent liabilities, causing the closure of stores and / or a reduction to the level of rent being paid.

·         In our most recent IPD watch we highlighted that void rates across the IPD portfolio had risen to their highest level (12.3% August) since 1994. This puts downward pressure on rents as landlords compete to retain and attract tenants.

·         Against this back drop, the currently strong cash yield driven demand for real estate assets may well show that corrections in asset values have come too soon and gone too far.

·         The premium to NAV that much of the sector is trading at is unjustifiable.

·         We remain UNDERWEIGHT on the sector based principally on legacy asset valuation risk.   

Evolution Securities' analyst Harry Stokes has commented on today's third quarter Credit Conditions Survey from the Bank of England.
"The surge in interest in real estate investment appears to have taken credit providers
by surprise as demand for credit for commercial real estate posted a positive
reading in the survey of +7%, compared to expectations of -25% at end-June," he said.
Stokes adds that the survey also provided some good news in terms of the cost of financing, suggesting that margins and fees on loans to large corporates will fall in the fourth quarter, having increased more than expected in Q3.