December 2009 Archives

As reported on EGi today, Segro is the front runner top buy a 50% stake in the £500m Airport Property Partnership.

The deal would cap a fantastic year for the company, lead by Ian Coull, which saw it retrun to the FTSE 100 after nearly dropping out of the FTSE 250. The obvious high point was the purchase of rival Brixton, and the company also raised £300m through a corporate bond - the first porperty company to tap the capital markets in this way since 2006.

If Segro does buy a stake in APP, it would again show the canny timing of the management team.

Remember 1993?

For some it may bring back memories of Bill Clinton coming to power in the US or Monica Seles being stabbed in the back by an obsessed fan of rival Steffi Graff at a tennis tournament in Hamburg. Meat Loaf's 'I'd Do Anything For Love' was the biggest selling song of the year, way before i-pods and on-line downloads.
 
For me I remember working in Hanover Square at what was to be the end of the recession before a record 15 years of continuous economic growth in the UK.  I was at Healey & Baker (now Cushman & Wakefield) and the market was tough.  Letting activity in the retail market was almost non-existent for all but the best schemes, and investment values had kept falling for the preceding three years.
 
Although technically the UK was by now out of recession it certainly didn't feel like it.  Unemployment was still rising at the start of the year, house prices had fallen off the edge of a cliff and vacancy levels in shopping centres had reached 8%.  Rents were still falling and wouldn't show meaningful growth for another 3 - 4 years.
 
So what happened next?

Last week, the Treasury revealed a breakdown of the £282bn of asset that Royal Bank of Scotland will ringfence through the Asset Protection Scheme.

As far as property goes, the extent of the loans that RBS will put into the scheme paints a shocking picture of the extent of the problems within its loan book.

It is putting £69bn of property loans into the scheme, which equates to more than three quarters of its £91bn property loan book. And as the Treasury stated in its 100-page analysis of the RBS assets, all of the property loans going into the scheme have either defaulted already, are in the middle of a restructuring process to avoid a default, or are on its high-risk "watchlist".

CS Real Estate has issued a new note on the property sector saying yields could compress beyond expectations in the short-term, meaning potential upside for real estate share prices.
"The weight of equity that is pushing into a supply constrained UK commercial property market is likely to have sent values up by 10% already and demand from equity appears to be spilling over from prime into the next tiers of quality," the broker said.

CS says:

■ The reasons for the yield compression could also see it reverse
In our view yields are compressing due to low bond yields, low interest rates on cash, a weak sterling all working in a market where demand for property is outstripping bank constrained supply. This yield compression is occurring as rents have fallen significantly in London offices (remaining weak) and where rents in retail appear set to remain challenged, probably with further to decline in most markets. With this in mind we remain concerned that this yield compression without occupier support could stop and reverse just as quickly as it appeared but looks set to continue well into the New Year prompting our NAV revisions.

■ Share prices are anticipating upward property revaluations
The UK large cap REIT's are pricing portfolio value increases of 9% for Land Securities (c60bp yld compression), 10% for British Land (c70bp yld compression), 16% for Derwent London (c100bp yld compression) but only 5% for Hammerson (c30bp compression) and 1% for Liberty International where we argue the latter two portfolios are more aggressively valued. The share prices are implying portfolio value increases in the face of weak occupier markets and growth potential beyond that already priced in appears limited.

■ Updating estimates
We have reviewed our estimates for Land Securities, British Land, Hammerson and Liberty International resulting higher NAV estimates reflecting expected year end portfolio value increases. Beyond the current year end we anticipate a small reversal of values as yield compression abates, rents stabilise and slow growth resumes. This muted growth implies downside to our price targets of 15% for Land Securities, 10% for British Land, 13% for Hammerson and 12% for Liberty International. Yields compressing beyond expectation is a clear upside risk to our price targets.

Weak prospects for commercial property occupier demand and rental values won't change much after figures show merger and acquisition (M&A) activity among UK companies remained very low in the third quarter.
UK companies were involved in just £5bn of M&A deals in Q3, according to figures from National Statistics.
That was higher than the figure of £4bn in Q2, but it was still down by 57%y/y and less than 25% of the quarterly average since 1987 of £22bn.
Research firm Capital Economics says while M&A activity may rise in coming quarters, it won't be meaningful enough to change the prospects for occupier demand and rental growth.