The Property Finance Blog

Brokers' thoughts on Liberty's split

2010-03-09T09:37:45Z

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.

]]> Evolution Securities
EVO TAKE - Results were in-line with our expectations, with the Dec-09 NAV coming in at 464p vs our forecast of 465p. However, the key information being reported is with respect to the demerger of the Capital Shopping Centres Business from Capital & Counties. The company has announced it is retaining its US portfolio in CSC, which was widely believed to being in the process of being sold.
DETAILS - NAV of 464p, from 745p adjusted at end-Dec 2008; Adjusted EPS of 18.3p, from 29p in PY; Full-year dividend of 16.5p, flat on PY. Business will be split into Capital Shopping Centres (shopping centre REIT) and Capital & Counties Properties (Prop-co focusing on central London). Capital & Counties had a proforma NAV of 127p at end-Dec.
VALUATION AND RECOMMENDATION - The shares trade at a 9% premium to Dec-09 NAV and offer a 3.3% dividend yield, the lowest of the FTSE 100 REITs. We maintain our REDUCE recommendation and 485p target price.

Nomura Real Estate
NAV was some way below our forecast (515p) at 464p, the key reason being significantly weaker-than-expected capital value growth in 2H09. Underlying growth in CSC was +2.6% in 2H09 versus our forecast of +8.0%, while CapCo UK rose 3.1% (Nomura +5.0%) and CapCo US fell 7.8% (Nomura +2.0%).

The key point of the statement, however, was confirmation of recent press speculation (FT, 5 February 2010) that management intends to demerge the business into its two constituent parts: CSC and CapCo. Shareholders will retain their existing shares in Liberty (to be renamed Capital Shopping Centres and which will remain a REIT) and will receive one new share in Capital and Counties (will initially not be a REIT). We believe this is the correct move for the company and will provide investors with a focused way to invest in either/or UK regional shopping centres and the cyclical Central London development sector at their own discretion. We were expecting the group to announce an equity raise at the same time in order to de-gear both balance sheets and also to provide additional capital for each new entity to further its proposed business plan. However, it appears that neither entity intends to raise new equity from shareholders. CSC has a net LTV of 55%, cash of £319m, undrawn debt headroom of £248m and no asset-specific debt refinancing requirements until 2014 (Cardiff and Xscape £62m); CapCo has a net LTV of 37%, cash of £263m, no undrawn debt headroom and no refinancing until EC&O in February 2012 (£154m). It will need to raise further debt facilities in order to be able to execute its proposed strategy of redeveloping EC&O and Covent Garden.

The latest NAMA lowdown

2010-03-08T15:48:08Z

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.

BL appointment completes search for board members

2010-03-04T09:44:50Z

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)."

Unite Group's results weaker than expected

2010-03-03T10:22:53Z

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.

Interesting comment on taking heed of 'industry veterans'

2010-03-01T09:55:40Z

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 pleases analysts with no bad surprises on vacancy rates

2010-02-25T15:21:08Z

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."

]]> Management said: "Regarding property values, IPD Industrial yields in the UK have already compressed by some 70 basis points since the trough in the market last summer and it seems unlikely they will contract much further unless supported by a pick up in rents.
"Indeed, faced with potentially rising interest rates, there must be some scope for yields to expand at some stage over the next year.
"Whilst UK commercial property prices have surprised on the upside in the last quarter of the year and the situation in Continental Europe appears to be stabilising, we remain cautious about occupier markets, particularly in the UK where we expect the wider economy to lag much of the Continent for the coming year at least.
"Nonetheless, the Group is in a strong position and is well placed to benefit from any recovery."

Capital values rebound will halt by mid 2010

2010-02-24T11:54:57Z

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.

Hammerson's results produce mixed broker reaction

2010-02-22T12:24:04Z

Brokers have had a mixed reaction to Hammerson's full year results announced today.
The company's portfolio rose in value by 6% in H2 - with an 11% rise in the UK. But, for the full year, values were down by 9% to £6.5bn.
This valuation movement led to a 13% rise in net asset value in the second half of the year to 421p a share, but an overall NAV drop of 18%.
JP Morgan analyst Harm Meijer said the H2 rise in NAV was slightly above his expectations.
"Most importantly, like-for-like rental growth, one of our key performance indicators, of +1.1% was above our estimate of 0%," he said.
"Overall, we believe these results underpin our model input and currently forecast around 16% total return for Hammerson (similar to UK largecaps in general).
"However, we reiterate our view that a lengthy de-leveraging process and rising bond yields is upon us, which means that investors do not have to enter the sector at any price.
"Our 2010 theme remains: buy on weakness, but do not chase stocks to higher levels."
On the other hand, Nomura Real Estate says its house view remains Neutral on Hammerson, with the NAV broadly in line with its expectations.

]]> o Allocation of majority of portfolio to regionally dominant shopping centres and retail parks;
o Management of investment properties to ensure they continue to be attractive to occupiers enabling them to increase rental income and other revenues over time; and
o Generation of attractive income and capital returns through development on both retail and office sectors.
"Since the start of the year, the shares are down 7.8% underperforming the sector, which is down 5.7%, and they now stand at an 8% discount to FY09 NAV or a 15% discount to our FY10 NAV forecast of 462p," said Duncan.
"With a yield of 4.0% versus the sector on 4.1%, the shares continue to look about fair value, although, in our view, the market will be looking for additional colour from David Atkins on the conference call as to how he intends to create value for shareholders."

Things are looking up for UK commercial property

2010-02-19T11:57:21Z

Capital Economics has issued a revised forecast for UK commercial property saying it expects IPD capital values to climb 10% this year and total returns to reach 18%.

It says this is in light of the "sheer momentum in the market and the fact that property is starting from a point where it looks slightly cheap".

However, it added that subsequent years beyond 2010 may not be as bullish with lenders remaining under pressure to reduce their exposure to property from its current record-high level.

Analyst Ed Stansfield said he also expected GDP growth to be below trend both this year and next and the labour market correction was not over yet.

"This suggests that property occupier market prospects remain weak. Indeed, we expect IPD all-property rental values to decline by 3% in 2010, before rising only moderately (by 1% or so) in 2011."

Stansfield adds the major risk to the new forecasts is the tightening in monetary policy that will come "at some point".

However, for now, Capital Economics does not expect interest rates to rise until 2012 at the earliest.

"However, the limited scope for rental uplift over the next few years suggests that commercial property prices will be vulnerable to renewed falls at the point at which rates do eventually start to rise," said Stansfield.

For the full Capital Economics report, click here. UK Commercial Property Analyst (Q1 2010).pdf

CBRE says banks more willing to lend to commercial property

2010-02-17T15:42:28Z

CBRE's latest European Capital Markets report for Q4 2009 claims the commercial property market is seeing the first signs of a positive shift in sentiment among banks to lend to the sector.
It says the recovery in prime real estate values and investment market turnover in the second half of 2009 has improved sentiment in the European debt markets.
However, it added the change in attitude was heavily concentrated on the top end of the market.

Under the report sub-heading "Debt Markets", CBRE says three of the key changes it has witnessed recently include:

•Maximum loan size is generally increasing;

•Maximum LTVs have increased to 60-70%, when secured against prime property; and

•Margins have fallen across most markets.

It adds the shift in sentiment has also led to increased competition among debt providers to offer improved lending terms on loans secured against prime real estate.
To read the full report click here:.EMEA_FPR_CAPITAL_MARKETS_MV_Q4_2009[1].pdf

Why has no-one opened the champagne yet?

2010-02-15T16:12:40Z

Knight Frank's head of commercial research, Claire Higgins, has released another edition of the monthly UK Market Outlook report.
In it, she highlights the issue of yields and investments and which segments of the market are winning.

Higgins says:
􀂃 A key theme of recent investment activity has been the quest for prime property, with a gradual spread to better quality secondary as the best assets prove either unavailable or the subject of very intense competition.
􀂃 Little decent information is available on poorer quality properties, but IPD's quarterly index helpfully provides some analysis broken down into quartiles by yield.
􀂃 Thus we're able to look at how yields have moved over the course of 2009 for the 25% of properties with the lowest yield, set against the 25% with the highest yield. It's not a perfect proxy for the good versus the ugly, but it's a start.
􀂃 IPD's research shows the better class properties have seen yields chased down notably across the board. With only the sad exception of shopping centres (which, given the lot sizes, is a sector to have suffered more than most from restrictive finances), all segments saw yields improve in their top quartile of properties.
􀂃 In particular, this was true for Standard Retail, Retail Warehouses and Central London offices. Indeed, the latter two of these were the only segments also to see yield improvement among their worst properties.
􀂃 Interesting, then, that Central London offices should, according to IPD, also be the
segment that saw the highest level of net disinvestment during 2009.
􀂃 In H1 09, disinvestment was across the board, but H2 tells a different story as the retail and industrial sectors start to see net purchases as activity restarted. Not so offices, and notably not so for Central London.
􀂃 The conundrum of significantly improving yields but dramatic disinvestment implies buyers outside of IPD, most likely overseas. How will we continue to benchmark a segment for which the best properties are no longer in our index?

Higgins adds that while the UK is now out of recession - just - there remains a significant amount of caution about the economy.
"Property provided a positive return last year, the economy is growing (just) and if
you work in the Central London market you're probably wondering why no one's
opened the champagne yet.
"I'm not going to end with my usual note of caution. Instead, let's just enjoy the moment."

Really, really interesting take on British Land's results today

2010-02-09T13:42:09Z

http://blogs.wsj.com/source/2010/02/09/is-chris-grigg-comfortably-confused/

British Land reports 18% NAV hike

2010-02-09T10:37:24Z

British Land has today posted an 18% jump in its net asset value to 438p a share for its third quarter results. The rise was driven by recovering capital values across the property sector.
Brokers have begun analysing the figures and giving their opinions on the company's results.
JPMorgan's Harm Meijer said: "We believe today's results underpin our positive view on the company and reiterate our view that its investment case is very straightforward:
1. Stock trades at Dec-09 NAV of 438p,
2. 6% dividend yield,
3. Today's results make us very comfortable on our forecasts (our year-end NAV forecast of 464p only requires 3% capital growth),
4. 272,000 sq ft of new lettings and still 655,000 sq ft of office available,
5. £3.2bn of cash and unused credit lines at 48bp: the company sees further investment opportunities within 18 months (our view: no need to rush),
6. Income growth of 1.4%, 13 years lease length (only 7% to expire in three years), 11.2 years debt maturity and 94% occupancy,
7. Net portfolio yield of 5.8% and gross topped-up of 6.7%.
Overall, we believe this is the type of company that should appeal to investors: what you see is what you get with a potential surprise to the upside. Please see our alert, sent out separately today, for more details.

Nomura analysts Robert Duncan and Mike Prew say the following about BL:

]]> • 3q10 NAV came in at 438p (+18% on 1h10 at 367p), based on underlying capital growth in the quarter of 8.2%. Our informal forecast was for 450p (consensus of 421-450p), based on underlying capital growth of 9.5%.
• Looking in more detail at capital growth by sector, retail warehouses appeared to perform weakly relative to IPD, increasing in value by 9.3% (IPD 12.4%). City offices relatively outperformed IPD rising in value by 8.6% (IPD 5.2%) and West End offices marginally underperformed at 7.9% (IPD 9.1%). Average growth in the quarter was 8.2% versus IPD at 7.4%.
• Occupancy rates remain strong at 94% overall, although this masks a wide disparity between offices (84% occupied) and retail (99% occupied). While it appears that short-term leases on weak economics have not been used to maintain the high occupancy across the retail portfolio (only 5% of the rent roll falls due in the next 3 years) we intend to ask management what letting trends it is seeing (see below for further detail).
• Acquisitions since September 2009 totalled £121m and includes the acquisition of a 50% interest in Surrey Quays shopping centre, SE London and Clifton Moor retail park, York for combined consideration of £87m (Tesco 5.3% IY, shopping centre 8.5% IY and retail warehouse 8.2% IY), and a superstore in Macclesfield for £31m (5% IY) leased to Sainsburys for 29 years with indexation.
• Developments. Management intends to submit a planning application for 4&6 Broadgate, which would enable delivery of the buildings by early 2013. Other than that, some 750,000 sq ft of retail park extension plans (with planning) are being reviewed.
• Asset management. An additional £5.0m pa of rent was secured in 3q10 (including incentives) from 53 rent reviews (+19% ahead of previous rents), 69,000 sq ft of lease renewals and 276,000 sq ft of new lettings with a combined average of 8 years to break and 80% of lettings/renewals had in excess of 5 years to first break. LfL rental income was up 1.4% in the period.
• Outlook. A limited outlook statement was given, with Chris Grigg commenting that "British Land is now well positioned, combining a prime portfolio, strong income profile, talented people and significant firepower." This firepower consists of £2.8bn on undrawn debt at an average margin of 47bp and £342m of cash (but how much of this is 'free cash'?). £1.7bn of undrawn debt has a maturity in excess of 3 years.
• Valuation. We have a Reduce rating on British Land and a current price target of 477p. The shares stand on a discount of 15% to our Next+1 NAV of 515p.

CBRE shows evidence of slowdown in capital growth

2010-02-05T12:11:15Z

CBRE may have provided the first evidence of an anticipated slowdown in the recent rate of capital growth.
The agent's Monthly Index for January has posted a 0.9% rise in capital values.
The figure is significantly lower than December's record-breaking monthly rise of 3.3%.
Total returns were also lower in January at 1.5%, compared with December's 3.9% increase.
Central London offices saw the strongest performance over the month, with total returns of 2.2% - but this was about half of December's 4.3% figure. Capital values rose 1.7%.
By contrast, retail warehouses showed the most significant slowing in capital growth with a rise of just 0.6%, down from 6.1% in December.
The retail sector saw a 0.7% increase in capital values and a 1.3% total return. Industrials posted a 0.5% rise in capital values and a total return of 1.2%, while offices reported a 1.3% rise in values and 2.0% total return.

]]> Other key points from the CBRE Monthly Index are:
• The All Property total return was 1.5% in January, with annual returns up to 8.6%.
• All Property capital growth moderated to 0.9% in January, down from the record 3.3% increase recorded in December.
• All Property rental values fell only marginally by 0.1% in January, significantly less than the monthly falls seen in the last quarter.
• All Property equivalent yields were broadly flat over the month, remaining more or less unchanged at 7.3%.

Property headed for two-stage recovery, says Aberdeen

2010-02-03T14:41:24Z

Aberdeen Property Investors expects UK commercial property to undergo a two-stage recovery in total returns in the coming two years.
The company released its latest UK Property Snapshot today, saying the recovery will be reminiscent of the mid-1990s with an initial surge driven by the investment market, followed by a rental market-driven improvement.
"We expect 2010 to be a very strong year for performance, as yields continue to
fall sharply in the first half of the year, despite rents continuing to decline, albeit more
slowly," says Aberdeen.
"Investment demand from UK pension funds, the retail funds, private UK investors,
overseas investors, REITs and property companies is expected to continue rising over
the next few months, leading to increasingly competitive bidding which will drive up
capital values further."
But, beyond a strong total return performance in 2010, Aberdeen is predicting returns to "drop back sharply" in 2011 as interest rates and bond yields rebound, while rental growth struggles to resume.

]]> • A five year annualised 'All Property' total return of 9% is forecast, based on pricing at the end of December 2009. The majority of this (approximately 7%) will be delivered by income return, with the remainder coming from some strong capital returns over the next year, and rental growth at the back end of the forecast period.
• Over the next five years, the best performing sector is projected to be central London offices. Central London markets have the most volatile rental cycle, and prime rental values are already stabilising. Total returns will be boosted by very strong rental growth off a very low base. Shopping centres, office parks and South East offices should also perform reasonably well, boosted by a very strong income return. Yields rose more rapidly for shopping centres than for the other retail sectors, and did not fall as much as other property types in the second half of 2009. The large lot size of the shopping centre sector, and the absence of the debt-backed financing, meant that capital values fell much more than other sectors in the downturn.
• The standard shop sector is projected to be one of the weakest performing sectors. For standard shops, the upward yield shift was far less substantial, and consequently, there is now less potential for a significant decline, particularly as rental growth prospects are muted, with oversupply an ongoing issue in many markets. Nevertheless, standard shops, with their smaller lot size, have been very popular with private investors who have been attracted by their yield premium over cash.
• The key risk in the short term involves projecting the strength and duration of the current surge in UK property market recovery. We have projected a total return of 16% for 2010. This is well above the current IPF consensus view of 10%, and a similar total return anticipated by derivatives prices. However, with monthly total returns running at over 3% in late 2009, our forecasts already factor in a substantial slowdown for the second half of 2010.