Source : Business Times - 22 Jan 2009
Share placements, rights issues on the agenda as firms try to stay above water
Britain’s quoted property sector needs billions of pounds to fund a fight for economic survival, and a slew of costly share issues could be inevitable as lenders face their own struggles to stay solvent.
Many lenders who bankrolled an unprecedented credit-fuelled real estate boom in the first half of the decade have been poleaxed by the financial crisis and are now powerless to aid property firms as a downturn nears a second year.
Property firms need their own plans to stay above water and unpopular options such as share placements, rights issues and convertible bond issues are all under consideration, industry experts told Reuters.
‘The Reit (real estate investment trust) majors are holding around £pounds;20 billion (S$42.6 billion) of debt, and I’d estimate that they need to raise on average 20 per cent of their total existing debt to get themselves comfortably under breach,’ said Simon Cooke, managing director of property at boutique investment bank Close Brothers .
‘Compound that with the intransigence of the banks, and you have a problem that means large rights issues and convertible bond sales are virtually inevitable,’ he said.
UK office landlord Workspace started the ball rolling last week by saying that it may issue new shares to bolster its finances, which sent its shares plunging.
‘It is massively dilutive to existing shareholders and reputationally damaging. Most companies, and property firms are no different, will not voluntarily go for a rights issue,’ said Tony Edgley, managing director of Jones Lang LaSalle Corporate Finance.
Even if companies take the brave step to issue new shares, there are no guarantees that investors will race to subscribe after nearly two years of disappointing share price performance, sinking dividends and few signs of an end to the sharpest UK commercial real estate correction on record.
But analysts at JPMorgan said that an unrelenting credit squeeze could mean that larger property firms such as British Land, Hammerson and Liberty International are forced to follow suit to keep clear of loan-to-value covenant ratios tied to their corporate debts.
Credit Suisse analysts on Tuesday estimated that if capital values dropped a further 20 per cent, up to £pounds;8 billion would be needed by UK Reits to maintain a comfortable 45 per cent loan-to-value ratio ‘and provide sufficient financial headroom for growth’.
Beset by escalating loan-to-value ratios, property executives may discover that a share sale is their quickest route to capital as plunging property prices, already down one-third from their peak in July 2007, make profitable asset sales difficult.
‘Most of the majors have started asset sale programmes but this just won’t be enough. There’s no such thing today as a willing seller or a generous buyer, only a greedy buyer and a forced seller,’ Mr Cooke said.
Land Securities said on Tuesday that it would look to sell more property to boost its balance sheet as prospects for the UK economy darkened.
It announced earlier this month that it had sold its property outsourcing division Trillium for £pounds;750 million, far lower than the unit’s £pounds;1.3 billion gross asset value as reported in September 2008.
But some market experts see a ray of light amid the gloom, pinning their hopes on the success of the UK government’s second bank rescue package aimed at getting bank lending flowing again.
One feature requires banks to identify their riskiest assets, which they can then insure against future losses with the government for a fee, placing a ceiling on their losses in the event of a default.
‘Banks will be less inclined to call a loan-to-value covenant because they now have an option, albeit at a cost, to guarantee potential failure of that loan,’ said Mr Edgley. He said that this puts property firms in a stronger position to renegotiate terms and avoid large equity issues.
‘Rather than going to the capital markets for an expensive and dilutive rights issue, property firms might help the banks by paying some, or all of the insurance premiums, to prevent banks actually calling the loans,’ he suggested.
Nevertheless, some analysts claimed that Britain’s real estate firms over-expanded in the boom years and consolidation, as seen in the banking sector, will be necessary to ensure the long-term health of the quoted property market.
‘I believe a crop of rights issues is little more than a precursor to a phase of significant consolidation in the sector,’ said Close Brothers’ Mr Cooke, who warned firms against seeking expensive financial cure-all solutions.
‘We have had a plethora of products and company start-ups but in these markets, quality managers end up with the majority of the assets,’ he said.
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