UK property firms need to raise US$20b

Source : Business Times - 15 Jan 2009

They need to restore their balance sheets at a time when financing is scarce

UK real estate companies may need to be rescued by shareholders this year to stay afloat.

The largest commercial property firms need to raise as much as US$20 billion this year to restore their balance sheets at a time when financing is scarce, according to estimates by Bernd Stahli, an analyst at Merrill Lynch & Co in London.

‘Real estate will be at the front of the queue for equity this year,’ said Ian Coull, chief executive officer of Segro plc, the largest investor in UK office parks. ‘There will be companies like us that want to put themselves in a strong position to benefit from the upturn when it comes.’

The five largest real estate investment trusts - Land Securities plc, British Land Co, Hammerson plc, Liberty International plc and Segro - have combined debt of £19 billion (S$41.6 billion), according to their latest reports. About £700 million of loans are due this year, research by Nomura International plc shows. The banks that granted those loans may now be reluctant to provide more credit.

That could spur another year of losses for real estate investment trust (Reit) investors. The FTSE 350 Real Estate Index of 18 stocks fell 46 per cent last year, the most since the index was created in 1986. The worst performer was Liberty, which declined 56 per cent.

The index has fallen by almost two-thirds since its peak in January 2007. During the industry’s last slump, shares of UK real estate companies fell by about 60 per cent, hitting a low in 1992. Stock prices more than doubled over the following year, even though the three biggest companies, including British Land and Hammerson, carried out rights issues.

This time, some companies may again have to issue new shares, or be forced to sell assets at a time when there are few buyers. Commercial values in the UK have slumped almost 36 per cent from their June 2007 peak, CB Richard Ellis Group Inc said last Friday. There may be another 15 per cent decline in 2009, according to King Sturge estimates.

The companies in the FTSE 350 real estate index need to raise a total of about £13.7 billion of equity, assuming that UK values fall 50 per cent from the market’s peak, said Merrill Lynch’s Mr Stahli. ‘This looks problematic as there is a very real possibility that this money is not there to begin with,’ he said.

British Land, Hammerson, Liberty, Brixton plc and Capital and Regional plc are among the companies that will be pushed close to breaching bank agreements by the end of the year because of depreciating assets, said Harm Meijer, an analyst at JPMorgan Chase & Co in London.

‘Companies could potentially mitigate these problems by obtaining amendments to debt-gearing covenants or by cutting dividends, but we don’t think these measures would be sufficient to address the problem fully,’ said Martin Allen, a London-based analyst at Morgan Stanley.

Half of the large real estate companies would need to take action to avoid breaching debt gearing covenants by December 2009 or March 2010, he said.

JPMorgan, Citigroup Inc and Morgan Stanley estimated that the largest companies in the FTSE 350 index may need about £2.5 billion to bolster their balance sheets.

Liberty, the UK’s biggest owner of shopping malls, is the leading candidate for a rights issue, according to Mike Prew, an analyst at Nomura International. The company does not have enough cash or undrawn debt to fulfil spending commitments and debt obligations this year, he said in a note to investors last Wednesday.

Liberty had debt of about £4 billion as at Sept 30, according to the company’s nine-month report. Liberty spokesman Michael Sandler declined to comment.

British Land, the largest office landlord in London, has ‘no immediate requirement’ to raise capital, said spokeswoman Laura De Vere. ‘But clearly, raising equity is an option that’s open to British Land, especially if matched with an opportunity.’

Credit ratings of European real estate companies could be cut because of shrinking asset values, Standard & Poor’s said in a report on Monday. Falling prices increase a company’s loan-to-value ratio, a key measure of credit.

Some companies are selling assets but not without price cuts. Land Securities, the largest Reit, last week raised £440 million to pay off debt by selling its property management arm at a 25 per cent discount to book value.

London and Stamford Property Ltd, which raised the second largest public offering by a European property company in 2007, made its first purchase last week, a City office building, One Fleet Place, for 45 per cent less than its peak value.

During the five-year boom that ended in 2007, UK commercial property companies saw asset values more than double and used debt to make purchases.

Typically, borrowing by large, publicly traded companies was equivalent to 50-60 per cent of assets. The ratio has since increased as real estate prices have fallen.

To secure a loan, companies usually agree to keep their debt-to-asset ratio below a certain level. Failure to do so limits their ability to borrow in the future.

Some UK companies have already offered investors stock to repay loans. DTZ Holdings plc, a London-based broker, announced a plan last month to raise as much as £55 million in a share sale while Mapeley Ltd, the property manager controlled by Fortress Investment Group LLC, asked shareholders for £45 million in return for convertible bonds.

‘A lot of investors will be against paying just to bail out a balance sheet,’ said Toby Courtauld, chief executive of Great Portland Estates plc. ‘Some may have no choice because it makes sense for their investment to keep it afloat, but the discounts they are going to demand will be enormous.’

The largest real estate companies are unlikely to carry out ‘rescue’ rights issues, according to Nomura’s Mr Prew. ‘It’s so dilutive.’ he said. ‘Why would you annoy all your existing shareholders?’

That may be unavoidable, said Patrick Sumner, head of property equities at Henderson Global Investors Ltd. ‘People would rather see their equity diluted than see it go to zero - it’s a pretty stark but obvious choice,’ he said.