The crisis had a severe impact on AIM-listed property companies and investment slowed to a trickle. But the long-term case remains strong for investors seeking diversification through important emerging markets, as Graeme Newell reports
I previously wrote an article about property companies on the Alternative Investment Market (AIM) in the December 2008 issue of IPE Real Estate. This article reviews the further development and performance of property companies on the AIM stockmarket over 2005-2010. It clearly highlights the impact of the global financial crisis on these property companies on AIM and the potential benefits of these property companies in a portfolio.
Significance of property companies on AIM
AIM is a growth stockmarket in the UK, targeting smaller start-up companies, being complementary to the main market of the London Stock Exchange. AIM is the number one growth market globally. While the oil and gas sector and mining sector are the leading AIM market sectors, property is the third largest AIM sector.
These property companies on AIM provide property investment opportunities for portfolios across the traditional European markets, as well as the global emerging markets. This includes Central/Eastern Europe (including Ukraine, Bulgaria, Romania and Russia) and Asia (including India, China, Taiwan and Vietnam). The property sectors covered by these property companies on AIM include the traditional property sectors of office, retail, industrial/logistics, hotels and residential, as well as tourism/resorts, healthcare, ski resorts, self storage, entertainment and windfarms.
Property companies make a significant contribution to AIM. At February 2010, there were 90 property companies listed on AIM, with a total market cap of £6.1bn (€7.3bn). This accounts for more than 10% of AIM's total market cap, with property companies on AIM typically being 50% larger than the average AIM-listed company. Leading property companies on AIM include Songbird Estates, London and Stamford, Dolphin Capital, Vinaland, Max Property and Raven Russia.
The global financial crisis clearly hurt property companies on AIM; the sector's market cap dropped from nearly £13bn to £3.4bn in 2008. This significant fall was larger than for the overall AIM market (74% decline versus 61% decline). However, property companies on AIM have enjoyed a stronger recovery in 2009 as we moved out of the crisis, with a 76% increase versus a 50% increase for AIM overall.
The global financial crisis also had an adverse impact on capital raisings by property companies on AIM. The companies were perceived as the number one capital raising sector in 2007 (23% of AIM capital raisings), accounting for £3.7bn. This fell to just £7m in 2008. Successful capital raisings have been evident in 2009, with £1.4bn, accounting for 25% of AIM capital raisings. Songbird Estates debt financing via the China sovereign wealth fund (CIC) was a major initiative in this area.
Performance analysis of property companies on AIM
Performance indices are produced by AIM for various AIM sub-sectors. However, the market does not produce an AIM property companies performance index. As such, a major recent development has been the establishment of a performance series for property companies on AIM in December 2008 to enable the benchmarking of the performance of this important sector. This series has been developed by FTSE/EPRA/NAREIT from August 2005.
Over August 2005 to February 2010, AIM property companies gave an average annual capital return of -20.0%. This compares with -9.5% for the overall AIM market. The AIM property companies risk level (32.4%) was also higher than the risk level for the overall AIM market (25.6%). This resulted in lesser risk-adjusted performance by AIM property companies than for the overall AIM market over this period. The AIM property companies were also seen to be highly correlated with the overall AIM market (r = 0.86) over this period, reflecting only a very small degree of portfolio diversification benefit. Clearly, the global financial crisis had a more adverse effect on AIM property companies than the overall AIM market.
On a more positive note, property companies on AIM and on the London Stock Exchange main board provided more diversification benefit (r = 0.61) than for the overall AIM market and the LSX main board (r = 0.76). Hence, more diversification benefits were achieved via property exposure across these two markets than for overall market exposure across these two markets.
As we emerge from the global financial crisis, challenges and opportunities exist for the property companies sector on AIM. The capital raising environment remains difficult but is improving. To May 2010, £127m has been raised, accounting for 7% of all AIM capital raisings in 2010.
Risk factors continue to be the global financial crisis work-out, competition from other growth markets and increasing the level of institutional investor support. Importantly, the recovery of the emerging markets in Europe and Asia will be a key ingredient in the future prospects for the property company sector on AIM. Property companies on AIM will continue to play an important role, both as a leading sector on AIM and providing investors with the opportunity for quality property exposure in these important emerging markets.
In a previous AIM report, one of the first statements made was that "AIM is not for the faint hearted". The global financial crisis has certainly reinforced this statement.
Graeme Newell is professor of property investment at the University of Western Sydney