During the boom property stocks on AIM performed well relative to the market generally but since the downturn started they have also seen the heaviest falls. Graeme Newell reports

Property companies have been established on the smaller growth stock markets, providing international property exposure opportunities for property investors in both the traditional and emerging markets. This article reviews the AIM stock market in the UK and the significance of property companies on this key growth stock market.

Significance of AIM
The Alternative Investment Market (AIM) is a growth stock market in the UK, targeting smaller start-up companies, being complementary to the main London Stock Exchange.

AIM has become the number one growth market globally, with similar growth markets now established in Europe (for example: First North, Alternext, Entry Standard, Nuevo Mercado and Mercato Expandi) as well as in the US and Asia.

Offering a less regulated structure than traditional stock markets, AIM provides a more accessible and less expensive listing opportunity for both UK and international companies starting up or seeking capital to expand.

Nominated advisers take on the regulatory responsibility and advisory role regarding the IPO process and ongoing support. Institutional investors have strongly supported AIM, accounting for over 55% of stock ownership.

While oil and gas, and mining are the leading AIM market sectors, property is third. Beginning with only 10 companies (£80m/ €102m) in 1995, AIM had over 1,600 companies and over £61bn in market cap by September 2008, having grown significantly since 2003.

Like all global financial markets, AIM has been adversely affected by the current volatility, dropping 37% in market cap in 2008. International companies have actively sought listing on AIM. UK companies now only account for 79% of AIM-listed companies in the 39 sub-sectors.

These international companies include those from developed economies (such as the US, Canada and Australia) and more recently, the emerging markets (such as Eastern Europe and BRIC). Several well-known UK football teams are listed on AIM (among them Tottenham Hotspur, Birmingham City and Sheffield United); previously Chelsea was also listed on AIM.

Since being established, AIM has raised over £59bn in IPOs (54%) and further issues (46%). While 2006 (£16bn) and 2007 (£16bn) were record years for capital raised, only £4bn has been raised in 2008 to September.

Given the nature of the smaller companies listed on AIM, the volatility is approximately double that on the main London stock market, as well as these two markets becoming more correlated (r=0.62) as AIM has matured in recent years.

While being higher risk, "failures" on AIM have been estimated at only 3%. The AIM website (www.londonstockexchange.com) is very comprehensive, with significant investor information and detailed monthly market statistics.

Significance of property companies on AIM
Property companies have made a significant contribution to AIM, particularly since 2005. At September 2008, there were 103 property companies listed, with a total market cap of £6.5bn. This sees property companies accounting for 11% of AIM's total market cap, compared with oil and gas (13%) and mining (11%). Property companies on AIM are typically larger than the average.

The growth in property companies on AIM in recent years has been far more significant than the overall growth rate of AIM. This has seen the market cap for property companies increase at five times the rate of the overall AIM market over 2004-07. Similarly, 2006 and 2007 saw property companies being the leading sector on AIM for raising capital (£8bn), accounting for approximately 25% of all AIM capital raisings in 2006-07.

However, 2008 has been a very different story. The AIM property companies sector market cap has dropped 49% to September 2008. Only £6.6m has been raised by these companies to September 2008, being only 0.2% of AIM total capital raisings this year.

Property companies on AIM
Five of the top 50 companies on AIM at September 2008 are property companies; this compares with 11 property companies in the top 50 in 2007. These leading property companies are:

Dolphin Capital Investors (number 9 at £436m) China Real Estate Opportunities (23 at £306m) Vinaland (24 at £305m) London & Stamford Properties (26 at £289m) Raven Russia (33 at £268m) reflecting property portfolios in Greece, China, Vietnam, UK and Russia respectively.

To put these property companies in perspective, the leading companies on AIM were Sibir Energy (£1.5bn) and Global Specialty Metals (£1.3bn).
An assessment of the regional property profile of the property companies on AIM clearly reflects their property activities across the traditional European markets as well as the global emerging markets. This sees property activities in:

UK (31% of companies) Central/eastern Europe (22%), including Ukraine, Bulgaria, Romania and Russia Western Europe (20%) Asia (20%), including India, China, Taiwan and Vietnam with many of these emerging markets having high risk factors, including lesser property market transparency, lesser business competitiveness and higher perceived levels of corruption.

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 wind farms.

Future prospects
Like all financial markets in 2008, AIM has been adversely affected by this global market uncertainty, with significantly reduced market cap and capital raisings. After exceptional growth years in 2006-2007, the property companies on AIM have been even more adversely affected.

This is compounded by many of these companies having property activities in the higher-risk and less transparent emerging markets in eastern Europe and Asia.

In a previous AIM report, one of the first statements made is that "AIM is not for the faint hearted". The current global credit crisis has certainly reinforced this statement, particularly concerning the significant adverse affect seen for the property company sector on AIM.

Graeme Newell is professor of property investment at the University of Western Sydney