Listed property companies took to the public debt markets in number last year and the sector in Europe is unlikely to look back, writes Lynn Strongin Dodds
Tired of waiting for banks to return to the market, property companies have increasingly looked to tap the bond markets for funding. Last year there was a record level of issuance, while activity this year is expected to be similarly robust. Europe is leading the charge in this way as the region’s financial institutions continue to grapple with the ongoing euro-zone crisis and a stalling economic recovery.
According to Nigel Almond, head of strategy research at DTZ, real estate firms raised $92bn globally, up 30% from last year. The story is really a European one, with over €15bn of issuance in 2012, an impressive 80% hike over 2011 and well above levels in 2006 and 2007 which were between €9bn and €10bn. First-quarter figures of around €4.29bn suggest that volumes should equal last year’s. And if the pace continues at this rate it will help accelerate the closure of the continent’s debt financing gap of some €60bn by the end of 2013.
“Banks are going through a painful deleveraging process, but we are not yet seeing the overall shrinkage in the total outstanding debt,” says Almond. “The UK has the widest funding gap, with about 20% of the potentially uncovered refinancing needs of the entire European region. Overall, the country, along with Germany, Spain and France, accounts for about two-thirds of the total. Non-bank lenders such as insurance companies and debt funds have come in and increased their contributions by 80% to €34bn in 2012 from €19bn in 2011. However, they will be able to pick up all of the slack.”
Bart Gysens, senior property analyst at Morgan Stanley, also sees the bond market playing an increasingly important role for property companies. “There are a variety of drivers, but the main reason is, as recent experience has highlighted, that it makes sense to diversify sources of funding. Previously, many banks would lend long-term money to real estate companies and borrow short-term, making a profit on the spread. New regulations such as Basel III are forcing banks to increasingly match funding and lending more closely, so they lose that profitability.”
One of the main attractions for real estate firms of the bond market is the current favourable terms on offer. Take Unibail-Rodamco’s €750m issue last year. The five-year bonds of Europe’s largest listed property company were valued at only 80bps over mid swaps.
“Companies find the pricing in the bond markets, due to the low coupons, much more attractive than what the banks can offer,” says Almond. “The bond markets are also a better option for companies in the €25-100m category, because it is particularly difficult for them to obtain debt from a single or syndicated group of banks.”
Guy Barnard, fund manager for property equities at Henderson Global Investors, agrees. Bond markets are “open for the right borrowers”, he says. “Both margins and swap rates have been steadily declining in recent years, meaning the overall costs are attractive. In addition, they have the added advantage of greater duration of finance while the ability to lock into today’s attractive rates is also a key consideration.”
For now, refinancing seems to be the main reason companies are turning to the market and this is likely to remain the case for the near term. As Gysens and his team at Morgan Stanley point out in a recent research note, “so far, most quoted property companies have issued low coupon bonds to refinance existing debt that is close to maturity, or to increase the duration of the debt portfolio”.
The report goes on to say: “We are yet to see any meaningful issuance to finance acquisitions. It looks as though access to low-cost bonds comes at the condition of a highly selective investment strategy and a disciplined balance sheet. As such, we think this could actually drive further deleveraging from quoted property companies.”
The largest European deal to date has been the University Partnerships Programme’s (UPP) planned £5bn bond programme, which will be secured against the rent it collects from its 28,000 student apartments. UPP, the UK’s largest developer of student housing backed by the Chinese government, has already issued a £500m slug of senior notes tied to university campuses, including Kent, Oxford Brookes and York.
Other notable examples include the £800m debt issue by Intu, formerly known as Capital Shopping Centres, the €500m issue from Dutch shopping centre specialist Corio, and the €350m unsecured bond from Atrium European Real Estate.
The capital raised by Atrium will be used to refinance existing debt, but according to Rachel Lavine, CEO of the Amsterdam/Vienna-listed company, says acquisitions – “as and when identified” – are also on the agenda. “Our upgrade to an investment-grade credit rating opened up important new funding sources for us. And Atrium’s recent bond issue, which was heavily oversubscribed, allowed us to both capitalise on investors’ support for the company and take advantage of the current low interest-rate environment and high demand for debt investments.”
Although the larger deals have captured most of the headlines, figures from DTZ highlight that a number of smaller companies are carving out a greater presence. According to the first-quarter figures, firms above €250m still dominated, issuing €1.5bn in bonds, followed by their colleagues in the €100-249m range at €1.1bn. However, those below €100m boasted the fastest growth rates, issuing about €967m in the first three months, up from €844m last year and a substantial jump from €351m in 2011.
Barnard believes Europe will follow in the footsteps of the US property companies that have a long history of tapping alternative sources of funding. “If we look to the US REITs as a guide to where we may be heading, then the fact that they typically only have a third of their overall debt provided by banks – with the remainder coming from bonds, insurance companies and the CMBS market – suggests there is still a long way to go. European property companies still typically rely on banks for well over half of their overall debt.”