UK property heads told to buy back shares to lower gearing

Property companies and listed REITs in particular should cut their gearing and buy back their stock, according to John Lutzius, Managing Director of Green Street Advisors. Speaking at the annual EPRA and Nabarro Insight event in London on Tuesday, Lutzius fuelled the debate by concluding that leverage across the industry was still too high and that listed REITS especially had been 'too aggressive on development'. He recommended a level of around 30% and even as low as 20%.

Whilst other corporates had deleveraged since 2007, gearing has actually increased In the listed REIT sector, he argued. Continental European retail accounted for the strongest growth in leverage and given Europe's large development pipeline, gearing could increase even further, he added. Share buybacks would reduce risk and generate higher returns compared to development, he said: 'Buy back your own stock rather than develop.'

Of the three panellists representing the UK property sector, only Andrew Cunningham, head of Grainger Trust, said he was deleveraging his company. Chris Grigg, CEO of British Land, responded by saying he was 'comfortable' with 45% at this stage in the cycle, while his counterpart at Hammerson David Atkins pointed out that his company already has a leverage in the low 30s. For Hammerson finding a 'sustainable level of debt' is the most important objective, he added.

Grigg also pointed out that REITS have gone through 'a crisis and a half' in only five years. 'The challenge is to make sure we are managing for the long term.'

One of the key conclusions for 2012 was that the overall market - including the general housing market - would likely remain flat. Patrick Sumner, head of property equities at Henderson, predicted that market cap rates would remain flat for UK REITS overall, although central London property would perform better than the rest of the market. One encouraging trend, he added, is that capital inflows into Henderson's funds were increasing from the Netherlands, Asia, Italy and many other areas due to resilient yields as well as the strong focus on prime property.

The EPRA and Nabarro Insight event in London, which was moderated by Sara Montague of the BBC, generated a record level of attendance, EPRA head Philip Charls said. He added that the focus in 2012 would very much be on 'investor outreach'.