The credit crunch has already toppled a few invisible towers once destined for London’s skyline. But a continuing rout in property values combined with high profile management defections could signal a far reaching strategy change at the UK’s two biggest property companies.
The industry’s property valuation benchmark, the IPD Index, continues to plumb new depths reporting an 18.1 per cent annual decline in September (see Towering ambitions topple). This sombre state of play is reflected in the FTSE 350 real estate index, which has fallen a staggering 41 per cent in the past year.
“The real estate sector hasn’t been as exciting as this for 15 to 20 years,” says Mike Prew, real estate analyst at Nomura. “Some of the dividend yields on these stocks are getting very chunky, shares are trading at yawning discounts [to net asset value] and the implied underlying yields on assets are also very interesting.”
At the extreme end of the curve, Warner Estate boasts a dividend yield of 40 per cent. One of the smallest UK real-estate investment trusts (Reits), its high gearing caused shares to shed 91 per cent of their value in a year before bouncing 31 per cent last week when a key banking covenant was rejigged. Given the worsening outlook for real estate, dividends could be under threat, especially in the case of Warner which is priced for disappointment.
Nevertheless, larger Reits with beefy dividend yields include the two industrial property specialists Brixton, which boasts 7.2 per cent, and Segro, not far behind on 7.1 per cent. But the property generalists also look more appealing. Sector bellwether Land Securities boasts a dividend yield of 6 per cent, and comes with an added bonus – the prospect of corporate change.
Land Securities’ chairman Paul Myners stepped down earlier this month following his appointment as Minister for the City. Mr Myners is the man widely credited with devising proposals to split the company into three separate entities, and analysts hope that his exit will lodge the plans firmly in the wastepaper basket.
The obvious spare limb to Land Securities’ property empire has always been the outsourcing arm, Trillium. It once hoped to achieve £1.4bn by lopping it off, but recent reports suggest that private company Telereal is contemplating an offer of just £900m.
Harry Stokes, real estate analyst at broker Citi, is not convinced that now is the right time to sell Trillium, but admits “its disposal could sharpen the Land Securities story and provide the company with substantial funds which could either be distributed to shareholders, or used to take advantage of assets at distressed prices”.
However, analysts baulk at the thought of progressing to stage two of the Myners plan, which was to de-merge the London office and retail portfolios. To do so would trigger the refinancing of a bond secured across properties in both portfolios, described by one critic as ‘completely unviable in the current climate’.
Mr Stokes is in agreement. “To give up average debt costs of 5.4 per cent and an average maturity of 10.7 years looks unwise in current debt markets,” he says. “We wonder whether Mr Myners’ departure may lead to what we see as the ill-timed split being shelved for the time being.”
The winds of change are also blowing through British Land, which loses chief executive Stephen Hester next month when he becomes chief executive of the Royal Bank of Scotland – interestingly, the bank is one of the biggest lenders to UK commercial property.
Non-executive chairman Chris Gibson-Smith will become executive chairman while British Land looks for a new chief executive and he will also head the nomination committee, which is considering both internal and external candidates.
Mr Hester, who has a banking background, took over the reins from Sir John Ritblat four years ago and proved to be a shrewd choice. Key decisions were ejecting residential property and secondary assets from British Land’s portfolio, and selling off £12bn of property in the years before the crunch. Less memorable is the botched sale of a 75 per cent stake in Sheffield shopping centre, Meadowhall, last year, and shelving the construction of its ‘cheesegrater’ tower in the City of London.
Mr Hester’s chief legacy is the refinancing of British Land’s entire portfolio in 2005-06, which now boasts the longest maturity (12.9 years) and lowest average cost of debt (5.3 per cent) of any UK Reit. As one might expect from a former banker, it is also the most highly geared Reit at 93 per cent and boasts an astonishing £2.6bn of debt facilities. This means it can make the most of opportunities to buy assets at bombed-out prices if management can spot the market’s trough.
Market commentators believe a property man will be picked to run the show next, with Great Portland’s chief executive Toby Courtauld and Sir John’s son Jamie Ritblat, who is a successful property developer in his own right, topping the polls.
Whoever makes the final cut is destined to make or break their career when they attempt to call the bottom of the market. We can only offer the following advice to prospective candidates: it hasn’t arrived yet.
