European property fever strikes AIM

Published on: "Growth Company Investor"

By Christopher Spink

No less than £550 million out of the record £2.02 billion raised by companies joining AIM in December went towards property vehicles with plans to invest in various assets across Europe.

Dawnay Day Treveria led the flood, raising £260 million to buy German shopping centres.

Ben Habib of First Property, which manages a £75 million Polish property fund, believes institutions are queuing up to back these funds because of the enhanced returns they offer when compared with equivalent property in the UK.

‘Commercial property has enjoyed a boom in the UK over the past few years forcing the yields you can obtain to fall to less than five per cent. However, on the continent you can still pick up commercial properties yielding 6.5 per cent.’

‘In addition euro interest rates are very low, at roughly half the current UK base rate of 4.5 per cent. This means your returns can vastly exceed what is available from UK property at the moment,’ continues Habib.

David Lockhart of top-performing AIM property stock Halladale, which manages £600 million of UK assets, says a factor making yields on UK property look reasonably expensive at present is that, with UK interest rates rising, ‘the cost of [borrowing] money has increased over the past few years. That will have an effect on returns.’

Surveyor Jones Lang Lasalle said a record £15.4 billion of commercial property in London changed hands in 2005, 41 per cent higher than in the previous year. This pushed yields down to four per cent in the West End and five per cent in the City.

Location, location, location

Private investors have been left out of this fundraising frenzy and, in most cases, backing the funds in the secondary market will mean buying at a premium to the placing price – mostly set at the value of the cash subscribed, on a pound-for-pound basis.

This is not surprising since many of the fundraisings – in particular those relating to Eastern Europe – were oversubscribed. Investors see most opportunity for uplift in asset prices from those countries planning to join the EU, such as Bulgaria and Romania.

For example, Equest Balkan Properties, which is focusing in this area, like many others, aims to borrow in euros and receive rental payments in hard currency as well, such as US dollars. This should reduce local currency risk and boost returns.

There is also strong demand for commercial property in other more established economies in Europe, such as Germany, Belgium and the Netherlands. One company hunting for opportunities here is Hansteen. It raised £125 million in a November placing that was three times oversubscribed. The vehicle was set up by Ian Watson and Morgan Jones, who built up UK industrial property investor Ashtenne, achieving annual returns above 20 per cent over the 15 years prior to its sale last March.

This deal prevented the duo from dealing in UK property but Watson is now concentrating on finding similar assets on the continent. Indeed Hansteen’s first transaction included a purchase of a Dutch industrial property Ashtenne previously owned.

Robert Court of Cardales, who is responsible for Tilney’s Glanmore Property Fund, an OEIC that has produced a steady annualised return from UK commercial buildings of roughly ten per cent annually over the last eight years, cautions investors not to expect a similarly smooth ride on the continent.

‘The UK is the most sophisticated property market in the world,’ he points out. ‘Other countries, such as those in Eastern Europe, are far more volatile, where the titles to the land are often not so clear cut, having changed hands dramatically over the past 50 years.’

Income vs growth

Private investors also need to be careful about what type of animal they are backing. As Hansteen’s Ian Watson mentions: ‘There are different motivations for the different companies floating lately.’

They can broadly be split into those that intend to produce a healthy income by paying out most of their earnings as dividends and others hoping to reinvest such earnings and focus on capital growth. The former will barely move in price while the latter will produce yields that are far lower than such competitors.

Equest Balkan Properties should certainly be grouped amongst the income earners. The company raised £140 million to back commercial property, primarily in Bulgaria and Romania, and intends to pay a dividend yield of 7.5 per cent on the initial placing price.

Equest follows the wave of property concerns, such as Black Sea Property Fund and Orchid Developments, which floated in the summer looking to invest in residential and leisure buildings in Bulgaria. Equest instead will look to back industrial, office and retail assets, principally near Sofia and Bucharest and managing partner Petri Karjalainen has already identified 14 possible projects.

At the other end of the scale, Dolphin Capital Investors raised £70.7 million to generate sharp capital growth from investing in land beside the sea in Greece, Cyprus, Turkey and Croatia.

Dolphin’s managers, Miltos Kambourides and Pierre Charalambides, who previously worked together at Soros Real Estate Partners, part of billionaire currency speculator George Soros’ private equity empire, say this land will either have been earmarked for residential resort development or be where such development is at an early stage.
The sites will aim to attract high-grade holiday home owners and incorporate such facilities as golf courses, marinas and spas. Dolphin plans to sell embryonic projects onto other investors but envisages retaining interests in a third of the projects, if such a sale is not possible.

Greece to boom

Kambourides, who was also behind the formation of property behemoths Trillium, now part of FTSE 100 Land Securities, and Mapeley, which floated on the Full List last June, believes the fundamentals are right for a boom in residential holiday property in Greece.

‘Following the Barcelona Olympics in 1992, there was a boom in developments in South East Europe (Spain and Portugal). Soros was the biggest investor here. This phase has now reached saturation point,’ he points out. ‘However, there have been hardly any developments in South West Europe (Greece, Cyprus, Croatia and Turkey). We aim to take advantage of the goodwill generated by last year’s Athens Olympics,’ he explains.

Dolphin could also prosper because land prices are between 30 and 50 per cent cheaper in Greece than in Spain. Dolphin aims to produce total annual returns of 25 to 45 per cent, relying on its strong network of international advisors and local property developers.

Hansteen falls between these two extremes, hoping to produce a dividend yield on the placing price of three per cent. ‘We aim to build up a portfolio of industrial property which will then prove attractive in its entirety to a purchaser such as a pension fund,’ says Watson.

If you want a more wildly exciting property ride, then fast-growing economic giant China might provide such an opportunity. Just before Christmas China Real Estate Opportunities raised £14 million in an AIM placing to find a speculative development in China.

The tightly held stock immediately jumped 200 per cent, with punters desperate to get involved at an early stage in a venture which ‘ideally, is looking for a greenfield site to initiate a major development’ in the People’s Republic, according to chairman Ray Horney. Once such a site has been identified, then the company will try to raise further funds to develop it.

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Source: "Growth Company Investor"