Property bond issues set for record

European real estate companies are closing in on a record year of bond issuance having already raised nearly double 2011’s total, highlighting the industry’s growing disenchantment with the bank funding market.

Property groups have raised €15.4bn for the first nine months of this year, compared with €8.3bn in 2011, through a combination of corporate bonds, private placements and smaller denomination retail bonds, according to research provided for the Financial Times. If the trend continues, issuance will hit almost €20bn by the year end, a record annual total.

The depth of demand and low cost – the average coupon interest on the 134 bonds issued so far in 2012 is 4.74 per cent – suggest capial markets are pricing risks at less expensive levels than the continent’s banks in an era of historically low interest rates.

At the extreme end of the spectrum, Unibail-Rodamco, the French real estate investment trust, issued €750m of five-year bonds at a coupon of 0.75 per cent. However, much of the new issuance came from small, often family-controlled companies raising between €1m-€5m.

Hans Vrensen, global head of research at DTZ, the property consultancy, said the surge in bond issuance was happening for two reasons.

“If you are a property business and you want to raise any sort of large fund quickly, there isn’t a bank in Europe that can do the loan at the moment. On top of this, a lot of companies in the sector are keen to diversify their financing away from the traditional funding of the banks,” Mr Vrensen added.

He said, however, that the bulk of the debt being raised would only be used to replace existing bank facilities, rather than fund acquisitions or expansion.

Lending to property companies has fallen sharply during the past five years, as Europe’s banks focus on purging billions of euros of debt amassed before the financial crisis. Some of the continent’s key lenders, including Germany’s Commerzbank and Société Générale of France, have shelved all real estate lending.

The funding shortfall is expected to grow as changes coming in next year under Basel III – the third accord in a sequential move on global bank regulation – increase the amount of capital banks must have to offset the risk of holding real-estate backed debt.

“Previously, many banks would lend long term money to real estate companies and borrow short term to make a profit on the spread,” said Bart Gysens, senior property analyst at Morgan Stanley, adding: “New regulation is forcing them to match funding and lending much more closely, so they lose that profitability”.

Morgan Stanley estimates that the so-called additional funding market for property companies, which includes bonds, borrowing from insurers, and private equity finance, could increase to €200bn over the next few years.