European property back in vogue

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European property companies are raising a surge of new equity to expand their activities, as international investors’ confidence in the real estate sector returns.

There has been a wave of IPOs and equity issuance in recent weeks, building on the large volumes of equity raised in the second half of 2013.

The flotations of two Spanish property investment vehicles raised €900m between them, and last month US-based private equity company Kennedy Wilson raised £750m for a new European listed investment vehicle focusing on the UK, Ireland and Spain.

The European listed sector is small relative to the publicly traded real estate in other parts of the world, but it has begun to grow as fears over economic and political instability in the eurozone recede.

In total €1.6bn has been raised in IPOs so far in 2014, more than a third of the total 2013 figure of €3.9bn, which was itself three times higher than any annual total since the eurozone crisis began in 2010, according to figures from Epra, the European listed real estate association.

Meanwhile, existing listed firms have raised substantial amounts to fund fresh development and acquisitions. In the past week alone, London Reit Shaftesbury raised £157m and student housing specialist Unite raised £100m. Fraser Hughes, deputy chief executive of Epra, said that property firms’ shares were trading at a premium to their net asset value, making capital-raising attractive to investors.

UK firms are on average trading at around a 10 per cent premium and continental European firms are averaging a 3 per cent premium, according to Epra data.

“An increasing number of global investors incorporate listed real estate and real estate investment trusts into their total real estate allocation – this trend has really taken off since 2009,” said Mr Hughes.

Europe’s biggest real estate conference, MIPIM, takes place in Cannes this week amid a renewed optimism. Attendance is at its highest since 2007 and the fastest-growing groups of delegates are from Spain and Italy, say organisers.

This reflects the turnround in peripheral eurozone markets, where investors have begun to anticipate economic recovery.

David Brush, managing partner at global asset manager Brookfield Property Group, cited increasing economic stability as a key driver. There has been a “rotation of capital from North America to Europe as market participants believe valuations are more compelling in Europe,” he said.

However some analysts warn that in the rush to raise equity, new firms are using risky structures.

John Lutzius, European managing director of Green Street Advisors, said: “The most interesting element of the wave [of new IPOs] is the structure of most of the companies: they are externally-advised cash boxes. This is in sharp contrast to the peer group of existing companies that are internally managed operating companies with sizeable existing investment portfolios.”

This “blind pool” structure poses a number of risks, Mr Lutzius said, citing potential management conflicts of interest and rising property prices pushing up the cost of acquisitions.

“Most of these new Reits are structured like private-equity vehicles, not operating companies,” he warned.

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