A popular, if macabre, game last year was to pick the property companies most likely to fail owing to the sector slump, with much debate about debt covenants against asset values, and a cynical eye on whose banks would crack first.
There were many companies on the risk list, ranging from developers Minerva, Workspace, Brixton and Quintain to investors such as Capital & Regional, Grainger and Warner.
But the only winners of the game will have been those who took a brave view on some of these smaller cap companies, given a resounding recovery on the back of debt restructurings and equity raisings against a broader market rally.
Quintain shares have increased sixfold in the past six months, while Minerva’s have risen twofold. Grainger is up more than 100 per cent, and most others are also much higher – admittedly from low bases.
It is difficult to underplay how much some were struggling, mostly because of high levels of debt, but also through some rash decisions in the boom years.
Going concern and material uncertainty warnings were common in the first-quarter accounts, which makes it surprising that almost all have emerged not just alive, but well positioned for the next leg of the cycle.
Most have their banks to thank for refinancing and extending loans, loath as most are to crystallise losses, although help from cornerstone investors has also been important for companies such as Capital & Regional and Songbird Estates, which have emerged with dominant shareholders.
Songbird, which controls the Canary Wharf Group, completed the raising of some £1bn last Friday to help pay back an £880m loan. The London estate can expect rising vacancies and falling rents next year but Songbird is now safe from debt problems, and controls a group that has approaching £1bn in cash.
Alongside the deep pockets of its backer in Qatar, this means it can withstand further difficulties and was yesterday trading at a premium to the rump placing price at net asset value (NAV) of 1.32p.
Capital & Regional has also benefited from equity market support, with a new shareholder in Parkdev, the South African investor, and a partner in Area Property, the private equity group.
Having been close to the brink – if not of total collapse then a debilitating agreement with its banks – it managed to raise equity and renegotiate debt at a group and fund level. C&R could now use its management experience with the new equity backing to launch funds.
C&R benefited from having a banker take the reins when the conversations with banks began, although Hugh Scott-Barrett, former ABN Amro chief financial officer, could not have expected to use his restructuring experience quite so early in his property career.
The sector has generally benefited from an influx of bankers, including Paul Idzik to take on the unpopular job of chopping at DTZ and Salmaan Hasan, chief executive at Minerva, to lead conversations with former colleagues at Deutsche PostBank among others about its debt refinancing.
Minerva last week confirmed the refinancing or extension of about £800m of debt, giving crucial breathing space and funds to complete its developments, and there is again speculation the company has attracted private equity interest.
Kifin, the vehicle of South African investor Nathan Kirsh, would be key given its large minority shareholding. Some pondered its acquisition of a large stake in the company late last year. It now looks a canny gamble, given it may have trebled its money, and the future looks brighter if management can act during the stay of execution provided by the banks.
As with Quintain and Workspace, Minerva offers exposure to London development. A letting at its London schemes would act as share price catalyst, and is more likely now given the lack of the supply of new offices.
Whether or not now is a good time to seek these smaller cap companies depends on attitude to risk, which undoubtedly remains. Some debt problems have been deferred rather than solved. Property companies are no longer very cheap, with most trading nearer or even above NAV. While this may increase for a few months in a cash-driven bubble, asset values could fall again next year without a recovery in the occupier market. There is little in the way of dividends and it is unlikely risk-seeking investors will see the double- digit returns they require until after 2012.
But the fact is that most have gone from sinking ships to potential platforms for growth and are also now able to join the companies looking to partner banks on problem property portfolios. As one chief executive recently remarked, it was difficult to target distressed assets when his company was deemed to be one.