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Hard times in Belgian market

The Belgian real estate index performed poorly – once again – with a 2.2% decline over the past three months. The non-technology BEL20 index experienced the same sort of loss, posting a 2.4% decrease (–3.07% for the Brussels All Share Index), as at 7 December 2000.
Unfortunately, the flagging performance of Belgian property stocks has not been a temporary phenomenon. The quoted sector has declined by 18% since January 1999, whilst the BEL20 index has gone down 13.8% (without taking into account payable dividends). Furthermore, European property shares were able to outperform the Belgian quoted property sector over the same period. The Fortis Bank Dutch Real Estate index, comprising major Dutch funds, stabilised at +1.4% (against +22.4% for the AEX index), the French SBF Finance Real Estate index rose 15.7% (against 51.8% for the CAC40), whereas the DJ Stoxx Real Estate index lifted about 13.7%.
We previously wrote that investors would increasingly dip into Belgian property shares again, albeit “without expecting much momentum”. We would dare to say this has not really happened yet, but better prospects are in sight – in our view – for two major reasons:
q Richly valued equities, and especially those related to the TMT sector, are being punished by investors’ waning appetite, and this is reflected in the current extreme volatility. It has to be noted that the Belgian market has never been technology-driven, but the few listed stocks have taken terrible beatings over recent months.
Lernout & Hauspie Speech Products, once the subject of all kinds of superlatives, is the incarnation of the general disappointment flooding Flanders’ fields. This company, having being suspended from the Nasdaq and Easdaq bourses, has filed for bankruptcy protection in both Belgium and the US. In the meantime, investors – and, in this case, small investors in particular – have lost money, in a company formerly tagged with ‘buy’ recommendations, that was granted unwarranted bank loans, and that had political friends in high places.
All the parties involved – including analysts, bankers and investors – are licking their wounds, and now have only one question on their mind: How did this nearly worst-case scenario unfold? One of the few benefits of this nation-wide debacle might be the renewed awareness of investors concerning ‘valuation issues’. How can a stock be valued, and which tools should be used? Property stocks in this respect could again be considered as a safe heaven, especially since their current valuation is now largely in line with that of their international peers. Belgian property shares were indeed somewhat shielded from the outside world in the past, but the funds are now being internationally compared with their bigger-sized peers in terms of multiples.
Broadly, SICAFIs are far from richly priced, carrying a dividend yield of roughly 7.9% gross. But they are fairly valued, compared to their international peers, with an 11% discount on average. We would remind the reader that net asset value is determined on gross market value, taking into account the 13.9% transaction costs. Excluding these high costs, we can argue that Belgian property funds are more or less on offer at net asset value. The average premium of 30% (February 1999) is definitely history! We project that there will be no spectacular narrowing of Belgian discounts in the months ahead, but that we do believe that private investors might find attractive dividend yields in SICAFIs again, based on current share prices.
q The consolidation trend, which is well on track across Europe, appears to have been ignored in Belgium. The players in the Belgian property market are all talking to each other – easy enough in such a small league – but no tangible results have been seen yet. We believe that one of the ‘difficult’ issues is the ownership of a merged or enlarged entity. Who will assert control?
There are some entities that are approaching critical mass by means of acquisitions/purchases. Cofinimmo has realised the biggest real estate deal ever (Primaedis), and Intervest (and to a lesser extent WPD and Siref) have also expanded their property portfolios. We would dare say that the SICAFI market has been fragmented as a result of funds being assembled in a hurry over the past two years. Why can’t the only two semi-industrial funds (WDP and Siref) just merge? What about Retail Estates and Intervest? And are Cibix and PeriFund, with only a couple of buildings in their portfolios, going to stand alone for ever? In this respect, we would argue that some SICAFIs should change their legal structure, form a partnership limited by shares to a public limited company to facilitate consolidation. In this category we would include companies such as Cibix (still attached to Immobel), PeriFund, Befimmo, and Wereldhave Belgium. Anglo-Saxon investors in particular appear to dislike the idea of a partnership.
Having said that, we do believe that the attitude of various chief executive officers is changing, and moving towards a more dynamic and modern approach in terms of financial communication, corporate governance, and transparency. We have had constructive but critical discussions with them on some of the above-mentioned issues, and we expect a consolidation wave in the two years ahead. After all, the Belgian SICAFI sector is a very young market (around two years old) compared to the situation in neighbouring countries, and can only be judged on a fairly short-term track record. Property funds offer no strong liquidity to investors at this point (other Belgium-listed stocks can be very illiquid too these days), but the average daily volume of between 300 and 3,100 shares will undoubtedly increase in the years ahead. Cofinimmo for example is now in the process of acquiring the Primaedis portfolio. As a first stage, the company could buy 41% of Primaedis using a e272m bank loan. The remaining 59% is held by Belgian Office Properties (BOP), a special-purpose company owned by CSFB. Cofinimmo was nevertheless authorised by the Banking and Finance Commission fully to consolidate Primaedis as from July 2000, as the company de facto controls the board through a majority seat. The management owns a six-year option to purchase the remaining 59% stake from CSFB (and vice versa). We believe that Primaedis might be fully acquired around April 2001 under the assumption that the debt ratio in Belgium will be raised from 33% to 50%, allowing for increased leverage. In addition – and this might be more tricky – a capital increase in cash of about e200m might be in the works, unless some assets are disposed of to raise cash. We believe that once the sky clears over the Primaedis transaction, we might upgrade the share to a buy. In all events, the stock should become more liquid in the near future.
We have only one favourite at this point. Befimmo, previously recommended, has escaped the effects of market nervousness in real estate over the last quarter (in contrast to other funds). The fund intends to create shareholder value through dynamic management of its property portfolio (purchases/divestments). The share is trading at a 2000 P/E of approximately 13.3, corresponding to the sector average, but still carries a dividend yield of roughly 6.3% net (similar to the bigger-sized Cofinimmo, and similar to the smaller-sized Cibix, both office peers).
Pol Tansens is an equity analyst with Fortis Bank in Brussels

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