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Shareholders' first-call a 'barrier to capital-raising'

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GLOBAL - US REIT investor Cohen & Steers has called on European shareholders to waive their pre-emptive rights to give listed companies access to lower-cost access to equity capital.

In a white paper entitled ‘Why Europe must open access to equity markets’, the firm argues that pre-emptive rights often mean companies are unable to issue equity when valuations are optimal.

Instead, managers miss investment opportunities because the initial rights offering process - when shareholders can subscribe to newly issued shares - typically takes five weeks.

According to chief investment officer Joseph Harvey, this can lead in the long term to poor capital allocation decisions and impair shareholder returns.

Specifically, the paper claims pre-emptive rights were responsible for driving UK industrial REIT Brixton into a distressed sale in 2009 because it could not bring a rights offering to market before its share price collapsed.

Moreover, it argues that companies effectively “coerce” shareholders to subscribe by setting subscription prices below the market.

The paper contrasts Europe’s insistence on pre-emptive rights with the US, which allows equity raising without them.

It claims this accounts for the outperformance of US REITS over European listed property companies, with UK listed real estate companies trading at lower valuations than US companies that have better access to equity markets. 

In addition, Harvey targets the pre-emptive rights market structure as a contributing factor to European over-leveraging.

“Without the execution hurdles of rights offerings, companies across many industry groups likely would run more equity-rich balance sheets,” he said.

“With respect to property, the public market is a solution to help de-lever the private property sector. But real estate companies must gain better access to the public market, at a cheaper cost, without pre-emptive rights.”

In a response to the case for pre-emptive rights - that they prevent shareholdings from dilution, prevent management from issuing shares at advantageous prices and give shareholders more control over management - Harvey said he was “not against” rights offerings in specific circumstances.

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