The successful flotation of Canary Wharf on the London Stock Exchange last month once again focused attention on the property sector. The company – which owns the massive office development in London’s Docklands – was valued at £2.2bn (E3.3bn) and instantly became the UK’s third-largest quoted property company, outstripped only by the sector giants Land Securities and British Land.
The flotation price valued Canary Wharf’s shares at a premium to their net asset value, which is extremely rare. Almost all property companies are trading at a discount. However, analysts say this is due largely to technical factors: to attract development to Docklands, the UK government allowed Canary Wharf 100% tax relief on all capital expenditure well into the twenty-first century, meaning that its rental income goes straight to the bottom line. The company is therefore the nearest thing to a tax-transparent property vehicle in the UK, and this accounts for much of the institutional interest in the issue. UK institutions reportedly snapped up more than 50% of the new shares.
The flotation coincided with a resurgence in institutional interest in UK property. Merrill Lynch reports a return of institutional and debt-originated money to the sector. But although share prices have been rising they are still well below their peak of late 1997. Merrill Lynch calculates that the seven major quoted UK companies in the sector are trading at an average discount of 19%.
In recent weeks three companies have finally lost patience with investors’ refusal to give them full credit for their assets, and have thrown in the towel, sparking off a new wave of corporate activity in the sector.
Amsterdam-quoted European City Estates announced that it was looking to merge or be taken over in a drive to improve shareholder value. The company has a Dfl377m (e830m) portfolio, mainly consisting of offices in Germany and the Netherlands. But even after the company announced that it was effectively in play, the share price still did not rise anywhere near net asset value. At a current price of Dfl27, the shares are still 20% below NAV. The most likely purchaser is the company’s own management, which may be happier running a private operation, although ECE also has a relationship with US investor Apollo Real Estate, which may be interested. A deal is expected within the next three months.
Smaller UK companies are facing a similar problem: City of London property specialist Greycoat – valued at £183m (e273m) – decided to put up the for sale sign. “Our shareholders are upset with the size of the company, so we decided the best way to realise value was to put the company out to tender,” says chief executive Peter Thornton.
But no sooner had the decision to sell been made than Delancey Estates – backed by George Soros and headed by Jamie Ritblat, son of British Land chief John Ritblat – stepped in with a bid, pitched at 193p per share. Delancey already held 10% of Greycoat but analysts treated its all-paper offer with something approaching derision. It represents a massive discount to Greycoat’s NAV of about 250p per share and this would not meet shareholders’ aspirations to realise value. City sources say something closer to 230p per share would be necessary to deter the company from liquidation.
Greycoat was actually the second UK company to choose liquidation: earlier this year Chesterfield Properties’ shareholders voted to liquidate the property portfolio. Their view was that, even allowing for a slight discount for a portfolio sale they would still receive more than their shares had been worth. However, the actual mechanics of the sale provoked a storm of protest: some of the properties were to be sold to former Chesterfield directors and a portfolio sale was agreed with GE Capital on the basis that Robert Maxted, Chesterfield’s chief executive, would receive an on-going fee for managing them.
Merrill Lynch’s property analyst Robert Fowlds questioned whether the directors were actually looking to achieve the best possible prices in the interests of shareholders. Faced by mounting criticism, Maxted resigned.
Only hours before an EGM to discuss the disposals, a rival quoted company – Quintain Estates – made a bid approach. Quintain’s plan is to sell off the central London properties to the specialist investor Benchmark and retain the others. Quintain Estates has yet to name its price, and other rival bidders now look to be circling Chesterfield.