Old-school buyers put lessons learnt into practice

Land Securities’ £750m sale of its Trillium business at a significant loss to book value to the family-owned William Pears was a further sign that well-capitalised property veterans are finding market conditions turning in their favour at the expense of listed and institutional rivals.

As in the early 1990s, the more entrepreneurial buyers willing to roll up their sleeves to squeeze value from property are finding a perfect market to fish for bargains. It is perhaps no surprise that many property old-timers have not just survived the downturn so far intact, but can also call on significant amounts of cash.

The Trillium acquisition shows that public companies are willing to swallow a bitter pill on pricing to generate necessary cash to secure their finances. Many other listed companies will this year be as keen to raise money, through sales, equity raisings or dividend cuts.

The pricing on British Land’s Meadowhall shopping centre is said to be unthinkable from just a year ago, and with talk of a minority stake in the Broadgate office estate also for sale, there are no longer any sacred cows.

Martin Allen, Morgan Stanley analyst, believes that half of the large quoted property companies will have to take action to avoid breaching debt gearing covenants.

While amendments to debt covenants or dividend cuts are possible, he says that these measures will not be sufficient to address the problem fully. There may have to be £1bn of equity raised or £2.4bn of sales to be safe, he says. By the end of 2010, this could rise to £2.4bn of equity raised and £4.9bn of sales.

Harry Stokes, an analyst at Citi, agrees that £2bn-£2.6bn of equity is wanted by UK real estate investment trusts, highlighting Segro and Liberty International.

There will also be further pressure on mainstream UK fund managers. There is a potential overhang of redemptions in some funds that must be met once hold periods come to an end.

For those with money, there is clearly the opportunity to acquire assets based on attractive cash-on-cash returns. The market entry last week of veteran investors Patrick Vaughan and Raymond Mould – their Aim-listed company London & Stamford bought its first building in the City of London from Legal & General – is a good example. The building, based off an initial yield of 7.75 per cent, will give steady income on a long lease.

The entrepreneurs behind many private vehicles are no strangers to corporate action, although others will wait until companies go bust and cherry pick assets in receivership, just as in the early 1990s.

Sir John Ritblat’s acquisition of Broadgate for British Land stands up as one of the deals of that decade and it would be foolish to bet against him and son Jamie doing similar with the €1.5bn (£1.35bn) of equity that Delancey has in its coffers.

It is no surprise that the largest deal so far this cycle – the £640m of property being bought out of the administration of the Dawnay Day group – is by the new F&C Reit venture managed by Leo Noe, a veteran of several property downturns.

London & Stamford still has more than £500m to spend in the UK, while Helical Bar’s Mike Slade has a similar amount promised through a tie-up with a North American pension fund. Other well-known investors, such as Sir Stuart Lipton, have agreed to help some of the Middle Eastern sovereign wealth looking at the UK.

Fresh funds are being raised by private investment groups such as Mountgrange, founded by Martin Myers and Manish Chande; Catalyst Capital; and David Roberts’ and Tony Quayle’s Edinburgh House.

Deals were struck in the boom based purely on expectations of capital growth, utilising complicated swaps, structures with stepped interest rate rises supposedly covered by rising rents, and of course highly geared structures that were then securitised or syndicated to others.

Catalyst’s Peter Kasch says those that saw property as a financial instrument – with high returns but also high risks – rather than bricks and mortar are under the most pressure. “The fantasy-spinning financial engineers dreaming of a new investment paradigm for real estate are obsolete, leaving the market open for us old-school property professionals.”

Many private investors left holding property have suffered as much as any in the slump, which has seen almost a third off asset values since a peak in 2007.

Entrepreneurial investors such as Dawnay Day and Aaim Limited have been among early casualties, while declines in the property businesses of Robert Tchenguiz and Sir Tom Hunter are well-documented. Glenn Maud’s Propinvest had a very public conversation with lead lender, Barcap.

But other industry veterans sold or waited for the crash, and they are among the few domestic buyers queuing to take advantage of the listed sector recapitalisation and fund shake-out.