Vultures need to pick time to swoop

There have been two flotations in as many months by property companies looking to capitalise on the drop in real estate prices in the UK, proving a rare flurry of activity in an otherwise moribund IPO market.

The two companies – Max Property and NewRiver Retail – are unlikely to be the last real estate vultures to seek an initial public offering this summer, with several others known to be exploring the prospect of raising money to launch recovery vehicles focused on different parts of the market.

In fact, the property sector has attracted keen interest from investors hoping to snare bargains among the discounted assets, and in turn by fund managers and management teams hoping to tap into this shift in sentiment.

In spite of the value of property in the UK falling by almost 45 per cent, there is evidence that the pace of this decline is slowing.

This week, David Lockhart, the veteran property entrepreneur, unveiled his return to the listed sector with a specialist UK retail property investment company, NewRiver Retail. The founder of Halladale is seeking to raise up to £250m ($415m) on Aim to capitalise on the rapid fall in capital values in the retail sector.

The move comes less than a month after Max Property Group, the investment company managed by Nick Leslau, became the UK’s first IPO this year.

The appetite among investors is such that Max is trading at a premium to the cash that it holds. This means that investors think that ultimately there will be sufficient returns from the £220m closed-ended fund to buy cash at such inflated levels.

Mr Leslau, like other fund managers, says that the management can use their skills to find value in properties, but he also admits that this is as much about playing the cycle.

His vehicle is targeting cash proceeds equal to the net of investment alongside a preferred return of 11 per cent per year prior to hefty management payments.

The last month has also seen a renewed interest in unlisted funds. Most come with a game plan of playing the cycle as well as capitalising on distressed sellers; companies who have breached or are in danger of breaching banking agreements and need to sell.

There have been fund launches from Mountgrange, targeting 20 per cent leveraged returns; Apache Capital Partners, with an annual target of 12-15 per cent; and F&C Reit Asset Management, targeting an annual internal rate of return of more than 20 per cent.

However, the widely differing news on Thursday from London & Stamford and Terra Catalyst, two of the first Aim-listed vulture funds to be launched last year, shows the importance of timing. Opportunity knocks but once, they say, but that does not mean you have to open the door.

The Laxey Partners-managed Terra Catalyst, which invests in property companies, has exited its large stake in Shaftesbury at a loss of up to 10 per cent. Laxey saw a golden opportunity to buy an unusually large chunk in a well-regarded company, but the investment has proven unprofitable. The fund, in turn, is trading at a discount to net asset value.

Contrast that to the performance of London & Stamford, a direct property investor, which is the only property company this year to report a positive movement in net asset value.

This follows two astute purchases in particular, which have gained in value since acquisition despite the wider market fall, and follows a long period of sitting on cash. The company is trading at a premium to net asset value, showing the importance of waiting for the right property and the right time to invest.