Plummeting commercial property values are the most visible symptom of the real-estate malaise, now down 32 per cent from their June 2007 peak, according to the Investment Property Databank (IPD). The valuation rout is expected to continue into 2009, with rents under pressure, and tenant insolvencies to contend with. But the main cause of the problem is debt - or rather, the lack of it - as onerous refinancing deals loom, and threatens to increase the value of borrowings in real terms.
are a toxic combination given the loan-to-value banking covenants on property companies borrowings, which analysts expect to reach breaking point in 2009.
JP Morgan real estate analyst Harm Meijer predicts that UK property companies will need between £200m and £300m of fresh equity in 2009 to avoid breaching banking covenants, estimating that companies will offer a potential discount of 30 per cent to the open market price for the rights issues that will invariably arise.
Until recently, shopping centre giant Liberty International was considered the most likely to go cap in hand to investors. Along with , its shares tanked in December following , and it ended the year as the second worst performing stock in the index.
However, in the days before Christmas, Liberty retired £30m of convertible bonds in exchange for shares and cash, allowing it to reduce debt and increase its capital base. Investors can expect to see similarly dilutive strategies deployed elsewhere in the sector, not to mention sales of prime assets to bolster cash reserves. This looks likely at .
The brightest hope for the coming year is that real estate as an asset class will be perceived as good value. With property yields forecast to hit 8-9 per cent, and given low interest rates, low bond yields and the currency advantage for cash-rich international investors, the market could find its heart restarted in 2009.
and are widely tipped as the most defensive plays for 2009, but for companies like , , , and , which have now been relegated to the FTSE Small Cap index, survival will be an achievement.
In the words of Quintain's chairman and FT columnist John Plender, "The way to make big money in equities will be to identify those companies that will defy the market's expectation that they will fail”.
SUMMARY OF REAL ESTATE SECTOR:
