Nervous times for indebted property cos

The credit crunch claimed its first major scalp from the UK property sector last week and sadly, it is unlikely to be the last. Administrators are now combing through the multitude of property assets held or controlled by Dawnay Day, the major privately-owned company run by veteran investors Guy Naggar and Peter Klimt.

Dawnay Day managed funds - - insist that as separate legal entities, their assets are not in danger of being sold off. However, their share prices have suffered, because the parent company has dumped its shareholdings in the funds.

Dawnay's bubble burst the same week as Madrid-listed Spanish holiday home developer Martinsa-Fadesa filed for credit protection after failing to refinance the majority of its €5bn debt.

So who could be next? Merrill Lynch estimates that £48bn of UK commercial real-estate lending is due for repayment in 2008-2010, accounting for 36 per cent of outstanding loans across the sector. And Merrill reckons some companies could require additional equity from shareholders simply in order to convince banks to refinance their expiring loan agreements.

One indicator of which stocks are the most vulnerable to refinancing issues is the ratio of net debt to enterprise value (market capitalisation plus net debt). Out in front with a score of 91 per cent are Capital & Regional and Warner Estate, followed by Grainger on 85, Mapeley on 82, and Quintain and Minerva on 76.

Merrill's research was produced prior to this week's 160p-a-share for Minerva (see page 14). But Minerva's shares are trading below the bid price, suggesting a high probability that the bid will fail.

Meanwhile, the Royal Institution of Chartered Surveyors (RICS) this week revealed that demand for commercial property has fallen to its lowest level in more than a decade. The retail sector has been hit the hardest, and retailers' landlords face further problems from a campaign by the British Retail Consortium to pay rents monthly in advance, rather than quarterly.

IC View

As a highly geared property company with predominantly retail assets, Capital & Regional ticks all the wrong boxes. Though working hard to reduce gearing, in the current climate, its shares are high enough at 127p.

Last IC view:Fairly priced, 348p, 7 May 2008.

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