As if the Italian elections weren't enough, the UK property sector has given investors another reason to fret about the remarkable buoyancy of share trading so far this year - equity issuance. On Tuesday, developer St Modwen (SMP) raised £49m by selling shares to institutions at 245p. On Wednesday, Intu Properties (INTU), the blue-chip mall owner formerly known as Capital Shopping Centres, announced a similar share placing to finance a £251m acquisition in Milton Keynes.
St Modwen marketed the issue as a way of financing its redevelopment of the New Covent Garden Market area between Vauxhall and Battersea Power Station. But that project will not require cash until 2015, according to the company's own projected timetable - until then the site is expected to be locked in the planning system.
So it's tempting to see the main reason for the placing as its share price; it was the seventh-best performer in the FTSE 350 last year. After the company's annual results on 5 February, the shares broke beyond its crucial net asset value figure. The mechanics of equity issuance mean that new shares automatically boost book value per share (NAV) when sold at any level above it. For any property company with even a slightly constrained balance sheet, a stock market premium is therefore an open invitation to swap debt for equity. Michael Burt, analyst at Espirito Santo, labelled St Modwen's placing "opportunistic".
Intu's share issue raised £280m - considerably more than the equity needed for the mall in Milton Keynes. That means the company's loan-to-value (LTV) ratio will fall from 49.5 per cent to 47.5 per cent - keeping it a safe distance from the psychologically significant 50 per cent hurdle, which is the upper end of its targeted range.
That does something to resolve the constraints on the company's balance sheet, but it comes with its own problems. First, it will spread the rental income from the Midsummer Place acquisition over a larger number of shares, removing any earnings benefit from the acquisition. Second, Intu is selling the shares at 325p - a dilutive 21 per cent discount to its adjusted book value of 392p. This is an uncomfortable echo of 2009, when virtually all the major real-estate investment trusts (Reits) issued shares at vast discounts to book value. If the current trickle of equity issuance turns into a torrent, "investors will soon get tired of it", reckons John Cahill, analyst at Investec.
