By Richard Haimann
May 2007
Real estate stocks have lost their magic and market prices have fallen. The IPO of the British hotel-REIT Vector is considered the acid test for further development in Europe.
The stock market is not a one-way street. In fact, 2007 is supposed to be the year of the real estate stock and IPOs (Initial Public Offerings). Bankers in the consortia business are hoping for strong returns, particularly from introducing tax-optimised Real Estate Investment Trusts (REITs) in Great Britain, Germany and Italy. After four years of rapid gains, however, many investors meanwhile consider real estate stocks too hot: the Global Property 250 Index has fallen by 5.9 percent since the beginning of the year.
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Photo: After the stock market crash in 2001, REITs were considered a safe moneymaker in the USA. However, the time of generous dividends and rising prices is over—both are now falling. According to industry experts, prices will continue to fall.
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At first glance, this seems like a typical consolidation. However, the stocks of large companies in Europe had to shed some feathers. The stock price of the Spanish industry giant Metrovacesa lost 32.5 percent since January. Also, almost all British real estate investment companies that became REITs at the start of the year have disappointed their stockholders so far. The stock of Land Securities fell by 5.5 percent since the beginning of January, British Land fell by 9.4 percent, and the stocks of Primary Health Properties dropped 16.5 percent.
Difficult surrounding
That is not exactly the best surrounding for more IPOs of real estate companies. Still, the real estate tycoon Richard Balfour-Lynn and the Royal Bank of Scotland (RBS) are preparing the IPO of a hotel REIT in Great Britain. Both want to bring in up to 80 hotels from their own portfolios with a total value of 1.5 billion Euros into the Vector Company, including 15 Hilton hotels from the RBS real estate portfolio. For Deutsche Bank, Goldman Sachs and UBS, who want to accompany the emission, the IPO will be seen as the indicator for the further development of quoted real estate companies. “If the Vector IPO fails, hardly another large European real estate company will venture onto the trading floor during this year,” predicts an investment banker from the consortium.
The IPO of the German asset manager, Alstria, at the beginning of April 2007, was not a good sign for the industry: During the first trading day, the price fell under the issuing price of 16 Euros. Only half of the majority allotment of 3.8 million stocks was able to be issued because of weak demand. Currently, the stock is quoted slightly above the issuing price. “The hype of the real estate stock is over,” comments Stephan Thomas, Fund Manager at Frankfurt Trust, to the Financial Times Deutschland.
Already in October 2006, US investor Fortress had to lower its expectations of the IPO of its German residential holding Gagfah. The investment company made 852 million Euros for the 20-percent stock tranche of the REIT-listed company in Luxembourg. Market insiders know that Fortress had originally counted on 1.5 billion Euros. The only ones who were happy were the stockholders of the initial hour who sold after a few weeks. The Gagfah stock had a brilliant start—on the first day the price shot up above the issuing price of 19 Euros by more than 16 percent and was noted at over 25 Euros in November. However, today the stock, which has meanwhile been taken over by the MDax Holding, is only slightly above 20 Euros— that is only six percent above the issuing price.
Experts are not surprised. “The issuing price of 19 Euros is ambitious,” warned Thomas Gütle, Managing Director Germany of the international real estate investor Cordea Savills before the IPO. Morgan Stanley sees the fair value only at 18.20 Euros—below the issuing price.
Puzzling commentsIt is no wonder the British private equity company Terra Firma has not yet provided concrete information about the long-awaited IPO of their German residential real estate subsidiary Deutsche Annington Immobilien Gruppe (DAIG). Internal company circles might claim the IPO will take place “in the winter this year at the latest”, and the emission earnings will be “clearly more than one billion Euros”, but, Guy Hands, founder and CEO of Terra Firma, recently fuelled speculations of a possible sale of DAIG with their 180,000 own and 50,000 managed apartments to Gagfah. Such a deal would be a “wedding in heaven”, he told journalists.
Analysts are still puzzled whether these comments were just British humour or a hidden offer for sale. The corporate tax reform that will go into effect in Germany in 2008 will only make it more difficult for Terra Firma to bring the DAIG onto the market at a high stock price as a REIT in Luxembourg, as Fortress did with Gagfah in 2006.
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