IPOs float investors’ boat as confidence in property returns
Posted by Property Week on 7th Feb 2014
More property companies could follow Kennedy Wilson’s decision to float, as real estate sector is back in vogue. David Hatcher reports
Kennedy Wilson’s forthcoming £750m IPO (initial public offering) is one of the biggest indicators of recent times that confidence is back in the UK real estate sector (£750m float of confidence, 31.01.14).
The sector is back in vogue, and institutional investors and several listed companies are finally trading at premiums, rather than discounts to net asset value (NAV). Now that the window to float the right sort of vehicle with the right management seems to be open, Kennedy Wilson is unlikely to be the only investor looking at the equity markets with a sense of curiosity.
“The UK real estate sector tends to trade at a discount to NAV over the long term,” explains David Church, head of Europe, Middle East and Africa real estate, gaming and lodging at Bank of America Merrill Lynch. “With existing company shares trading at or around NAV - and in some cases ahead of NAV in anticipation of growth — this is an opportune moment for companies to consider raising equity for expansion.
“My personal view is that investors should focus on cashflow rather than NAV, as cashflow is within the companies’ control - although NAV is also an important metric. It is the current depth of the equity capital markets and the anticipation of a real estate recovery that have driven equity pricing to a level that could fuel further equity issuance throughout 2014.”
Initial investor meetings have been positive and Kennedy Wilson’s listing appears to be heading for success. Its strategy could be replicated by others, enabling companies to grow steadily and tap into cheap and reliable capital. However, for eligible candidates there are concerns as well as advantages of floating a company, and macro-economics could also prevent a flood of further IPOs in 2014.
Kennedy Wilson’s listing is being executed as a “blind pool” or “cash shell” - whereby no assets are put into the vehicle, and the company has more or less carte blanche to buy what it wants. This makes the process simpler, although investors must have absolute confidence in the management if they take this approach.
Placing existing investments into the vehicle for a company such as Kennedy Wilson would be complex, as most of its assets are held in co-investments of various forms and would therefore need numerous agreements from its partners.
This would be a similar problem for other traditional asset managers that have taken equity stakes in projects - for example, Ellandi, which, if pursuing such a route, would likely have to undertake a blind pool, or consider lining up a big new deal and then present it to investors.
It is rare to find large, privately owned portfolios with a management team in which investors would be confident. Bruntwood is one such candidate that has been highlighted by investors and advisers as having the potential to float.
However, for long-established, privately held companies, a public listing is synonymous with fundamental change. Realising the value of the portfolio can create short-term gains, but companies can lose the ability to make decisions autonomously and can end up at the mercy of City sentiment.
In addition, the bureaucracy of running a listed vehicle can be arduous.
Other private equity-style companies could consider the IPO route - not to raise capital, as Kennedy Wilson has, but as an exit: amalgamating coherent elements of their portfolio they have acquired through distressed sales or loan portfolio acquisitions and have asset managed.
As with any IPO, these companies will still need to woo investors with a “growth story”, and have a strong team in place. It is also likely they will need to retain a stake in order to align investor interests — investors are less likely to invest if companies are offloading all of their ownership.
One private equity investor that has been touted over the past couple of years as likely to undertake an IPO is Blackstone, through a flotation of its industrial Logicor business. However, interest is now understood to have cooled as it continues to grow, and an IPO is not likely until mid-2015, if at all.
The opportunity for real estate firms to take advantage of favourable market conditions may not be around forever, and the prospect of imminent changes to monetary policy — particularly in the US — means the window could close later this year.
“I expect a progressive reduction during the course of this year of the rate at which the US Federal Reserve buys US CMBS [commercial mortgage-backed securities] and government bonds to reduce liquidity in the global financial system on which property shares thrive,” says Martin Allen, head of pan-European property research at Deutsche Bank.
For now, there is a clear opportunity for companies to realise value, increase their access to capital and fundamentally change the make-up of their business forever. But for those that do take up the mantle, it will undoubtedly be a challenging process.