UK real estate companies need to raise $20 billion

Bloomberg

"Real estate will be at the front of the queue for equity this year," said Ian Coull, chief executive officer of Segro, the largest investor in U.K. office parks. "There will be companies like us that want to put themselves in a strong position to benefit from the upturn when it comes."

The five largest real estate investment trusts - Land Securities, British Land, Hammerson, Liberty International and Segro - have combined debt of 19 billion pounds ($28 billion), according to their latest reports.

About 700 million pounds of loans are due this year, research by Nomura International shows. The banks that granted those loans may now be reluctant to provide more credit.

That could spur another year of losses for REIT investors. The FTSE 350 Real Estate Index of 18 stocks fell 46 percent last year, the most since the index was created in 1986. The worst performer was Liberty, which declined 56 percent.

Shares decline
The index has fallen by almost two thirds since its peak in January 2007. During the industry’s last slump, shares of U.K. real estate companies fell by about 60 percent hitting a low in 1992. Stock prices more than doubled over the next year, even though the sector’s biggest companies, including British Land and Hammerson, carried out rights offers.

This time out, some companies may again have to issue new shares, or be forced to sell assets at a time when there are few buyers. Commercial values in the U.K. have slumped almost 36 percent from their June 2007 peak, CB Richard Ellis Group said Jan. 9. There may be another 15 percent decline in 2009, according to King Sturge estimates.

The companies in the FTSE 350 real estate index need to raise a total of about 13.7 billion pounds of equity, assuming that U.K. values fall 50 percent from the market’s peak, said Merrill Lynch’s Stahli.

"This looks problematic as there is a very real possibility that this money is not there to begin with," he said.

British Land, Hammerson, Liberty, Brixton and Capital and Regional are among the companies that will be pushed close to breaching bank agreements by the end of the year because of depreciating assets, said Harm Meijer, an analyst at JPMorgan Chase in London.

"Companies could potentially mitigate these problems by obtaining amendments to debt-gearing covenants or by cutting dividends, but we don’t think these measures would be sufficient to address the problem fully," said Martin Allen, a London-based analyst at Morgan Stanley.