The European property sector is set to shrink further with the announcement that Invista European Real Estate will move to a realisation strategy.
The fund was listed at the end of 2006 and raised £160 million from investors, allowing investors Uberior and Chelsfield to sell down their interests in an existing fund and providing fresh capital to make new investments. The opening net asset value (NAV) was estimated to be €2.64 or 179p and they were supposed to generate a yield of about 6%.
Fast forward a few years and the falls in property prices and lack of available credit meant the fund was already in trouble. The dividend was suspended and it had been forced to renegotiate its debt on more restrictive terms.
The portfolio had, in retrospect, been acquired too expensively and using too much leverage, but it was of reasonably quality – most assets were in France or Germany, rather than in the periphery of Europe, it had a diverse tenant base, the buildings were close to fully let and it had minimal rent arrears.
The investment management fee was too high, though, at 1% of gross assets and marking its interest rate swaps to market was hurting NAV. The share price fell below €0.10.
By the middle of 2009, the fund was struggling; further falls in property values were pushing it close to its loan-to-value (LTV) limits, the investment management fee was cut to 2% of net assets and the focus was on selling assets to shore up the balance sheet. It was forced to raise £53 million with an issue of new shares and preference shares but this diluted the asset value down to €0.595.
The first quarter of 2010 saw a slight rise in property values and marked the nadir in the NAV but Lloyds Bank terminated its asset management contracts with Invista Real Estate Management and threw the future of the fund manager into doubt.
The fund proposed internalising its fund management but when this was rejected it had, after consulting shareholders, to come up with a new idea and the shift to a realisation strategy is the result.
It is unsurprising, given the turbulent history and the wide discount to asset value the fund was trading on, that it decided to give up. I wonder, though, whether the fund – which seemed to be making real progress in managing its LTV covenants, was generating an attractive yield on its investments and making noises about reinstating dividends – should be carrying on? Are we seeing the classic investment company story of raising a fund at the top of the market and winding it up at the bottom?
The European office market has been improving for some time. Average yields peaked just over 6% in mid 2009, but have been falling since and are now about 5.25%. The credit crisis depressed the new build market and so very little new space is becoming available.
The same is true of the industrial market where, after falling for some time, rents improved a little in Q1 2011, largely thanks to the improvement in the German manufacturing sector. Of course, there is no guarantee that the improvement will continue, especially now that the European Central Bank is raising rates, but agents are cautiously optimistic.
Some funds have little choice about their course of action; Invesco Property is being forced to change its investment objective to comply with the terms of its renegotiated banking facility. Treveria lost control of one of its property silos last year because it was seized by the lender – this actually enhanced its NAV.
It is working to stabilise the rest of its portfolio, have paid out a special dividend and bought in a few shares. Matrix European, Tamar European and Nordic Land realised their portfolios and returned net proceeds to shareholders.
At Sirius Real Estate, Weiss has requested a meeting to have another go at changing the board. Last time, it hoped to cut costs and improve operating efficiency. One director, Brian Myerson, resigned but the extraordinary general meeting resolutions were defeated. Sirius has not yet told the market what Weiss is after this time.
At the time of writing, Invista’s shares have jumped about 9% on the news, but there is still upside if the new manager succeeds in selling the portfolio close to asset value – it will do very nicely out of it as well, as it is getting 12.5% of cash returned above the level of the market cap before the announcement (compounded at 10% pa). It will also do well if it takes a haircut on property values to get the job done quickly, however, and this limits the attractions of buying now.
James Carthew is a former director of Advance UK Trust and a longtime activist investor