Home News Investors cool on property groups as tide of cheap money recedes

Investors cool on property groups as tide of cheap money recedes

by admin
0 comment

Last March, Swedish real estate mogul Roger Akelius decided to take a few chips off the table when he discovered that his 30-year-old business was facing challenges.

Akelius Residential Property was riding a rising wave property Falling prices and interest rates. The now 77-year-old real estate mogul has presented his board with a simple plan to “protect current interests.” Sell ​​assets and pay off debts. “We are selling Stockholm, Malmö, Copenhagen, Hamburg and Berlin,” he wrote in an email to board members.

Six months later, the company signed a deal to sell nearly 30,000 apartments in Germany, Denmark and Sweden to rival Swedish real estate firm Heimstaden Bostad. Heimstaden Bostad has assumed over $6 billion worth of new debt in order to complete over $10 billion in deals. .

“Heimstaden has doubled the size of its portfolio and has taken full advantage of it to make it happen,” said David Schnapps, senior analyst at research firm Creditsights. “At the time, I thought one was right and the other wasn’t.”

A year later, interest rates rise and spiral inflation Acherius seems to have been vindicated by blackmailing a landlord in debt.

At the same time, bond investors, who have lent more money to European real estate firms at increasingly low yields in recent years, are worried about these companies. Losses on real estate bonds have outstripped the overall corporate bond market this year.

Roger Acherius, founder of Acherius Residential Properties © Mats Nolebring

A high-profile governance scandal at German residential real estate group Adler has cast a shadow over the sector, halting new bond issuance since the European Central Bank ended its bond-buying program in July. .

“Such low interest rates are not normal,” Acherius told the Financial Times. “You can mostly play with central banks, but you can’t play with the whole market for a few years. The nature of the economy will retaliate.”

Now that the tide of cheap funding has passed, some heavily indebted European real estate firms are in danger of being stranded.

Index line chart rebased, percent change this year shows real estate bond returns are lower than returns for other companies

Real estate debt, which accounted for less than 1% of European corporate bond issuance in 2012, accounted for nearly 6% of the market by last year, according to an analysis by the Legal and General Investment Manager.

A shortage of housing and a growing population on the African continent forced businesses to grow by borrowing. Demand for residential real estate increased only during the coronavirus pandemic, and with cheap debt readily available, real estate investors were happy to buy new properties at historically low rental yields. .

Not only are rent costs rising, but landlords are now also facing higher fuel, material and labor costs. Then there is the very important question of how tenants will deal with rising rents given the current pressure on income.

house in sweden
Housing shortages and Europe’s growing population forced businesses to borrow to grow © Heimstaden

choppy sea

Adler embodied an excess of easy credit years. Through a series of his debt-laden acquisitions, a little-known business was transformed into a sprawling conglomerate that owns his 70,000 apartments across Germany.

in the background Sebdet Kanel, the Austrian real estate mogul who presided over Germany’s second largest real estate bankruptcy at the age of 35. On paper, he played a passive role at Adler, building up a stake in the company through his family’s investment foundation, but near Europe – it’s not clear he was heavily involved in the real estate industry. It was a secret.

In 2020, a whistleblower told regulators and lenders that Caner was hiding its involvement with Adler through a “complex and opaque structure.” published a highly critical report on the link in

A subsequent forensic examination of Adler’s accounts by KPMG revealed extensive evidence that Caner was not only heavily involved in Adler’s decision-making, but was also paid by the company.

GM090907_22X European landlord WEB

In April of this year, the company refused to approve Adler’s account and resigned as auditor. Adler has yet to find a replacement.German financial watchdog BaFin said last month that Adler 2019 results overvalued by up to €233 million.

In response to KPMG’s review, Adler’s chairman said no “fraud or deception” had been found. Caner said the report “refuted financial and reputational-damaging allegations made by the Viceroy.”

But the episode proved to be painful for Adler bondholders. Some bonds with over 7 billion euros of debt are trading at just over 50 cents on the euro.

It’s also a more general wake-up call for investors.

“The Adler situation has had some knock-on effects as investors are reassessing what they thought was safe annuity risk,” said Gabriele Fore, portfolio manager at Algebris.

For some, the Adler issue points to broader governance issues across the club world of European real estate.

Excavator working on the construction of a new apartment
An excavator working on a new apartment building in Samhallsbyggnadsbolaget i Norden © Jeppe Gustafsson/Alamy

In February of this year, Viceroy set fire to Swedish real estate firm Samhallsbyggnadsbolaget i Norden, claiming that the “indebted” housing company overstated the value of its assets and had conflicts of interest on its board of directors. SBB denied the Viceroy’s allegations in a press statement.

Some of the governor’s criticism centered on the company’s “monstrous” pile of debt. The short-selling firm calculated SBB’s “loan-to-value” ratio of almost 70%, an industry indicator of debt to assets, if the hybrid bonds issued by SBB were debt rather than equity.

This was well above the 46% reported by SBB in the first half of 2022, but classifying hybrid loans as equities is “not uncommon” in real estate, the company said. That bond has not lost as much value as the bond issued by Adler.

Debt consolidation procedure

In Germany, Bonovia, the country’s largest real estate company and Adler’s largest shareholder, is taking steps to ease pressure on its balance sheet.

With bond markets cooling and Europe’s new bond issuance down 16% in the first half of 2022, Vonovia CEO Rolf Buch said in a recent earnings call that the company will sell €13 billion in assets. Told the list. We will provide the cash as soon as possible.

Vonovia Chief Financial Officer Philip Grosse said:

GM090904_22X New European corporate bonds WEB

Bankers expect other companies to offload real estate to reduce their debt to more manageable levels, but some are pulling out of the market and others are willing to buy.

Heimstaden, Europe’s second largest residential real estate company, spent a further €217 million in April to buy more than 2,000 homes from Finnish company Sato.

Christian Fladeland, chief investment officer at Heimstaden, said continued housing shortages across Europe mean “home investment fundamentals” remain strong.

FT Survey: How are you coping with parenting challenges?

We are investigating the impact of rising childcare costs around the world and would love to hear from working parents about what governments and employers can do to help. simple survey.

But investors are less certain. Achelius Residential’s loan-to-value ratio, an industry indicator of liabilities to assets, is currently at 9%, while Heimstaden’s second quarter result was above 45%.

“We are not so positive [on real estate] Philip Doe, head of global fixed income at asset manager Candrium, said: “There is a lot of debt in this sector.”

Algebris’ Foà added he was wary of the real estate sector. “Real estate has taken a lot of leverage. They’re very cyclical.”

However, with very few government bonds maturing by the end of 2023 and 2024, companies are not yet overly concerned about debt servicing. “If a rating agency moves someone preemptively, if someone struggles to raise their rent, or is held back by government regulation.”

But as the situation worsens, groups with less access to cash may struggle to refinance their debt. “It could lead to consolidation within the sector, which could lead to smaller names getting into trouble and being acquired in the next year or two,” said another bank official.

Another long-term investor also continues to look for European real estate opportunities. According to Roger Akelius, “There is a lot of potential to acquire well-located properties in the next three to four years after the crisis is over.”

You may also like