Ciref stalks large prey

Posted On Friday, 24 July 2009 02:00 Published by
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Ciref, a R432m market-capitalised British-listed property fund controlled by SA’s Coronation and Redefine, is after R11,5bn unlisted UK Glanmore property fund.

Ian Fife

At first it looks like David and Goliath. Ciref, a £32m (R432m) market-capitalised British-listed property fund controlled by SA’s Coronation and Redefine, is after £850m (R11,5bn) unlisted UK Glanmore property fund, managed by Deutsche Bank

But Ciref’s prey is weakened by being one of the worst-performing funds in the British property sector; its embattled management is having to raise £95m to reduce Glanmore’s debt to below 70%. Royal Bank of Scotland and Canada Life have agreed to hold off the fire sale of Glanmore’s properties in a bid to recover their £700m debt.

Glanmore wants shareholders to produce the £95m by July 31. But Ciref says it has a better idea. It has offered to buy Glanmore at 25 Ciref shares for every Glanmore share plus a £16 Ciref preference share, giving 6%/year. Ciref will have the preference shares underwritten at a swap ratio of 18 Ciref shares for one Glanmore. Clearly Coronation and/or Redefine intend taking up those shares to retain their dominant holding.

What particularly attracts Ciref is that 35% of Glanmore is owned by SA investors through Old Mutual, Investec, Brian Hirsch’s Pioneer and other financial services companies. It would also raise Ciref’s profile on the alternative investment market (Aim) in London among the swarm of also-rans trying to attract UK attention. And it would give the fund economies of scale that would boost its performance.

Glanmore has rejected Ciref’s offer as not in the shareholders’ interests. Its executive would probably argue that it’s a different animal from Ciref and doesn’t fit. Glanmore is unlisted and its value is directly connected to the value of the underlying properties. Ciref is listed on Aim and its share price is much more volatile. Listed values have fallen further than unlisted ones.

Glanmore’s problem is that it has postponed redemptions, which means investors can’t cash in their shareholdings. It has also passed its dividend. Ciref would free investors to cash in or stay for the ride with Ciref. South Africans would be comfortable with the more accessible SA management under CEO Mike Watters and co-director Stephen Carlin.

The FM was told by Deutsche that Jason Kearney handled the fund and was the only person who could comment. He was on holiday and unavailable.

“Besides giving investors liquidity, Ciref’s fees will be less than Glanmore’s, which are among the highest in the sector,” says a fund manager. “‘Manager’s fees’ were £17,119m for the year ended December 31 2008. The NAV at the start of the year was £570m and at the end of the year it was £306m, so if we assume a simple average in NAV of £438m, the fees are 3,9%. Even on £570m, fees are 3%.”

This is a touchy point for Glanmore’s management and Deutsche. Strutt & Parker real estate financial services MD Philip Ingman thinks 3% of NAV isn’t hugely high. He is advising clients who have Glanmore shares, though he is quick to say he hasn’t advised any of them to buy into the fund.

“The issue I have had is with past performance,” he says. “It has only just managed to stay with the market over a long period of time. It is a leveraged fund, and comparing its share price to unleveraged assets in the Investment Property Databank graphs — in a rising market — one would expect the leveraged portfolio to vastly outperform the unleveraged market. This has not been the case.

“Even in the very hottest part of the UK property boom from 2004-2007, Glanmore not only didn’t vastly outperform, it actually underperformed. The more rapid recent falls in value are caused by the leverage, as one might expect.

“This failure to perform during a rising market can only be put down to the assets it purchased and the way it managed them. Maybe a change in manager might help, but my main issue is the lock-in proposed in the current Glanmore capital restructuring, which ties investors down for four years even after they have been locked in already for nearly two.”

Ingman says: “Though promoted as a liquid and low-risk fund, it certainly doesn’t behave that way.”

Despite this poor performance, 65% of shareholders attended an extraordinary general meeting and 90% of them voted in favour of raising the extra capital.

Does that mean investors are happy with management? Not necessarily. Based on the SA investment, it seems Glanmore has been a favourite investment tool of large fund managers. They would want to preserve their territory and keep Glanmore intact. They would have the votes of their investors and they would probably have supported the capital raising. But it’s their clients who’ll have to produce the money. Faced with an alternative that doesn’t require them to cough up more, a sale could be very attractive to some Glanmore investors.

The FM could get no immediate response from Glanmore or from Old Mutual and Investec, and Pioneer’s Mark Colley said he had to “get the facts” of Glanmore and the Ciref bid before commenting. It’s inconceivable that they would want to lose clients, which could result if the deal went through, because Ciref would then have direct access to their client databases.

Ciref’s recent performance in the UK property meltdown hasn’t exactly shone, and it was too new on the scene before that to develop a reputation. But Watters was highly rated as a property manager at Corovest before he relocated to London. If they could vote, local investors would probably find the predator more attractive than the prey. They can still vote by keeping their capital-raising funds firmly in their pockets.

The writer and his family have shares in Redefine

Source: Financial Mail

Publisher: I-Net Bridge
Source: I-Net Bridge

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