Property companies turn focus to cutting debt

Posted On Monday, 29 April 2013 06:53 Published by Commercial Property News
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With limited targets up for grabs in the market, many listed property groups are taking advantage of the cheap funding environment to restructure their debts and improve the quality of their existing portfolios.

Marc WainerNeil Stuart-Findlay, portfolio manager at Investec Asset Management, says local listed property groups "are utilising the current climate to bolster the quality of their portfolios".

"The more astute management teams are taking advantage of the lower cost of funding to raise capital to upgrade their buildings," Mr Stuart-Findlay says. This enables them to drive rental growth "and also increase the probability of retaining tenants".

Tenant retention in the office market in particular is "paramount" at the moment, given the limited demand for space due to stagnant employment growth.

He says the lower cost of debt and equity is also facilitating management’s ability to upgrade their property portfolios through acquisitions and disposals.

"Purchases of quality assets can, in general, still be achieved on at least an earnings-neutral basis, while some of the weaker assets can be offloaded at far firmer capitalisation rates than was evident in the past few years."

There has been a diversification over the past few years in terms of the sources of debt that management teams can tap into, Mr Stuart-Findlay says.

Some companies are going to the capital markets for the first time and "clearly there’s been demand in that space and it’s given them the opportunity to diversify the terms of their debt".

Eyal Shevel, head of corporate ratings for Africa at Global Credit Ratings, says that both equity and debt financing is very cheap at the moment, with strong investor demand. He says opportunities for acquisitions in the market have mostly "dried up", and "all the funds seem to be chasing the same type of property" — being quality retail properties. As such, property groups are growing through renovations and improvements to existing properties.

With cheap funding and limited acquisition opportunities, Mr Shevel expects the major activity in the sector will be consolidation, with funds merging and acquiring one another.

"A few years ago, funding was coming through pocket securitisations — that has really come to an end."

Mr Shevel says these forms of funding were "complex and cumbersome" and an administrative burden, and tied companies in for long periods. "The minute those securitisations mature now, they are refunding them with either a secure bond — which is much simpler, or even unsecured debt.

"Most of the debt that has been issued this year so far has been unsecured debt."

The risk factors are mostly low in the commercial property sector, with most companies having low gearing levels. While most property companies are taking this time to restructure their debt, "that’s not only a property thing — we are seeing it filter into the general corporate sector".

"A lot of companies now, having come through the crises, have cut down on their costs where they can and are much more efficient.

"They are restructuring their debt and getting rid of expensive bank funding and changing it to capital market funding — which has become cheaper than bank funding, much cheaper sometimes."

Mr Shevel says ratings in the sector are generally expected to "move up over time".

Credit ratings consider a company’s ability to pay off its debts and meet its obligations timeously.

"Most of the funds that we rate are in a better position than they were three years ago."

Anthony Stein, financial director of both Premium Properties and Octodec Investments, says "about a year ago, Premium established a programme in the debt capital market, which is going very well".

"The cost of funding in the capital market is unbelievable and the appetite is unbelievable. Over and above that, the banks have realised that they have got a lot of competition so they are also coming to the party."

The cheap funding meant developments that would not have been considered two or three years ago are now being carried out.

Mr Stein says a few of the group’s loans are expiring this year, ones that have high fixed-interest rates. "On expiry of those loans, we are converting back to a prime-linked loan or fix-in at probably about 8.5% for a three-or five-year period," he says.

Redefine Properties CEO Marc Wainer says that funding is "very easy" to attain in the current market. Redefine raised R800m through a "heavily oversubscribed" issue of new shares, which it intends to use to balance its funding.

Mr Wainer says that some of the proceeds will be used towards the company’s three construction projects that are under way, as well as balancing borrowings used for other transactions.

Having raised funding from the capital market and bank debt, "we thought it was an opportune time to take some of that down by issuing equity", Mr Wainer says.

Last modified on Monday, 20 May 2013 10:44

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