Is small beautiful? Karen Lennox looks at how the smaller quoted companies have weathered the recessionary storm.
Small companies can claim to be lean and mean: more able to move quickly as the property market begins to pick up in order to take advantage of the rapidly shifting yields. But, more often than not, they find themselves financially constrained.
“Many of the smaller companies aren’t in a position to be proactive now. They are resting on the hope that the market will pick up,”comments Robert Fowlds, property analyst at stockbroker Kleinwort Benson.
The property sector is currently capitalised at £12.7bn, polarised between a handful of large players and lots of small ones. The largest seven property companies now account for 70% of the sector’s value. The vast majority of the listed plc’s are small, worth under £75m; their market capitalisation totals about £1bn.
These have been badly buffeted by the recession, as the “small company” table shows. The combination of plunging property values, lack of demand and falling rents has taken its toll both on profits and the balance sheet. The hardest hit are the companies which were caught out with high gearing or a large development programme – or both.
Investment-orientated companies with modest gearing have survived with minimal scars: conservative outfits such as Mountview, Allied London Properties, London & Associated Investment Trust and Southend Properties have held up relatively strongly.
Harder-hit companies have been forced to slim down their operations, pulling out of development and liquidating large chunks of their portfolios to reduce gearing.
The banks have the upper hand in refinancing negotiations and, with lenders looking to reduce their loan books, debt is difficult to roll over.
But now that property prices have started to recover, the survivors are thinking of moving to long-term investment, at least where they can afford to do so.
Raising equity at the lower end of the market is not always easy. Unless specific earningsenhancing property purchases are lined up, shareholders are often unwilling to write what are, in effect, blank cheques.
For many, the difference between survival or failure rests on their relationship with bankers. Robert Fowlds believes that, in general, the banks have been trying not to pull the plug. “Look at Bredero,” he says. “Now that Hammersmith is off balance sheet the company may have a future.”
Hypobank recently bought out its fellow lenders at Bredero’s Centre West scheme in west London. Others have also persuaded their bankers to stand by them. Developer London & Metropolitan (now worth £2.13m against £70m in 1990) was badly caught out. It got its banks to agree a £20m debt-for-equity swap in 1991 and is now discussing a second refinancing; it needs to refund £167m of debt and sort out a deficit of £55m. “We and our bankers believed we were at the bottom of the cycle when we refinanced in 1991,” says chairman and MD Christopher Harris. “But that was not the case.”
Regalian and Dares are other companies caught out by the slump. The banks have stood by them, but both have had to make deep cuts: Regalian slashed prices on its residential developments and sold an office building; Dares also had to slim down its portfolio and is currently negotiating with its bankers after falling foul of loan covenant agreements.
One of the most spectacular slides from the top is Greycoat’s. Caught with a large debt burden and newly developed central London offices, its market value has plummeted from £418m in 1990 to just £20m today. Receivership has been staved off by the Postel pension fund, which is stepping in as a white knight to rescue the company. Other fallen stars include Power Corporation, whose main asset, the Trocadero, was put into receivership earlier this year.
Some companies, like Ossory, have been reduced to shell status after property assets have been sold off or put into receivership. They are now likely to be reverse takeover targets for up-and-coming property groups.
But there are also success stories: Capital & Regional can boast a 240% increase in market capitalisation. It started degearing in 1988 and its value has held up better than most, thanks to the success of its US operations. And during the past two years the company has been able to use its paper to make judicious acquisitions.
Likewise, English & Overseas, St Modwen and Derwent Valley are all rated by the market. Relative strength has enabled some of them to issue additional shares and enhance capitalisation further.
“At the end of the day, it is down to the management,” says Smith New Court’s David Tunstall. “Big or small, sensible propositions can be financed.”
Of others that have ridden the recession, Michael Slade’s Helical Bar is well regarded. He is one of the most successful transitions: from developer of City offices in the mid-1980s to an investor concentrating on provincial industrial in the 1990s.
Now Helical is one of the select number of companies deemed to be fighting fit and ready to go: “We like the way things are shaping up,”says Slade. “We’re going to get back in there and start again.”
Five Oaks has been taking advantage of its size, or lack of it. The investment company run by John Watkins has been active in both the property investment and the financing markets in recent months. A £12.2m rights issue in August nearly doubled market capitalisation and cut gearing to 55%.
The 1990s shake-out has also seen new management move into bombed-out and troubled companies. Analysts consider that Hemingway Properties, the £11.9m investment company formed by Michael Goldhill’s and Andrew Browne’s reverse takeover of Marylebone Estates in 1991, is one to watch.
“Hemingway, along with Derwent Valley, has a highly regarded management which has made sensible expansion moves and has plans to take the company forward,” says Tunstall.
Having raised £22m with the sale of its offices at Dorset House, SE1, Hemingway is concentrating on the industrial assets it favours. Gearing of over 160% has been slashed in half.
At Dwyer, Joey Esfandi’s new regime has pruned costs by 34% and the £18.5m sale of the Abbeycentre in Belfast cut borrowings by £11m and gearing to 106%.
Martin Landau’s arrival at Clayform, now under the style of Development Securities, prompted a £27m share-placing in July, which should put the books on a sound footing. It would not have happened without Landau’s presence. Now the company is planning “opportunistic” purchases with a long-term view on new development.
And opportunities in the post-crash market are also pulling new players into the quoted sector: for example, Tony Grant at Olives Property and Tom King at Creston.
