FYI | Sep 01 2009
By Chris Shaw
Since October last year until the end of July this year real estate companies globally have raised more than US$41 billion in capital from equity markets, which has brought down leverage levels from an average of about 51% to around 43% now and even less in some markets.
According to ING Clarion Real Estate Securities CEO Ritson Ferguson, who has been presenting to investors and investment advisors in Australia, this money has significantly diminished the balance sheet issues the sector was facing as the global financial crisis took hold, meaning many companies have moved from a “will they survive?” position to a “how will they thrive?” position.
As Ferguson notes, the improvement has been enough to see investors return to the sector as they are recognising the companies have now positioned themselves to benefit from the next up-cycle in the property sector as cash reserves have been increased to the extent new opportunities can be considered.
The timing is good as Ferguson points out previous periods of financial stress have proven to be a time of opportunity, an example being the US Savings and Loan crisis of the late 1980s and early 1990s. During this period similar capital raisings were made by companies in the sector and in the period that followed earnings growth accelerated on the back of a combination of internal operating improvements and good acquisitions.
Given the state of the global economy at present, Ferguson expects short-term earnings performance in the property sector will be limited, his forecasts calling for average earnings to decline by 5.8% this year and by 2.7% in 2010. Longer-term the outlook is far more positive however, as in his view these softer growth rates have already been priced into the sector.
Ferguson suggests positive earnings growth will still be achieved in some markets and in particular the Asia-Pacific region, even allowing for his estimate that property values should fall by around one-third from peak to trough. Here too he suggests this expectation is already being priced into some markets, especially given listed property markets are traditionally a 6-12 month forward indicator of private property market levels.
The other factor supportive for the sector is the forecast 6% dividend yield on offer, with Ferguson pointing out the current spread between dividend yields and returns on government bonds is significantly higher than historical averages.
This leads him to suggest while what he calls the re-equitisation process has not fully run its course, capital raisings are becoming more opportunistic as they are now being tied to what appear to be compelling investment opportunities. With confidence returning to investors in the sector, and with history showing listed property is a good way to play an up-cycle in real estate, the outlook is getting much brighter in Ferguson’s view.
