Business | Property
Oil money to lubricate mergers
Acquisitions during a slump have higher chance of creating shareholder value.
- By Daniel Thomas, Financial Times
- Published: 00:08 June 20, 2008
Have we finally seen the beginning of the much heralded merger and acquisitions phase of the property cycle?
The slow mating game between Dubai's Limitless and developer Minerva is hopefully not a sign of things to come - the process has been like watching glaciers collide - but there is talk among bankers that activity is picking up just as many in the real estate market are flicking through brochures for an extended holiday.
The oil money, looking for diversification into other businesses backed by similarly tangible assets, is now undoubtedly in town and spending relatively freely, as many had hoped.
Admittedly, it seems to be the only game in town at the moment, although there has been market chatter that one of the big US investment houses is on the prowl, while another Australian investor is said also to be waiting to make its move.
Gazeley was sold by its parent Asda Wal-Mart for a sum of more than £300 million last week - apparently not far from what the retailer realistically hoped to achieve - to another of Dubai's investment subsidiaries, while Trillium, Land Securities' outsourcing arm, is also being chased by Middle Eastern cash.
Meanwhile, in another part of the property sector, Humberts, the 165-year-old estate agents chain, was bought out of "pre-pack" administration last week by a Middle Eastern investor for the price of one of the homes that it is often asked to sell.
The headline sale price of £3.2 million was buttressed by £1.1 million of cancelled deferred considerations, but even at face value was a tenth of the company's market capitalisation a year ago. Not so long ago, the brand name alone might have been worth more without the 34 branches, staff and contracts. There was an almost daily flight of people from the company over the past month, a demise by a thousand cuts as it swiftly lost the very businesses it had acquired over recent years. Most managed to walk away with their companies still intact, and a brand name that needed only dusting off.
Similarly, the private equity acquisitions in that sector of Countrywide and Foxtons are now looking great for the vendors, but potentially risky for their buyers given the decline in value of their companies in relation to the debt used to buy them.
However, price no longer looks to be a risk in the property market - although whether it will be a reward remains to be seen.
Unrealised potential
According to a recent report by the Boston Consulting Group, mergers and acquisitions carried out during a downturn have a higher chance of creating shareholder value, partly because acquirers tend to see targets with unrealised potential and partly simply because purchases are cheaper.
UK property stocks have fallen 36 per cent over the past 12 months, and 47 per cent since the peak at the beginning of 2007 - coinciding with the introduction of UK real estate investment trusts.
Average price-to-earnings ratios are 17 on large-cap stocks, according to JPMorgan's 2008 earnings forecast, although some of the largest companies such as British Land and Land Securities are trading below average.
So it may not prove a bad time to buy big right now - the only thing holding back activity is the feeling there may be a better time when companies will become cheaper.
All companies linked to the property sector have been hit almost universally hard, but there are more falls in capital values expected in the direct property market, be it commercial or residential, which means further write-downs on asset values are inevitable.
The benchmark IPD index last week witnessed the first tangible signs of the feared "double-dip" recession in the property sector, with capital values and total returns falling further in May than April after several months of improvement.
There was a small fall in rental values registered last month, making it the first month that both the yield and rent components of capital value growth have been pushing downward.
It is impossible to see any upside in the short term - yesterday Lehman Brothers again downgraded net asset values in the commercial property sector by an average of 6 per cent, adding that prices needed further falls of up to 17 per cent before dividend yields would be supportive.
Industry: Popular choice
At a Morgan Stanley conference last week, participants were asked what could go right for the property industry over the next 12 months, and the most popular choice was "bids for quoted property companies", closely followed by "buying spree by sovereign wealth funds", showing that people saw little upside in the market on its own merits.
The oil money that is doing all the chasing right now has long term returns on its mind, and little in the way of debt to worry about today. But this will not be the case for many potential suitors. The fear factor will still keep bidding at bay for now at least.
Share this article
Gulf News classifieds
Popular in Business
Business Editor's choice
-
What to expect at the Dubai Airshow
We preview what types of aircraft to expect at the Dubai Airshow
-
Air Arabia revamps its website
Upgraded site offers new features, accessible in range of languages
-
Dubai looks ahead to 2010 with new projects
Global visitor numbers up 4% on year and occupancy rates remain strong
-
UAE
Abu Dhabi's infrastructure spending
New road networks to reignite construction sector.
