Companies: BLD    DTR    EEE    HSTN    INL    IRE    MPO    PROP    SAF    TRC   

An impressive £3.4 billion of new money was raised on AIM by the property investments sector last year, alongside the £934 million raised in secondary fundraisings. To date, 2007 has proven quieter, although the 14 new companies that had come to market up to the end of May managed to lure £769.6 million in total, with £1.1 billion raised via secondary fundraisings.

This money is going into property opportunities all around the world, from brownfield developments in the UK to Bulgarian coastal resorts and IT parks in India. With a plethora of options across so many geographic regions and property sub-sectors, an assessment of management’s track record is essential.

Hunt for value

For four years London’s listed property sector dramatically outpaced gains posted by the wider market, although this year, interest rate worries, weighing more heavily than concerns about a house price bubble, have depressed the performance. UK property shares are down nearly 13 per cent overall while the overall market is up by around eight.

Nan Rogers, real estate analyst at Arbuthnot, says there are two schools of thought when it comes to interest rates and their impact on property rental yields. One holds that property is very much a debt-based purchase and you feed off yields, whereas the second maintains that, in the long term, rents tend to keep parity with inflation.

‘Over the long term I do believe changes in the interest rate will have an effect on property values but I don’t think it will be a complete and utter disaster because people are still interested in buying property,’ she says, stressing the need to be even more cautious. ‘Good value now is a 15 per cent discount to peers or very exciting growth prospects in the longer term. So, for example, we’re not going for West End office properties [in London].’

Proven ability

The clamour for land on our crowded isle means there’s pressure on developers to use as little greenfield land as possible, spelling opportunity for a handful of brownfield specialists looking to buy low and sell high by cleaning and clearing redundant industrial sites and the like, obtaining planning permission and selling them on to developers. Typically, such companies have lumpy revenues, although two such players with respected management stand out from the crowd.

Property Recycling is run by veteran value creator Paul Rackham, who sold Waste Recycling for a hefty multiple, while £80 million newcomer Inland was brought to AIM by Stephen Wicks, the entrepreneur behind the highly successful Country & Metropolitan, another company sold for a princely sum. Rackham currently has six sites with planning permission but is awaiting maximum value, while Inland has already sold two properties for almost double their purchase price, although it has seen its shares slip slightly since float.

Safe pair of hands

Elsewhere, with its own proven management formula, Safeland is looking to tap burgeoning demand for office space. In 2000, it de-merged managed workspace provider Bizspace onto AIM with a £10 million tag and the business was bought for more than £80 million six years later. Safeland has since assembled exactly the same team to repeat the trick through a fund management division to be kept within the business, called Safeland Active Management.

As with Bizspace, a deal has been inked with a private equity group to set up a managed workspace fund, with Electra putting in £15 million, Safeland £1 million of equity and then using debt to gear the fund up to £50 million – and a further £50 million is currently being sought.

‘That would give us £100 million, which we’d gear up to £200 million,’ explains Paul Davis, finance director of Safeland, which will receive a management fee of 0.8 per cent of the cost of the properties, a return of its equity in five years when the fund is liquidised and a performance-related bonus of up to 30 per cent. ‘Our return on £1 million equity could be huge,’ he enthuses.

House broker Arbuthnot’s Rogers says Safeland, presently 88.5p with a £16.4 million market tag, deserves a re-rating: ‘The business is not valued for what it’s going to do, only for its old, unexciting property trading business.’ Her target price of 124p only ascribes £1.75 million, or 9.5p per share, for the new ‘Bizspace II’ fund management division, which makes the shares look cheap.

Another reliable pair, Morgan Jones and Ian Watson, sold their previous business Ashtenne to Warner Estates for £170 million and are looking to replicate former glories with Hansteen. Its focus is on buying and letting high-yielding European, rather than UK, industrial and logistical property. Earlier this year the respected duo drummed up £70 million for Hansteen at 131p to add to the £124 million attracted at float and a recent £16.7 million acquisition in Germany and the Netherlands has pushed the total invested in properties to £194 million. Jones and Watson claim a short-term pipeline of £68 million, of which approximately half is expected to complete over the next few months’. Three times oversubscribed, the recent placing suggests the shares should find good support going forward and are worth buying on recent weakness.

Teutonic yields

German property funds are borrowing at much lower rates than their UK counterparts (around four per cent) and yet still yield seven to eight per cent from rents, which means that, even if the property does not appreciate as dramatically as hoped, they should still pay a good dividend. AIM-quoted and concentrating exclusively on Germany are International Real Estate, German Land and the £820 million behemoth Dawnay, Day Treveria. All are worth a look.

Smaller sister fund Dawnay, Day Carpathian is centred on further Eastern European states. Manager Paul Rogers aims to pay a 10p dividend this year for an 8.3 per cent yield at the current price, which explains the investment presence of AMVESCAP, Henderson Global and Credit Suisse. The company has already acquired more than £330 million of property with an annualised rent roll of more than £26.1 million and a ‘blended net initial yield’ of 7.9 per cent. Rogers says, ‘We’re focused on Central and Eastern Europe, a very wide spread of territories, which gives us the opportunity to compare market pricing.’

Boasting a similarly wide brief is Engel East Europe, a developer rather than simply an investor that persuades joint venture partners to invest cash for a share in its developments, thereby reducing risk. The company has a huge land bank of more than 17,000 units across Serbia, Bulgaria, Poland, the Czech Republic, Hungary and Romania, with the ‘potential sales value’ of the portfolio thought to be €1.4 billion (£950 million). Engel grew its pre-tax profits almost eightfold to €15.4 million from revenues up 181 per cent to €29.7 million in 2006 and house broker KBC Peel Hunt has set a 223p longer-term target for the shares, presently priced at 140p.

Bulging Bulgarian offers

As well as being located at the ‘crossroads of East and West’, Bulgaria’s attractions include largely unspoilt countryside, inexpensive mountain skiing, the popularity of the Black Sea coast, dubbed ‘the new Costa del Sol’, and of course its budding economy, which has been given a shot in the arm through its recent accession to the EU.

Exposure to the Bulgarian market is on offer through Bulgarian Land Development (BLD), Bulgarian Property Developments, Black Sea Property Fund, Orchid Developments, Lewis Charles Sofia and Madara Bulgarian Property.

Bulgarian Property Developments’ Ivo Hesmondhalgh says Ireland’s post-EU economic upturn provides a template. ‘Within decades Ireland has gone from dirt poverty to being one of the most prosperous countries in the EU. If we only get 25 per cent of what has happened in Ireland in Bulgaria then it should be a huge success,’ he says.

Bulgarian Land Development looks an interesting bet, with canny chief executive Christo Iliev possessing 13 years’ experience in the local property market as well as heading another company he dubs ‘the Foxtons of Bulgaria’, the business from which BLD sources and has first refusal on opportunities. BLD recently widened its strategic remit to include commercial and retail property as well as residential opportunities and is backed by blue-chip institutions such as Jupiter, New Star, F&C and RAB Capital as well as Swedish property veteran Sten Mortstedt’s £545 million CLS Holdings.

Eastern property promise

AIM is increasingly finding itself the listing home of Indian property funds of considerable size. Looking rather undervalued is Trinity Capital, whose diverse portfolio is managed by former Lehman brothers man Rak Chugh. The purchase of a 49.9 per cent stake in joint venture Luxor Cyber City and an investment in listed retail developer Phoenix Mills has taken funds invested to 91 per cent of those raised. Collette Ord at house broker Numis argues that the shares trade for 0.9 times Trinity’s net assets, setting a price target of 157p far above the current 84p.

Access to the Chinese property market is less extensive on AIM (China Real Estate Opportunities, the only option, is currently suspended while it looks for £260 million of new funds). There is an interesting play available, however, on Macau, one of the People’s Republic’s Special Administrative Regions, through Macau Property Opportunities Fund (MPOF), managed by regional operators Tom Ashworth and Martin Tacon, a pair with a combined 30 years’ experience in the area. Last June, this management duo attracted £105 million for residential investment in Macau, a former Portuguese settlement 60km from Hong Kong and the only location under China’s rule where gambling is allowed. China has banished gang violence from Macau, formerly something of a den of iniquity, and major Las Vegas casino players are moving in with grandiose casinos and hotels under construction. Local housing is still needed to accommodate tourists and all the extra casino workers that will be required. Visiting numbers of luck-obsessed Chinese leapt from five million to more than 20 million last year.

So far MPOF has bought a luxury residential tower that backs onto a swathe of new casinos and will be ready in 2009. Ashworth reports that the development, of which the tower is just one element, has risen 45 per cent in value already, with it taking just ten days to sell all the units made available so far. Its two other purchases have been blocks of land for proposed “entry level” blocks of flats.

Although Macau is more populous, property values are still less than half those of nearby Hong Kong and its economy continues to grow at a good pace. With the company’s property up 21 per cent in value, net asset value up 13.8 per cent since admission and nine further opportunities identified, MPOF, the only share offering access to the Macau market, is an attractive speculation.