Twelve months on – and despite no end in sight to the eurozone crisis – we see no fundamental reason to change that view.
If anything, the market has improved thanks to an increasingly diverse universe of funding options and more attractive lending rates.
Indeed, according to a recent survey conducted by Deloitte, UK finance ministers are feeling more confident about the availability and the cost of debt than at any other time since the onset of the crisis.
Let’s start with banks. True, the regulatory environment heralded in by BASEL III has meant many lenders have had to start the process of deleveraging. But the predicted fire-sale of properties has not materialised.
Property prices, as a result, have not fallen nearly as far as many had predicted. And those distressed assets that have come to market have been snapped up by the likes of Hansteen for a tidy profit.
Lending requirements may also have tightened, but for companies such as Hammerson and Unbail-Rodamco – firms that we like – access to bank funding remains in place.
These companies have strong balance sheets and their portfolios contain some of the best-quality properties in Europe – precisely the types of businesses that banks want on their loan books.
Insuring for the future
That said, the days of cheap and plentiful bank credit have gone.
This has created opportunities in the market for a diverse range of players. Insurance companies, for one, have become increasingly active in the provision of real estate debt.
Last year, Shaftesbury took advantage of this sea-change by borrowing £120m from Aviva at a more competitive rate than many banks could offer.
Recently, Allianz and AXA have ramped up their activities in the sector, attracted by the offer of low-risk transactions and superior credit spreads.
At the time of falling annuities, real estate debt is a relatively secure source of income for insurance groups looking to meet their long-tailed liabilities.
As at 2012, insurance firms held 14 per cent of the European real estate debt market. This figure looks set to grow in the coming years.
Time to take credit
Tapping the market directly, in the form of issuing corporate bonds, is another popular way to gain funding.
Bond issuance can give quick and, given the current climate, cheap access to large amounts of capital. From an operations point of view, it also gives the issuer independence and a freedom to administer their portfolios in a more dynamic manner.
Bonds also mean real estate firms can gain funding with a longer maturity, especially when compared with the duration of your average commercial loan.
Activity so far this year has been brisk.
On the continent, Corio and Unibail-Radamco both issued eight-year bonds in February, raising €500m and €750m respectively – the latter with an extremely low coupon of just 2.375 per cent.
Closer to home, UK group Intu raised £800m on the market. These deals highlight the growing importance firms on both side of the Channel place on the diversification of their funding sources.
Bourses for courses
Another way for companies to expand is to raise equity.
This method has grown in popularity over the last year as it reduces a firm’s debt levels.
British Land was the latest company to go to market, with a £500m placing to help finance future development projects and acquisitions.
This follows in the footsteps of Great Portland and Capital & Counties, which raised £140.6m and £150m respectively last year.
With many companies trading close to their NAV [net asset value], we expect to see more of this activity as 2013 progresses.
This expanding universe of funding options is not only making financing easier for the better real estate firms, it is also making it more profitable.
The biggest expense a property company will face is the interest on its loans. But with increased competition driving down these rates, real estate firms of all stripes will increasingly reap the rewards.
With the added ability to growth through equity issuance, real estate companies should continue to grow profitably in 2013 and beyond.
Vicky Watson is investment director in SWIP’s global equities team and the manager of the SWIP European Real Estate fund.
Performance of manager vs peers since Mar 2008
Source: FE Analytics
Watson has beaten her peer group composite since she started running portfolios in 2008, albeit with more volatility.