Cosmetatos said that while this had been easy for REITs to date, in current market conditions - like a number of other companies - they needed to conserve cash, and it would be become harder for them to make cash payouts if the economy deteriorated further.
Indeed, the IPD reported in March that the UK commercial property rental decline deepened with an all property rental value decline of 1.34 per cent, which implies a more rapid correction in expected future cash flows than at any time since the IPD started keeping records 22 years ago. IPD research director Malcolm Frodsham commented that the momentum of falling rents is a concern for property owners.
Cosmetatos said the original proposal to HM Treasury was for REITs to make their 90 per cent distribution in the form of stock instead of cash, similar to a scrip dividend, as US authorities have allowed US REITs to do on a temporary basis. An alternative suggestion was that REITs be allowed a 12-month deferral period on the existing distribution requirement.
He added that the proposals were put forward on the basis they would be temporary arrangements over a couple of years, as REITs were concerned about cash. The impact on government and longer term shareholders would be a small cashflow delay.
However this might not be appreciated by investors seeking yield as investors including equity income funds are returning to the sector, drawn to its implied property yields of 8 to 10 per cent (as of February) – an attractive level compared to base rates and corporate bonds.
Cosmetatos continued: "This request was about allowing REITs to behave in a sensible way in the current environment; because of the special rules governing them they are much more constrained than other businesses as it is."
"We should not need to wait until we have REITs falling over for government assistance."
However he asserted that he is not expecting any REITs to become imminently insolvent, rather many of them are 'scenario planning', including for very harsh economic conditions. Cosmetatos noted that in yesterday’s budget economic forecasts had been revised down.
Five REITs have strengthened their finances via rights issues this year including FTSE 100 REITs Hammerson, British Land and Land Securities, and on the FTSE 250 Segro.
Since the rights issues there has been renewed interest in the sector by institutional investors, with British Land, Land Securities and Segro attracting particular interest on the grounds that they have stronger balance sheets - as well as very attractive yields.
Performance vs FTSE ALL Share over past year
Source: Financial Express Analytics
Top 5 performing property funds over the past year
| Rank | Fund | Group | Yield | 1y |
|---|---|---|---|---|
| 1 | Skandia IM Global Property Securities R GBP | Skandia | -56.8 | -57.2 |
| 2 | Franklin Templeton Franklin Global REIT A Acc | Franklin Templeton Inv Funds | -53.5 | n/a |
| 3 | Tri European Residential Property Standard GBP | Tri | -51.9 | -47.5 |
| 4 | Stan Life Inv Global REIT Ret Acc | Standard Life Investments | -51.2 | n/a |
| 5 | Stan Life Inv Select Property Ret Acc | Standard Life Investments | -51.0 | -51.0 |
Source: Trustnet.com
Reita chairman and head of property equities at Henderson Global Investors Patrick Sumner recently stated in industry body Reita’s quarterly report: "These issues were fully underwritten, and the response from general investors was broadly positive. But there remains a question mark over those companies that have yet to raise new money."
"The rights issue opportunity has probably passed, and the only route is now asset sales, but at what price?"
"The assumptions on which the rights issues were based were that the companies should protect themselves against a peak to trough fall in property values of 60 per cent. The IPD index has fallen 40 per cent so far and is expected to fall further. Anticipating cash flow difficulties and providing assistance, especially in certain retail instances, is par for the course."
On a more positive note the budget has made provision in Finance Bill 2009 to amend what Cosmetatos describes as four technical glitches with the 2007 REIT legislation, which could only be resolved by finance legislation. While most of these were low priority issues he said the move to allow REITs to issue convertible preference shares was a priority request, and he is particularly pleased this will become possible.
One of the FTSE 100 REITs had been seeking to issue convertible preference shares but held back due to restrictions in existing REIT legislation.