Floating on air

The AIM has become the market of choice for real estate companies focused on Central and Eastern Europe. Can they all stay afloat? By Robin Marriott

Talk to a broker in London about what flotations he is working on and chances are it involves a property company focused on Central and Eastern Europe.

The fundraising route de rigueur is London's Alternative Investment Market (AIM) where the costs of listing are significantly cheaper than on the senior stock market, and where regulation is also lighter.

At last count, there have been no fewer than eight real estate companies that have either listed on AIM this year or expressed their intention to do so.

Some of the names are pretty self-explanatory, taking the “it does what it says on the tin” approach to investing: Pactolus Hungarian Property, Eastern Europe Property Fund, Bulgarian Land Development, Danube Property Investments and FF&P Russia Real Estate Development are all examples. Atlas Estates, North Real Estate Opportunities Fund and Nanette Real Estate Group are others.

Talk to a broker in London about what flotations he is working on and chances are it involves a property company focused on Central and Eastern Europe.

On a quick examination, they have managed to raise more than £150 million (€220 million; $285 million) from investors who are buying into the growth story of markets such as Romania, Bulgaria, Croatia, Poland, Slovakia, Hungary, the Czech Republic and even further east into Russia.

Despite the amount of money raised thus far, however, the market may not be saturated yet. Trigranit, a Hungarian developer, said last month it is mulling a €2 billion to €3 billion flotation, an amount that would dwarf those that have listed this year.

With all these public listings, it is surely fair to ask whether these companies are good bets for investors looking for opportunity fund-style returns. After all, the companies coming forward are beginning to look like property's version of the Johnny-come-lately gold speculators of America's Wild West.

On the face of it, prospects look good. Property prices in the countries of Central and Eastern Europe are booming—house prices in Bulgaria, for example, are rising faster than you can say “bubble.” Incomes are rising, improvements are being made in property law and further economic growth is predicted. In addition, the lack of institutional quality real estate in countries like Romania, Bulgaria and Croatia, which will all have joined the EU by 2009, suggests the need for significant development.

But the simple problem, according to many, is that too many people are playing the same game.

In Central Europe, for example, the market is fast approaching saturation point. Yields in Poland have already fallen sharply. Now it seems all investors are moving further east and southeast to find greater returns.

Clive Beagles, fund manager at the UK's JO Hambro Capital Management, says that a few companies have been investing their money slower than expected due to competition.

Adding to the problem is that some of the countries are rather opaque and corruption still persists, particularly the further east you go.

In a recent poll of investors and bankers by property adviser King Sturge, almost one in three believed that total returns from commercial property in new central and eastern European EU states would be up to 5 percent lower in 2006 than in 2005.

With that level of skepticism, investing in these new IPOs is no longer a no-brainer and on close inspection, shares in the companies that most recently joined the AIM have performed relatively poorly.

Take Atlas Estates, for example, which raised £100 million in March. Its issue price was 341 pence, but shares are now trading at below 260 pence.

To be fair to Atlas, share performance is not the most meaningful guide of a company's prospects—net asset value provides a better measure—but its performance thus far is hardly a ringing endorsement.

It is a similar story at Bulgarian Land, Eastern European Property Fund, and Pactolus.

Nevertheless, investors are arguing that it is a longterm bet. They say there are still better yields to be had in the emerging European countries than in, say, the mature UK. So why invest in the likes of British Land or Land Securities?

That might be so, but the market is beginning to pass its judgement on the companies jumping on the AIM bandwagon eastwards. Some property companies are shelving IPO plans, while others have suffered a lukewarm reception on their debut.

Whether investors in the latest public companies are rewarded with gold or a handful of dust is a difficult one to predict. What is pretty certain, though, is like any gold rush, it helps to be in at the start.

MSREF's enters Russia
Morgan Stanley Real Estate has made its first move into Russia, buying 10 percent of RosEuroDevelopment, a development company active in retail, logistics, offices and residential. MSREF made the investment through its Special Situations Fund III. It is the first time MSREF has made an investment in Russia, although the US investment bank has had lending operations there since 1994. John Carrafiell, global co-head of Morgan Stanley Real Estate, said: “We believe Russia's strong economic growth, and its fundamental undersupply of quality real estate, provide an attractive opportunity to expand our investment platform.”

ABN exits property
Dutch bank ABN-AMRO has agreed to sell its property and asset management activities via its Bouwfonds subsidiary to Rabobank for €845 million ($1 billion). It has also sold Bouwfonds' property finance activities to SNS Reaal for €840 million. ABN-AMRO revealed that it wanted to sell Bouwfonds last December because it was a non-core business. Rabobank said the acquired business would operate as Rabobank Bouwfonds and would help strengthen the bank's position in Dutch real estate.

Private equity firms set for European hotel exits via REITs
Britain and Germany are set for a wave of hotel REIT flotations led by private equity firms, according to a report by real estate advisor Jones Lang LaSalle. Private equity firms now account for 41 percent of the €20.6 billion ($26.2 billion) of European hotels bought and sold in 2005, compared to just one percent in 2000. Jones Lang LaSalle says the strategy to exit via the tax efficient structures or similar listed vehicles offers a “quick, clean exit with several properties in a single transaction.”

Morley sets up German retail fund after industrial success
Morley Fund Management, Europe's largest property fund manager, has raised €200 million ($256 million) for its Central European Industrial Fund (CEIF), surpassing its fundraising target by 25 percent. The news comes as it announces the launch of a German Retail Investment Property Fund (GRIP) to be run with SachsenFonds Asset. “We believe that the German economy will continue to recover over the coming years,” said Ben Stirling, head of Morley's European property team.

UK still dominates Europe
The UK remains the dominant real estate investment market in Europe according to property consulting firm DTZ. Money into Property, a report by DTZ, says the UK attracted net capital inflows of €102 billion ($130 billion) in 2005, a dramatic increase over the €33 billion in 2004. The UK inflows accounted for 46 percent of total net capital flows in Europe in 2005 of €223 billion ($286 billion). Private debt and equity from investors in Ireland, the US, the Netherlands, the Middle East and Germany are leading the upturn.