European real estate-related ECM volumes set to increase

In 2003 there were just 14 equity issues from the real estate sector, raising €787 million. The value of deals more than quadrupled in 2004 to €3.4 billion through 37 deals, and then almost tripled in 2005 to reach €9.3 billion, through 89 deals.

Already this year 11 deals have raised €1.1 billion and bankers say the pipeline is much fuller than it was this time last year. “We expect to see an even greater volume of deals in 2006,” says David Weaver, co-head of European equity capital markets at Deutsche Bank. “Over the past six months or so there has been a real change in investor sentiment towards real estate deals. Whereas demand used to be limited to a fairly narrow investor base, what we are seeing today is stronger demand from investors across the board.”

One reason for the increase in demand is that investors have started to feel more comfortable about valuing real estate companies from a cash generation perspective and not just in terms of their net asset value.

The supply of deals is expected to increase over the next few years as part of what investment bankers see as a macro-secular trend towards the institutionalization of real estate ownership in Europe. At present, only 30% to 35% of the real estate market in Europe is owned by institutional investors, compared with 60% to 75% in the US and Australia.

In the absence of legislation permitting tax-efficient US-style real estate investment trusts, investment bankers have been tinkering with structures to try to create tax-efficient vehicles. UK offshore quoted companies that create synthetic tax-transparent vehicles are one particular form.

Balance sheet relief

Investment bankers expect deals over the next few years to come from cash-strapped European governments and distressed companies re-examining the real estate on their balance sheets.

Germany and Austria are expected to account for a good proportion of deals, and deal volumes are expected to get a boost when Reit legislation, currently in the works, is finally introduced in the UK.

With more deals to choose between and more experience under their belts, investors are getting more discerning.

“Investors are becoming a lot more detailed in the level to which they are analysing transactions,” says Andrew Stainer, co-head of European real estate investment banking at Deutsche Bank. “They are increasingly drilling down on the specific strategy of the vehicle, the expertise and track record of the management team and particularly the proposed fee structures, where management is external. For the first time the market has seen a European real estate deal scaled back – evidence of investors responding rationally to increasing supply coming to market.”