The big new trust betting property party isn’t over
KWE, 2014’s biggest investment trust launch, is betting that Europe’s property market still has further to recover from credit crunch lows.
In many ways, 2014 has been a bumper year for investment trusts, and money keeps on flooding in.
Excluding Pershing Sqaure (PSH.AS) because it is listed on Euronext not London, the largest new issue this year was Kennedy Wilson Europe Real Estate (KWE).
KWE launched in February, raising £1 billion gross of capital. In October it came back to the market and secured a further £350 million. Jersey-domiciled (so not a real estate investment trust) and with a market capitalisation of £1.4 billion, it is one of the largest UK-listed property investment companies.
Its objective is to make annual total returns of 15%, part of which comes back to shareholders via quarterly dividends. It also includes residential property in the mix (which doesn’t feature much in most investment company portfolios).
They also buy and make loans secured against real estate. Developments and redevelopments of property are permitted; it isn’t just a passive investor.
The portfolio is managed by parts of the Kennedy Wilson Group, a large US-based property company. The group had quite significant presence in Europe before launching KWE, operating from offices in London, Dublin and Madrid and investing in about £2.5 billion worth of property in the UK and Ireland.
KWE’s initial focus is on the UK, Ireland and Spain but it is permitted to invest in other locations in Europe if it sees attractive opportunities. It can use gearing, up to a loan-to-value ratio of 50% in normal circumstances and an absolute maximum of 65%.
The basic idea behind the fund was to take advantage of the ongoing fallout from the credit crunch. They reckon vast quantities of property need to be offloaded from the balance sheets of financially stretched institutions. My initial thought was that they might be a bit late to the party, and Max Property’s (MAXP) decision in July this year to sell off the portfolio it had built up from 2009 reinforced this view.
KWE’s prospectus acknowledged market sentiment has already improved in Europe but it believes there is a lot further to go. It said, according to figures from the IPD Quarterly Digest, CBRE and the Instituto National de Estadistica, in the UK property was about 30% off its peak value (having been 42% off at the bottom). However, in Ireland and Spain the numbers were much closer to the trough; -66% versus -67% in Ireland and -44% versus -47% for Spain.
Furthermore, KWE thought that, as at November 2013, there was a lot of property (about £85 billion worth) that needed to be refinanced across Europe for which there was no credit available.
To get the ball rolling it secured a £223 million seed portfolio of 2.6m sq ft of property in England and Scotland. This had two parts: the Tiger Portfolio (14 retail, office and industrial estate properties) and the Artemis Portfolio (26 retail, office, warehouse and industrial estate properties). These deals were concluded about a month after KWE’s listing.
KWE then bought the bottom three tranches of debt in a securitised property vehicle holding 21 office, car showroom, leisure, retail and distribution properties in the UK. It paid a discount to the £119 million face value of this debt and spent €296 million (£235 million) on the equity tranche.
It then paid €480 million for two Irish property portfolios; £93.5 million for loans that Bank of Scotland had made against portfolio of high tech properties; €119.5 million for a mix of property in Ireland. It also bought the Fairmont Hotel in St Andrews, Scotland for £32 million and, most recently, spent £207 million on 111 Buckingham Palace Road, adjacent to Victoria Station.
In October, before the £350 million fund raise and the Buckingham Palace Road deal, KWE had a portfolio worth £1.2 billion, generating income of about £85.3 million, a 7.1% yield. That income was being achieved with just 89% occupancy; it plans to work on improving this.
It has planning permission to build 166 residential units in Sandyford near Dublin; add 31,000 sq ft of space to an office there and for an 11,000 sq ft extension and refurbishment of an Irish shopping centre.
They have started paying dividends but, as yet, these are modest; the latest quarterly dividend was 4p per share which would scale up to an annual yield of just 1.6% but bear in mind that they haven’t finished acquiring their portfolio yet.
There have been no deals in Spain to date but they haven’t ruled this out either, and I find it interesting that they’ve started including statistics on the Italian property market in their presentations. Maybe they have identified some opportunity here.
KWE has a sizeable war chest following the latest fund raising and the work done to refinance their portfolio.
KWE is worth keeping an eye on. The European investment company property sector is overburdened by the carcasses of funds that overleveraged in the credit boom so a more cautiously managed fund is a welcome addition.
James Carthew is a director at Marten & Co