SCEPTICS will interpret the imminent flotation of Invista, the first London-listed specialist property fund manager, as fresh evidence that the commercial property market is getting a bit toppy. With cranes sprouting all over London, speculative development booming, rental growth slowing and vacancy rates rising on some high streets, we may be approaching the top of the commercial property cycle, in the UK at least. After a glorious few years, the breakneck pace has to slow.
However, Invista, which is being spun out of the fund management arm of HBOS, sees a different landscape, with tremendous opportunities about to be thrown up by the advent of Reits (real estate investment trusts) in the UK and plenty of moneymaking opportunities because of a dramatic mispricing of assets on the Continent. From office blocks in regional France to retail parks in Belgium, Invista claims that it can sniff bargains.
Certainly, property fund management can be lucrative. Managers demand a cornucopia of different fees from clients and there is a touch of the hedge fund world about Invista. On top of management fees of 0.5 to 1 per cent, it takes 15 per cent of any profits above a hurdle rate of return.
No wonder it is confident that it can raise £100 million of fresh capital from institutional investors in the imminent flotation. That capital will be partly used to seed the many new funds that Invista envisages.
Under Duncan Owen, chief executive, Invista has grown to have assets under management of £8 billion in the space of a few years, adding £2 billion worth in the past year. Performance has been strong; it was able to boast that every single penny that it manages outperformed its benchmark last year.
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Like all fund managers, Invista will be an operationally geared play on the asset class it manages, in its case property. And as all investors quickly learn, gearing is a double-edged sword. Charlemagne Capital is a striking warning of what can go wrong. This fund manager, which specialises in emerging markets equities, came to AIM in March at a placing price of 100p. Cue the emerging markets’ wobble of May and June. Its shares now languish at 67p. Ouch.
The prospectus comes out next week for institutional investors. Retail investors are not invited to the party, but they can, of course, gatecrash it once dealing begins at the end of the month. Worth a cautious look.
Mitchells & Butlers
DON’T be fooled by the All Bar One sign above the door. Mitchells & Butlers is a story about property.
Yesterday the company gave a clear indication of just why its bricks and mortar assets are so important. The latest revaluation of its estate shows a 40 per cent uplift in values over the past three years.
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The company said that its securitised pubs were now worth £4.8 billion. As part of the refinancing, the group plans to return £519 million to shareholders, through a 100p-a-share special dividend and an already completed £33 million share buyback.
Although the refinancing and the return of funds were expected, the size of both came in ahead of most City forecasts yesterday. It may be tempting to assume that the company is simply passively surfing the property boom, but the 40 per cent rise over three years trounces the benchmark Christie & Co pub property index, which rose only 22 per cent over the same period.
Tim Clarke, M&B’s chief executive, said that the disparity is explained by the way in which pubs are valued, with a direct and significant link to their use and earning capacity.
The revaluation of the estate provides reassurance for investors, with the property assets underpinning the group’s valuation. Net asset value estimates now range as high as 700p. The group’s shares, which have risen steadily from 500p over the past three months, boosted in part by the abortive bid approach from Robert Tchenguiz, closed 6p higher at 560p yesterday.
In addition to the £4.8 billion securitised portfolio, the group has £700 million of property that is not securitised, including £500 million of former Whitbread pubs bought in July.
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Although the prospect of a smoking ban raises uncertainties over the future performance of pub operators, M&B is insulated from the worst of this, making 40 per cent of its money from food.
However, the shares trade at too wide a price/earnings premium to the overall sector to justify chasing them any higher just yet. Hold.
Hunting
HUNTING has executed a sprightly recovery on the back of the booming oil industry. Just as shovel-sellers wax fat on mining booms, Hunting has prospered by providing numerous services to oil explorers and producers. Yesterday’s strong interim figures showed the progress made, with revenues up 33 per cent, basic earnings per share up 52 per cent and a healthy 15 per cent rise in the first-half dividend.
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The business has two halves, Gibson Energy, which serves the booming oil sands industry in Alberta, Canada, and Hunting Energy Services, which supplies rigs anywhere in the world. The order books for both are lengthening, a good sign of the confidence of customers.
However, the prospects for Hunting are predicated, as they are for most in this industry, on the crude price staying high, or at least not dropping back too sharply. Despite the conventional view that high energy prices are here to stay, that is not guaranteed. The shares, up 38p to 448p, trade on a pricey 21 times earnings and yield only 1.5 per cent. Pass.