Equities Real Estate Finance and Banking Property Funds

Property Bond Issues Heading For Record Year

**Property Bond Issues Already Double 2011’s Total**

According to research provided for The Financial Times, European property firms are closing on a record year of bond issuance after already raising almost double the total of the previous year. According to the paper’s report from 25 November 2012, this record high of property bond issues underlines the industry’s growing disenchantment with the traditional funding market.

Only for the first nine months of 2012, real estate companies in Europe have raised €15.4 billion (£12.4 billion), compared to a total of €8.3 billion (£6.7 billion) in the previous year, through a combination of smaller denomination retail bonds, corporate bonds and private placements. According to estimates, if this trend remains, property bond issuance will reach almost €20 billion (£16.2 billion) by the end of the year — a record annual total.

**Lower Coupon Interest Rate**
Additional data provided by the FT research also shows a new trend in debt valuation. The average coupon interest on the 134 bonds issued so far this year is 4.74 per cent, suggesting that capital markets are pricing risks lower than European banks. An example from the extreme end of the spectrum is French real estate investment trust Unibail-Rodamco (EPA:UL), which issued €750 million (£606 million) worth of five-year bonds at a coupon interest of 0.75 per cent. Unlike this issued amount, however, most of the new bond issuance so far in 2012 came from smaller, often family-controlled property groups raising between €1 million (£809,334) and €5 million (£4 million).

**Two Reasons for Property Bond Issues’ Surge**
!m[Europe’s Real Estate Groups Closing in on Record Year of Bond Issuance, Lending Shortfall to Grow ](/uploads/story/895/thumbs/pic1_inline.png)According to global head of research at property consultancy DTZ, Hans Vrensen, there are two reasons for the significant increase in bond issuance this year – the recent bank lending shortfall and the general preference of real estate companies to diversify their financing. Mr Vrensen told The Financial Times: “If you are a property business and you want to raise any sort of large fund quickly, there isn’t a bank in Europe that can do the loan at the moment. On top of this, a lot of companies in the sector are keen to diversify their financing away from the traditional funding of the banks.”

**Lending Shortfall Expected to Grow**
During the past five years, lending to real estate firms in Europe has fallen drastically as the continent’s banks focus on ridding billions of euros of debt amassed before the financial crisis. Some of Europe’s main lenders, including France’s Société Générale and Germany’s Commerzbank, have even shelved all of their real estate lending.
According to analysts, the funding shortfall is set to grow further next year as changes under the third accord in a sequential move on global bank regulation — Basel III — will increase the amount of capital banks must have to offset the risk of holding property backed debt. As a result, over the next few years, additional funding market for real estate groups, which includes bonds, private equity finance, and borrowing from insurers, could reach €200 billion (£161 billion), according to investment bank Morgan Stanley’s estimates.

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