Stress Test

In the aftermath of the subprime meltdown, how are property-sector CFOs coping?

There’s another reason for Melliss’ confidence — better focus. When he arrived at Hammerson in 1994, he recalls how the company “was spread out all over the place,” with businesses in seven countries besides the UK, including the US and Australia, and a portfolio divided into 60% office and 40% retail. Rents were under pressure, and “we suffered from lease expiries at the bottom of the market.” Today, with properties just in the UK and France, and a £7.3 billion portfolio comprising mostly retail, which generally tends to be less volatile, “we have a much different risk profile.”

The portfolio reshuffle is looking smart today. Office rentals in the City of London — an important market for UK-based companies like Hammerson — fell 40% in the six months to March, according to property consultants Jones Lang LaSalle, with a further fall on the way if predictions of 16,000 job losses in the area over the next 12 months come true.

Melliss also notes that France hasn’t suffered from the subprime fallout as much as the UK, and that Hammerson’s five major French shopping centres reported total returns of more than 20% last year.

Looking ahead, retail assets overall in France are expected to outperform office assets by nearly 4%, compared with an underperformance of 2% in the UK, according to a five-year forecast of total returns from Henderson Global Investors. (See “Office v Retail” at the end of this article.)

Go East

Another finance chief pleased with his company’s choice of locations is Erez Boniel, who joined Polish blue-chip property group Globe Trade Centre (GTC) in 1997. Set up in Warsaw three years earlier by a small group of entrepreneurs with a $6m investment, the office and shopping-centre company grew steadily into seven neighbouring countries with similar characteristics to Poland, in a region now experiencing little spillover from the credit crisis in the west. “Whenever I’m in London for business lately, everyone around me has all this bad news, and I’m thinking to myself, ‘That’s not what I’m hearing back in Poland,’” he says.

Indeed, in the first quarter, GTC’s operating profit tripled year on year to €60m, and the value of its investment property increased by nearly 70%, to €950m. And its pipeline looks promising, having recently announced plans to build another 1m square metres of commercial space by 2010, increasing its portfolio fivefold. Part of that growth involves a potentially risky departure from its previous course, investing in Russia for the first time. As Boniel concludes, a company of GTC’s size “can afford to take a little bit of risk, in a very methodical manner and in a sector that we feel we are the strongest — offices.”

Most real estate investment in Russia is in Moscow, which accounts for nearly three-quarters of national real estate investment transactions in 2007, note consultants Jones Lang Lasalle. And its popularity looks set to continue. In their annual study of European real estate, the Urban Land Institute and PricewaterhouseCoopers polled nearly 500 industry experts — investors, brokers, property companies and so on — late last year, who voted Moscow as the top city in terms of investment and development prospects, displacing London. Moscow, however, was also voted the riskiest city by survey respondents.

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