Stress Test

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

To mitigate this risk, GTC announced in April plans to join Menora Mivtachim Holdings of Israel in a 50:50 joint venture to develop 110,000 square metres of office space in the Vyborgsky district of St Petersburg, far from the crush of development in Moscow. This was no hasty decision. GTC executives spent the previous 18 months investigating opportunities in both Russia and Ukraine. “We didn’t invest that whole time because we felt the level of risk didn’t suit our appetite,” says Boniel. When GTC did decide to invest, “we went for a relatively safe project. We’re talking about a project that is small for GTC, only 52,000 square metres — against our total portfolio of 2.3m square metres — and requiring an investment of only €26.8m.”

Sending Signals

Handling jittery investors is an area where property companies need to tread carefully when launching new projects in these uncertain times. Some are proving better at this than others. One that’s fallen short is Meinl European Land, an Austrian property developer with a €2.7 billion portfolio in Poland, Russia and Turkey. Last spring, it announced plans to repurchase 10% of its shares in a buyback programme that would, in the words of a company press release, “send a clear signal to investors regarding the company’s growth potential.” Rather than seeing the buyback programme as evidence of Meinl’s growth potential, however, investors saw an overstretched balance sheet. The ratings agencies agreed, leading to downgrades that caused the bottom to fall out of its share price.

In contrast, when PSP Swiss Property recently announced a buyback programme, approved at its AGM in April, CFO Giacomo Balzarini didn’t talk about growth potential for the Zurich-based company, which owns around SFr5 billion (€3 billion) of prime property in Switzerland’s main cities. Instead, he stressed the company’s need for “optimal capital management flexibility.” The buyback programme allows a maximum of 5% of issued capital to be purchased over the next three years and PSP will only initiate it “if there’s a significant market turmoil — nothing to do with Switzerland or PSP, but if there’s a threat of the stock price sinking below PSP’s net asset value,” explains the CFO. What’s more, he says, “it should be done with the conviction that you can access capital when needed.”

Is the programme a good way of giving PSP’s share price a boost to ward off advances from potential acquirers? Balzarini’s answer is a matter-of-fact “Our responsibility is to act in the best interest of shareholders.” Besides, he adds, its share price hasn’t yet needed any boosting. Thanks to PSP’s “focus, quality of the portfolio and the very conservative financing policy,” its shares rallied from a year-end close SFr57 to between SFr65 and SFr70 in recent weeks.

Gentle Shifts?

But with share prices in the industry generally trading below property net asset values, some suggest that property CFOs should get ready for sector-wide consolidation. CFOs themselves are sceptical. Most reckon that there are few synergies or other benefits from large-scale M&A among property companies.


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