ECM: No assets? No problem, say Reit and Spac investors
One of the fastest growing corners of the equity capital markets, particularly in the UK, has been the listing of investment funds and cash shells. The popularity of this asset class will continue in 2018, just as long as rates stay low and inflation continues to rise. Aidan Gregory reports.
Low income housing is not the kind of glamorous asset most equity investors dream of at night. Yet real estate investment trusts focused on the sector are proliferating. Three of them — Triple Point Social Housing, Residential Secure Income and Civitas Social Housing — have raised more than £1bn in the past year. This is just one sign of the booming interest in a wide variety of Reits and cash shells that is showing little sign of slowing down.
“A lot of these products are income-focused, and while we remain in a very low interest rate environment I don’t see the appetite for them diminishing,” says Tom Johnson, head of EMEA equity capital markets at Barclays in London. “With low rates it is inevitable that they are going to remain popular.”
A chronic shortage of social housing in the UK and the prospect of a safe revenue stream, secured in part by benefit payments from the government, has tempted investors that have found it difficult to secure yield in a climate of such low rates.
In addition to the expansion of Reits into social housing, there have been other new specialist funds focused solely on niche properties such as “big box” warehouses, supermarkets and student housing.
“These sectors were not appetising to traditional property investors four years ago, when one of the first such Reits — Tritax Big Box — was launched,” says Tom Frost, CEO of Akur Capital, an adviser to issuers. “At the time, property investors wanted development and capital gains. They didn’t really want a stable, long term income product — it did not fit with their UK property company investments. Most real estate investors weren’t interested because it wasn’t a typical Reit.”
The typical net initial yield on supported housing ranges from 5.5% to 6.5%, according to Triple Point’s intention to float document.
Aviva Investors promised investors a yield of 5% in the intention to float document for its first ever real estate investment trust in November 2017. Aviva Investors Secure Income Reit will focus on long-lease commercial properties.
There is little expectation of a rapid rise in interest rates in the UK in 2018. The Bank of England raised rates for the first time since the financial crisis in November but even then it only took the base rate back to 0.5% — where it was before the Brexit vote in June 2016.
“If interest rates go higher, it starts to get less attractive,” says Duncan Smith, head of EMEA equity syndicate at RBC Capital Markets in London. “Property values will start to go down a bit, but they have a long way to go and I don’t get the sense that is going to happen any time soon in the UK.”
The spread of Reits into niche areas of the property market in the UK has come amid a wider boom in new Reits coming to market.
There were more than nine Reit IPOs in London in 2017, worth more than $1.6bn, up from just two totalling $450m in 2016 and five deals totalling $494m in 2015.
Other kinds of closed-end funds are also busy. Greencoat scored another hit in July when it floated Greencoat Renewables, a new investment fund focused on wind farms in Ireland, raising €280m.
Its UK-focused fund, Greencoat UK Wind, has been listed since 2013. It raised £340m of fresh equity in its biggest ever follow-on offering in October.
“They are relatively stable compared with other equity investments and the yield is typically much higher,” says Smith.
Danger of saturation
The underlying conditions that have led to the popularity of these deals — low rates and rising inflation — show no sign of going away in 2018, but with so many deals there is a danger of the market becoming saturated.
“There has been a lot of issuance and investors are finding it harder to make more space, so it’s likely there will be a bit of a natural break in the market [i.e. a pause in issuance] but I expect there to be demand once investors have got more cash in their portfolios,” says Johnson. “I think that is the danger. Historically, when the infrastructure funds and the renewable funds first came to market, getting the first one done was hard but then one or two others followed in quick succession. But once a sector is formed and gets to critical mass, others find it harder to come as investors have made their bets already. You do end up tapping out the market for new entrants slowly but surely.”
By the end of last year, there were sure signs of investors becoming tired. M7 Multi-Let Reit, another new specialist UK fund focused on multi-let light industrial and commercial properties, cancelled its IPO on the London Stock Exchange in November due to a lack of demand.
“There was, in general terms, no doubt a degree of investor fatigue for new issues as we approached the end of 2017, but with the demand for attractive income continuing — and investors mostly thinking central bank rate raises will be gradual at worst — 2018 will very likely see more Reits trying to come to market,” says Luke Simpson, head of investment companies at Peel Hunt in London. “The key for those companies seeking to raise money in 2018 will likely be the quality of the investment proposition and (for an IPO) whether or not it offers something different to what is already listed.”
Simpson points out that with many sub-sectors of the UK property market having had their purchase yields pushed down by competition for assets, “there is some uncertainty as to where value can be found.”
In 2018, would-be Reit managers will be subject to ever-increasing scrutiny from investors.
“The investors want a specific focus and tight niche, or secure and good value niches, to invest in,” says Frost.
“They do not want income at any cost — this is not about: ‘I’ll have a 5%-6% yield and I’ll buy anything.’ This is about experienced, connected management teams, who are able to deploy monies swiftly and in a disciplined way into attractive sectors.”
Bankers are less confident that another niche area of ECM that flourished last year will continue to do as well in 2018.
There were four special purpose acquisition company (Spac) IPOs in London last year that raised a combined total of $3.1bn, making it the busiest year since 2011.
“The ones that have done well have come with a core following for management,” says Gareth McCartney, head of EMEA equity syndicate at UBS in London.
“It was a big theme in 2017, some of the bigger IPOs in London were Spacs. You could argue they tend to come relatively late in the cycle. It is less of a trend and more about strong single stock stories that make sense.”
Ocelot Partners, a Spac managed by LionTree Partners, Martin Franklin and Andrew Barron, raised $424m in March via an IPO led by UBS and Barclays.
Franklin, an industry veteran who has now been involved in half a dozen Spacs, returned again in the autumn with J2 Acquisition Ltd, a new cash shell founded with fellow former Jarden Corp executives Ian Ashken and James Lillie.
The deal raised an astonishing $1.25bn, making it one of the biggest IPOs in London last year.
Landscape Acquisition, another Spac, subsequently raised $484m in November. Noam Gottesman, the co-founder of GLG Partners, and Michael Fascitelli, former CEO of Vornado Realty Trust, are the managers behind the vehicle.
Spacs are by their very nature unique. Investors buy blind into a cash shell, which then goes out and acquires a company or a portfolio of assets within a set timeframe.
The success or failure of a Spac IPO depends entirely on the track record and investor following of the fund managers involved.
Investors that buy the stocks are typically large institutions or hedge funds with flexible mandates, which have worked with the fund managers in the past. Spac shares tend to be held in the side pocket of any portfolio.
After a busy 2017, those hoping for more such deals this year may be disappointed. The amount of money raised by Spacs last year is unlikely to be repeated for a while, because of their heavy reliance on the track record of the individuals that bring the deals.
If, however, the likes of J2, Ocelot and Landscape Acquisitions are successful and make money for their investors, then it could lead to a bigger base of demand for Spac deals in the future.
“I don’t think it is a market that is going to explode, but the more of these deals that happen and the more of them that make money, then the more investors will be open-minded and supportive of them,” says Johnson.