Bloomberg reports on German property companies suffering from their high debt burden and low stock prices:
Germany’s real estate companies are fighting for survival, with deadlines looming to refinance short- term debt that’s as much as 18 times their market capitalization while the recession erodes asset values.
Eighteen times market cap. Wow, that’s almost as poor as banks these days…
Obviously, this isn’t just a fact in Germany. This is likely to happen around the globe. Caused by the following:
1. Propertyco’s taking on as much debt onboard as banks allowed them to. 80% or even 90% LTV was no exception, until recently;
2. Fueled by raising real estate prices, boosted by occupier demand, propertyshares skyrocketed, until recently;
3. High shareprices (thank you, shareholder) and high propertyvalues (thank you, appraisal firm) allowed firms to attract high debt (thank you, bank);
4. On a separate note, propertyshares were traded at tremendous premiums to their NAV, again, until recently;
5. Then, the credit crisis kicked in. Property firms were struggling to keep their financing in place, fighting their bank’s covenants, facing rising vacancies and lower valuation;
6. These effects, along with the general downturn on stock markets, caused propertyshares to plummet. 90% in just under a year is no exception. Stockmarket sentiments cause overshooting;
7. No wonder you’re left with a high debt burden, relative to your market cap.
As many things, it is indeed relative. And as long as these propertyfirms don’t go bust, their brick and mortar may stay in place. Will they go bust? Some may, yes. But Neumann (Bankhaus Lampe) is not too sure that banks will pull the plug on them:
“Banks can’t afford to drive real estate companies against the wall,” Neumann said. “They have other problems at the moment than to cash in real estate portfolios.”
I think he may be right, offering some good opportunities to buy undervalued propertystocks. Apart from that, stockprices of some of these firms have suffered more than appropriate, based on the value of the underlying assets. In other words, they trade at discounts to NAV. I will come back to this specific subject shortly.
On A Peppercorn 