The uncertainty we’ve seen in global capital markets since the beginning of the year has caused somewhat of a rollercoaster ride for financial asset prices. In early February, worries over the global economy and, in particular, the health of the banking sector saw sharp declines in equity values across Asian, North American and European markets. The FTSE 100 had plunged 11% by the time we reached the low point in mid-February, with UK real estate feeling the impact of this market turmoil, exacerbated by the looming EU referendum, volatile oil prices and deflation risks.
It’s been well reported how this turbulence fed through into sentiment in real estate, depressing transaction volumes and UK property lending deals. With some commentators claiming that credit spreads for property business have widened since the start of the year, impacting funding choices for real estate investors.
At Hammerson, we have had a different experience and believe that credit markets are quite resilient and will offer attractive terms to good operators. Our recently announced successful syndication and signing of a £420 million unsecured Revolving Credit Facility, for a five year facility at an initial margin of 90 basis points, is clear evidence to suggest that borrowing conditions remain strong. The point being here, that despite some reported signs of increased volatility in credit spreads, Hammerson secured its facility with the same pricing structure as agreed 12 months ago and some 60bps cheaper than the facility it refinances, achieving a further material reduction in its cost of funding. In fact, this bank facility represents the largest arranged by a UK property company so far this year.
Not only is this encouraging news for the strength of the credit markets for our industry but it is also reflects banks’ appetite for solid business models. In Hammerson’s case, it confirms support for retail property at a time of continuing focus on multichannel initiatives and the Eurozone’s deflationary risk. New banks to our relationship group came from China, Japan, the US and France.
The bond market, which is often mooted by some as being smarter to the temperature of the global economy, also appears to be faring well. An index of all Real Estate Euro bonds compiled by JP Morgan, shows spreads over swaps contracted from circa 110bps at the beginning of the year, down to current levels in the mid 70bps, with the uncertainty in the markets in February only widening spreads out to around 130bps. The tightening in spreads has been strengthened by the ECB’s announcement of its asset-purchase programme in March 2016.
Therefore, with investor demand for corporate bonds remaining strong, many real estate businesses have been capitalising on this continued appetite and issuing bonds, with the majority being significantly oversubscribed. A prime example being Hammerson’s €500m seven year bond with 1.75% coupon, which was issued in March.
Successful debt origination has always been about good credit positioning, long-term relationships, timing and execution, tactics we have been able to employ twice this year. It is encouraging to report that in this uncertain economic climate credit providers are increasingly focussed on the strong underlying fundamentals of the real estate sector. They are drawn to the attractiveness of visibility over cash flows, robust operational performance, falling cost of debt and improving interest cover.