As the worldwide economic troubles continue it seems that there is no hiding place for property investors with each and every market around the world under pressure for one reason or another. However, on the surface it is a little surprising to see so many emerging market property companies hit harder than their general market counterparts. The shift in sentiment is no better reflected than on the UK stock market where a number of up and coming property investment companies are listed.
We are talking about groups which between them have exposure to all areas of the globe, a mass of different niche markets and have generally been performing well prior to the appearance of the credit crunch. So what is happening? Will it continue and what is the end game?
Background
While the major property companies of the UK continue to grab the headlines there is a growing band of smaller property companies which had started to make serious headway into a number of niche property markets around the world. We are talking about a group which offer exposure to such far flung sectors as townships in India, shopping developments in China and sheds in Europe. Not always the most fashionable areas of the property market but niche markets which have shown life over the last few years only to be cut down in their prime.
When you consider that the FTSE SmallCap index offers exposure, all be it on a lesser scale, to all areas of the worldwide property market it may come as a surprise to learn that the largest 10 property related companies on the AIM market have fallen from a combined value of £4.4 billion in July 2007 to just £2.6 billion today – and still falling. This is a serious fall for companies which offer exposure to what are seen as niche markets both in the UK and on the continent, markets which until now had been seen to be fairly safe from the worst affects of the credit crunch and turmoil in the overall property market.
There are a number of reasons why the fall has perhaps been more severe than expect which include :-
Lack of finance
The food of the property sector has always been finance because without finance it is impossible for investors and customers to become actively involved in the market. Cutting off the life blood of any sector at its base is like chopping away at a large tree, ensuring that it will slowly fall to the ground at some point. Some companies have passed that stage and are now literally on their knees with assets on offer at rock bottom desperation prices.
Risk factor
Is the glass half full or half empty? In the good times many investors will view niche markets as fairly well protected from the highs and lows of the general market but in bad times they are often seen as ‘over dependant’ on one area of business. This will always be an issue for any smaller company with exposure to a niche market, i.e. the way the business and business model is viewed in the good times and the bad.
Liquidity
When you are looking to buy for example a million pounds worth of Barclays Bank shares you are highly unlikely to encounter any serious supply problems as the company is enormous and the shares are very well traded. However, if you try and buy a million pound stake in a small business which may only be valued at £10 million itself, you are unlikely to get an immediate result. The same is true when selling large amounts of shares in smaller companies.
As many of the small company fund managers look to increase their cash balances for the future and reduce exposure to more unpredictable companies they may be a continuous sellers of a share for months before they are able to deal in any real size. This constant drip drip of shares into the market while the order is being fulfilled can and often does see the share price drift lower for some considerable period of time, until the sale order is either fulfilled of pulled from the market. This generally depressing state of affairs will often see investors avoid the company in question and it could easily slip off the investment radar.
Worldwide economic uncertainty
In times of worldwide economic uncertainty you will often see large areas of the population of all countries tighten their belts and attempt to reduce their out goings as much as possible. If there is less demand for any product, whether it is the latest motor car or a property, inevitably the price will start to drift lower. A small reduction in the asset value of a property can have a serious impact upon a company’s balance sheet where debt may have been raised on the back of higher asset values. This then ensures that property companies for example would need to cut back on the number of developments and slow their rate of growth to consolidate their cash levels.
So what does the future hold?
To look at the smaller property companies on the UK stock market you could be mistaken for assuming that we have reached a financial Armageddon for the sector. The shares are friendless, the assets value of the investments has fallen dramatically and debt as a percentage of the assets of the groups looks out of control. However, things may not be as bad as people think……
In troubled times the stock market and other investment arenas will often take a worst case scenario view of ANY investment. This is no different for the property market where we are seeing the value of more and more companies fall well below their ‘official’ net property asset values. While the difference between the asset value of the group and the actually market value of the group will take into account the possibility that asset prices have fallen further, many are now already at distressed levels to say the least, when possibly the situation is not that bad behind the scenes.
Over the next few months we will no doubt see a number of these smaller groups ‘rescued’ by larger property companies who have spotted the distressed nature of the group compared to the value of the companies assets. A struggling group being added to a larger parent operation will often see the perceived value of the smaller operation increase just because of the security factor – leading to an immediate uplift in the value of the company.