PETR KOBLIC Prague Stock Exchange
Many CEE development companies are going public right now why is that?
Many have seen the success of Orco, or numerous companies in Poland, and are following. Another factor is the huge demand from domestic investors. For years, real estate has been a major investment class for many high net worth individuals, but previously they would mostly do it through small, private development buying a villa and turning it to two flats for instance. Now they have the opportunity to buy into development through the stock market and they’re doing it big time.
Is the real estate industry increasing its presence on the public markets in relation to other sectors?
We only run a small number of IPOs, so it’s difficult to speak about ratios. However, looking at the pipeline, we see the real estate sector has a larger proportion of IPO candidates than the rest of the economy.
How do real estate companies compare with others in the eyes of public market investors?
They are different, though I wouldn’t say they’re seen as more risky, or less transparent. They are traded and valued partly as a normal company looking at the PL and balance sheet but also partly via the real estate price index. Does it mean they’re riskier? That depends on the economic cycle.
What are the toughest hurdles for real estate companies launching an IPO?
The transparency of their corporate structures is by far the biggest challenge. Internal organization tends to be complicated, with many daughter companies for example. This is due to two reasons: a high and complicated tax structure, leading to lots of tax optimalization, and the fact that they never expected that one day they would be going public. They have to try to streamline their structures as fast as possible to fit the decision.
What are the key strategies for property companies to maintain their stock price?
The successful strategy for the companies is similar to all. First they have to diversify regionally, and most importantly, to other asset classes. There is no way they can work solely in the office market in Prague; many analysts believe the major part of this story is over. Secondly, they have to maintain a healthy pipeline. The basics are of course to remain transparent, be honest with investors, and maintain prudent ratios to finance the business.
MARCIN SZORTYKA UniCredit CA IB Polska
Why are so many development companies going public right now?
We believe that there are two main factors for real estate developers entering the market. First of all, the CEE region appears fundamentally undersupplied with real estate stock both commercial and residential which gives developers the opportunity for accelerated growth. One of the means of raising capital for new projects is the IPO. The second factor, in our view, is that valuations of real estate developers have risen significantly in recent months.
Is the real estate industry increasing its presence on the public markets in relation to other sectors?
We believe it’s likely to increase its share on the markets, mainly due to further IPOs that are planned.
Do public market investors expect a premium when investing in development companies?
Because of the undersupply I mentioned, investors perceive developers as growth companies. Valuation-wise, the expected growth is reflected by relatively high price-to-earnings ratios.
What are the most important demands placed on real estate companies launching an IPO?
The most important factor in the IPO is to show that the company has a proven track record in real estate development and is able to secure a land bank for future projects.
Is there any significant difference in the level of interest from foreign/domestic or from institutional/retail investors?
That’s a difficult question. I’d say all the classes hold a similar interest in these equities.
What are the prime indicators analysts look for when making recommendations on development companies?
First of all the company should deliver the plans highlighted in the IPO. Secondly, we’d look at the ability to secure a land bank and price growth potential in company’s area of activity. In terms of commercial premises we would look at real estate yields, rental cycles, and occupancy levels.
JAROSLAW SZANAJCA Dom Development
Market: Warsaw
Closing date: October, 2006
Amount raised:€108 million (PLN 420mn)
What are the main attractions of an IPO versus other methods of raising funds?
Being a public company lends additional credibility, which is a very important factor in our sector. Our IPO allowed us to raise funds to finance projects over the next four years. We’ll use it mainly to purchase land, thus allowing us to plan further ahead.
Are there disadvantages to going public?
It certainly means openness and compliance with public trading laws, which is not always comfortable on a competitive market. However, the additional credibility related to that transparency makes it a worthwhile deal.
Many developers are launching IPOs why is now the time?
Both the real estate markets and the capital markets are in very good shape that’s the main reason for the supply of offers from developers.
How has the listing affected company operations?
As I mentioned, being a public companies means openness and compliance with public trading law. That requires a different approach to revealing financial data and other information important for the company.
LUC LEROI Orco Property Group
Market: Euronext (dual listing on Prague Stock Exchange Feb 2005)
Closing date: 15 December, 2000
Amount raised: ca. €10 million
What are the main attractions of an IPO versus other methods of raising funds?
With a JV you lose much more freedom than if you go to the market. The only disadvantage with going to the market is that it dilutes the company, and you may lose some control that’s a risk. JV’s are quite heavy to manage. You either go into a financial JV, where you do all the work and the other party just brings the money, or you do it with a company in the same business.
Why are so many developers going public now?
The real estate market is hot everyone wants to be in it, which is simply a sign of the success of Central Europe, and of real estate in general. So long as the market is showing the kind of returns it is at the moment, then together with yield compression and interest rates that remain quite low, all the conditions are there for the boom to continue.
What are the strengths and weaknesses of development companies in the eyes of public market investors?
The strength is the opportunity to profit from these investment conditions and the returns that investors are making although this success is also causing problems because costs are going up heavily. The situation now is that you don’t want to pre-sell too much, because then you fix your sales at today’s prices, but construction might not begin until next year [by which time the cost may have risen substantially]. That will then be reflected in your margin.
How does listing affect company operations?
It influences the way you design and execute your projects, because public market investors don’t like hikes up and down. They all want 10 percent growth every year, and you have to take that into account. A private company doesn’t care. It knows that nothing is stable in real estate, and if sales drop by 50 percent one year, then it simply means there was less to deliver, that’s all. The market doesn’t always understand that.
You’re planning further listings in Warsaw and Budapest?
We’re active in those countries, and listing gives increased visibility. We feel there’s big demand, especially in Poland, and we’re surprised by the amount of cash available there for investment. Polish pension funds can only invest in Polish shares if you’re listed on the Warsaw Stock Exchange then you’re considered to be a Polish share.
FRANZ JURKOWITSCH Warimpex
Market: Vienna/Warsaw
Closing date: 24 January, 2007
Amount raised: €58.5 mn nett. (27.8% float)
What are the main attractions of an IPO versus other methods of raising funds?
The public markets open the way for additional steps say equity issues, or corporate debt issues whereas a strategic partner naturally has its own business concept. It’s not always easy to align the management concept of one strategic partner to another. It allows the company to maintain its own vision, control and strategy.
Are there disadvantages to going public?
Not at all. We’ve always had a strong feeling for corporate governance, and I don’t see this as a disadvantage; rather, it has a positive influence on the self-discipline of the organization.
Why are we seeing so many developers launching now?
All the developers I’ve seen doing IPOs are now building far larger schemes than in the past. Before they were building mid-sized projects that they could fund with project finance. The larger scale of projects and markets think of Russia for instance naturally brings larger funding demands.
What are the strengths and weaknesses of real estate companies in the eyes of public market investors?
Real estate is an asset class with many sub-classes of investors and developers, and then the various sectors from residential to logistics. Investors can build a balanced portfolio out of just this industry even. The clear focus of most of the companies that are going public allows investors to diversify.
They look into it that closely?
