Funding Gap Leads U.K. Property Companies to Retail Bonds

CLS Holdings Plc, a U.K. investment company with $1.5 billion of real estate, wrapped up a bond sale four days early last month because of strong demand on London’s two-year-old market for individual investors.

The owner of properties in the U.K., Sweden, France and Germany increased the size of the sale by 30 percent to 65 million pounds ($105 million) after selling the 5.5 percent unsecured bonds to “mom and pop” investors.

Real estate companies, faced with banks that are reluctant to lend, have had to seek alternative sources of capital to make acquisitions and finance developments. CLS is the fourth property company this year to tap the London Stock Exchange’s Order Book for Retail Bonds, or ORB, joining banks, insurers and utilities using the market to raise funds.

“There’s no other way of getting unsecured lending” than so-called retail bonds, CLS Chief Executive Officer Richard Tice said in an interview.

Workspace Group Plc, landlord to 4,000 small businesses in London and southeast England, is offering as much as 75 million pounds of debt securities on ORB. Primary Health Properties Plc sold 75 million pounds of unsecured seven-year bonds in July with a 5.375 percent coupon.

Places for People, a provider of social housing, raised 40 million pounds in January with a 10-year inflation-indexed bond. Nine months earlier, it raised 140 million pounds in another debt sale.

Following Suit

“We expect more property companies to issue bonds -- including retail bonds -- as a way of diversifying their funding sources and reducing their reliance on the banking market,” said Patrick Long, managing director of real estate at Lazard Ltd. in London.

The LSE established ORB in 2010 to open the corporate bond market to retail investors by lowering the minimum investment. Energy network operator National Grid Plc and a Tesco Plc’s personal-finance unit are among companies that raised a total of more than 2.2 billion pounds on ORB since its inception, including about 800 million pounds raised this year.

Retail bonds allow companies to borrow for longer than five years, the usual term of a bank loan, said Harry Hyman, managing director of Primary Health, or PHP. The money raised can also be deployed more quickly because the debt is unsecured, he said.

Funding Acquisitions

The real estate investment trust, which owns 160 doctors’ offices and medical clinics across the U.K., was the first publicly traded property company to raise money on ORB. Since the bond sale, PHP acquired a new medical center in Newton Abbott for 3 million pounds and funded the construction of another facility in Stourbridge for 8.5 million pounds.

“We have lots more deals on the horizon,” Hyman said. “In the medium term, we will be doing more than one retail bond issue.”

Borrowers may struggle to refinance as much as 100 billion pounds of existing real estate loans under current bank-lending terms, according to a December survey of lenders compiled by De Montfort University. As banks repair balance sheets damaged by losses from the financial crisis and seek to meet tougher capital rules, property companies are increasingly looking to securities markets for funding.

So far this month, British Land Co., Capital & Counties Properties Plc, Capital Shopping Centres Group Plc and Hammerson Plc have sold bonds, convertible bonds and shares to raise 1.25 billion pounds.

High Yields

For small investors, the appeal of retail bonds is their yield, which exceeds record-low returns from U.K. government bonds or savings accounts. Their willingness to invest in debt securities gives small property companies a new source of unsecured credit that’s unavailable from banks, the wholesale corporate bond and U.S. private placement bond market, companies such as Workspace say.

“In the last 12 months the penny has dropped that low interest rates are here to stay for a very long time, so everyone is chasing income,” CLS’s Tice said. “There’s now a way for savers to get a really secure form of income through an open bond market.”

Workspace is offering seven-year bonds with a 6 percent coupon, or 4.93 percentage points more than the equivalent U.K. government bond. It’s also 2.27 percentage points more than the average income from five-year savings bonds offered by banks, a higher-yielding product popular with individual investors, according to personal finance website

‘Sensible Price’

“We see this as a long-term source of funding,” Workspace Group Finance Director Graham Clemett said in an interview. “We’re comfortable that we can get money at a sensible price.”

Retail bonds still cost companies more than bonds sold on the wholesale market, which require a credit rating. For example, Hammerson Plc, Britain’s third-largest publicly traded property company, raised 500 million euros ($645 million) last week selling seven-year bonds with a 2.75 percent coupon.

Some wealth managers don’t share the small-cap companies’ enthusiasm for ORB, saying the higher yields that retail bonds offer to small investors carry greater risk.

There are “plenty of pitfalls,” said David Smith, co-manager of the 470 million-pound Strategic Bond Fund run by Bristol, England-based wealth manager Hargreaves Lansdown Asset Management Ltd. Savers need to diversify investments, may face difficulty in trading the bonds and need specialized knowledge to fully understand where they rank among creditors in the event of a default.

Risk Concern

“We are concerned that private investors aren’t fully aware of the risks” of buying retail bonds, Smith said.

The minimum investment for retail bonds is typically 2,000 pounds with bonds denominated in increments of 100 pounds. That compares with the wholesale market, where the minimum investment is 50,000 pounds, limiting it mostly to professional money managers.

“The retail market is available in smaller tranches which can be more efficient for certain real estate issuers,” Lazard’s Long said. Companies need to sell a minimum of 200 million pounds of bonds to tap the wholesale corporate bond market, he said.