The major UK-domiciled REITs have been highly active in the debt capital markets this year as they have capitalised on a relatively quiet real estate investor market to strategically reshape the liability side of their balance sheets.
We have seen some issuers undertake a series of expensive legacy debt buybacks and opportunistically issue longer-dated paper to a receptive institutional investor base.
Take our client SEGRO, which accessed the market for the first time since 2009. This year alone it has successfully completed four major debt capital market issues in a variety of markets raising an additional £1.75bn, having repaid around £1.3bn of legacy debt.
The company has taken advantage of the low-rate environment to strengthen its balance sheet through a reduction of debt finance costs and it has extended its weighted average debt maturity by an additional three years to over 10 years.
Incumbent investors are being asked to forgo several more years of income at relatively steep interest rates in exchange for cash now and the option of a new bond at a discount of a double or sometimes more. For this, treasury teams deserve praise for their deft relationship management.
Focus on refinancing
Another client, Landsec, has also been active in transforming its balance sheet during 2017. It has taken advantage of maintaining open and constructive investor relationships over many years to repay more than £1.4bn of legacy debt and similarly issuing over £1.7bn of new debt securities.
This is the company’s first bond issue for more than 10 years and it issued across a wide range of maturities to suit investor demand for long-dated assets. As a consequence, it was able to extend its weighted average maturity by an additional six years to more than 15 years.
It makes sense for REITs to be have been so active in their debt management in 2017. The quiet investment market has afforded them more time to focus on refinancing and they’ve been able to save money by creating more efficient debt platforms that strengthen their financial position ahead of a potential market crash.
Recently we have seen new issuers access the market, including some from new sectors such as the PRS and student accommodation. The recent base-rate rise has not been material enough to affect investor appetite and we expect the trend to continue into 2018.
But for the time being at least, the industry’s treasury teams are in a great position to continue their financial housekeeping while rates are low and underlying investor interest remains.