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Solid Ground: real estate companies turn to equity financing

As global economic conditions continue to deteriorate, more companies are expected to turn to their balance sheets in 2023 to raise capital, particularly European real estate companies.

Some companies are already taking advantage of a window of brief market optimism at the end of 2022, as reported by ECM Explorer’s sister column ECM Pulseto issue deals.

A slew of European companies, many in Belgium, are in the market with capital raises, most recently VGP NV [EBR:VGP] which completed a EUR 302.9m rights issue today, November 25, according to a release. The deal had a take-up of 94.4% with banks launching a sale for the remaining stake on the day of the results announcement.

In June, Aedifica [EBR:AED], a Belgium-based health care investor, raised EUR 254.5m in an accelerated placement; this month, Montea [MONT:EN Brussels], a specialist in logistics real estate, raised EUR 103m from an issue of new shares.

An ECM investor predicted that real estate companies will be big issuers of primary equity next year as is often the case in a downturn. Dealogic data confirms that real estate capital raising does tend to follow economic cycles. Deal volume shot up in 2009 straight after the financial crisis as well as is 2020 and 2021 in the teeth of the Covid-19 pandemic.

The sector once again looks threatened, mainly by higher interest rates, inflation and recession. Companies have huge long-term commitments, which need financing, but the debt markets are far more expensive, said an ECM banker. The only option is equity, which will prompt several to tap the markets, he added.

Thankfully, investors are receptive to these issuers, especially because their deals are not about financing balance sheet issues but often about funding new growth strategies, said this banker.

“The market is good for that because buysiders are welcoming these stories,” he noted.

A second ECM banker said that real estate was a strong sector for ECM, and it was benefitting from the tailwind of previous quarters. Investors tend to be ready to finance projects and are comfortable with the plans laid out by issuers, and he also noted most stories are based on growth trajectories and long-term development plans.

In the context of real estate, investors particularly like logistics assets, he said, adding that warehouses and industrial parks get a lot of attention.

Demand for real estate exposure comes as investors continue to shy away from tech stocks, with buysiders able to grasp more tangible business fundamentals, the second banker said.

He added that a full host of European companies are ready to go to market at an appropriate window.

At a time of shifting economic sands, European real estate companies are looking at their foundations once again.