IPOs are now expected to join bids and mergers
Real estate companies performed well this month, both operationally (Q2 results) and on the stock exchange. The strong upward trend for real estate that began on the stock exchange in April continued during the first half of August. The second half of the month was more variable.
Bidding and merger activity in the sector has been very intense over the past six months. As mentioned before, there are several reasons:
- Multiple companies were traded well below NAV at the start of the year
- The difference in valuation between sector companies has increased significantly, which means share-based bids from higher valued companies benefit
- Larger companies can finance themselves more cheaply in the bond market
- It is not easy to find attractive properties on the direct market. Several of our holdings are still likely to be targets for larger buyers. Corem is an obvious candidate in the longer run (Castellum), and Stendörren and Amasten are likely attractive. Among the larger companies, acquisitions of Fabege and Hufvudstaden (Lundbergs) could take place.
Given the strong price trend for the sector during the spring and summer, we will now probably see new issues and IPOs, while bids and mergers will continue to be frequent. The IPOs apply to companies where owners do not currently want to sell to or merge with any of the majors, but still want to diversify the ownership and gain access to new capital via the stock exchange. Our feeling is that most of the potential new real estate companies may be of interest to the fund.
The laggard real estate companies this month published their Q2 reports. In summary, they reported strong results. Underlying cash flow (CEPS) for Q2 increased 10 percent year on year. Aggregate net leasing was positive and amounted to SEK 88 million, the highest level since the second quarter of 2020. All companies reported positive net leasing. Rental income in comparable holdings increased by an average of 1 percent year on year this quarter, a figure that is likely to improve during the second half of the year.
According to SEPREF’s compilation of mainly real estate consultants’ expectations for office properties in the coming quarter (Q3), a somewhat declining yield requirement is expected in Stockholm, as well as slightly falling market rents compared with the outcome in Q2. For Gothenburg and Malmö, unchanged levels are expected. For a one-year horizon, expectations are generally more positive compared with the last survey, both in terms of continued yield compression and rent increases for all three metropolitan regions.
With a few exceptions, we have this month made only marginal changes to the fund’s holdings. We have reduced our position in Kungsleden for technical reasons (likely merger with Castellum) and we have sold all our shares in Magnolia (bid). Instead, we have increased our exposure slightly to Skanska, Selvaag, JM, John Mattson and Diös, all of which appear to be very worth buying right now. We have also increased somewhat in Annehem, but given the limited liquidity in the share it is still a very small position.