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Richard Balfour-Lynn: his Vector Reit fell flat |
Vector, a 71-hotel Reit, proved to be a bit of an embarrassment to the property entrepreneur Richard Balfour-Lynn. Those close to the deal blamed its collapse on rocky market conditions. It is feared the market for real estate-related transactions, which has boomed in the past few years, might be close to the top and is starting to look vulnerable as borrowing costs rise.
In contrast, fund managers who looked at the deal pointed to a mixture of doubt about the valuations of the hotels in the structure, the fees paid to the management company and the key players in the deal as the causes of its failure. The portfolio includes several hotels owned by the Alternative Hotel Group (AHG) and Marylebone Warwick Balfour (MWB), and some investors were wary about Balfour-Lynn remaining on the boards of AHG and MWB after the deal. Funds that shunned the flotation included Morley Fund Management, Standard Life, Cohen and Steers, and Henderson Global Investors.
The advisers on the deal were Deutsche Bank, Goldman Sachs and UBS. The day before the IPO was pulled, advisers tried to save the transaction by cutting the target price. The price range of 995p to £11.15 was cut to an estimated 875p to 900p, dropping the market capitalization of the offering to £1.8 billion ($3.62 billion) from £2.2 billion. These last-ditch efforts still were not enough to get the deal done.
But analysts do not think this failure reflects the potential of the market: "Major lessons have been learnt from the Vector deal. I think it has shown how important it is to have a fee structure that is clearly explained and made attractive to investors," says Mark Nichols, a partner at CMS Cameron McKenna. "The hotel Reit market will definitely develop soon – with one or two deals likely to happen in the next year."
To date, the largest general real estate Reit deals that have been done in the UK have focused on maintaining share price above asset value. This contrasts with the mature US market where the Reit is a tool used to provide a solid income return and is valued in terms of income multiples rather than looking at the underlying net asset value of the assets: "The UK market is not ready to follow the US market yet but I think in time this will be inevitable as UK investors place more emphasis on strong and increasing income returns in the form of dividends and move away from focusing on the value gained from asset increases," says Nichols.
In time, hotel Reits might become more popular than other real estate deals as dividend yields are likely to be more attractive – as was the case with Vector – and clear financial structures become tried and tested. It is now a matter of someone else taking the plunge: "I don’t think there is a first-mover advantage with the hotel Reit market so there is a worry that several people will want to wait and see how others manage. This could stall the takeoff of this market further," adds Nichols.