Hammerson rights issue focuses City on real-estate sector and its need for equity

All eyes will be on real-estate developers including British Land and Liberty in coming weeks to see whether they make cash calls to the market after their rival Hammerson became the first major UK property company to seek emergency funding.

British Land, which announces results on Thursday, is considering a similar cash call, and Liberty International is considering coming to the market for as much as £350m, according to people with knowledge of the situations. Both companies declined to comment.

Tumbling property prices, a slump in mergers and acquisitions and reluctance from banks to lend cheaply will push many others to raise equity.

"The real-estate sector needs equity badly," one investment banker said.

Hammerson, which specialises in UK and French retail property investment, announced plans for a seven-for-five, fully underwritten rights issue yesterday, which is set to raise £584m. The offer represents a 62.2 per cent discount to Friday's closing price of 397p per share.

Hammerson's rights issue follows thwarted attempts to sell assets to raise new funds which had left its financial covenants vulnerable to being breached. The FTSE 100 company said the fundraising would slash its gearing to 81 per cent from 118 per cent, comfortably below a 150 per cent limit.

UK property prices have slumped more than one-third since the summer of 2007, leaving banking covenants covering debt at many UK real-estate firms exposed and vulnerable to being breached. While the companies have strong cashflow and can afford to pay the interest payments, most have covenants set around their gearing. Such companies calculate gearing as a rapport of debt over the value of their assets. With tumbling property asset prices, gearing therefore rises dramatically. Hammerson's gearing rose from 57 per cent at the end of 2007 to 77 per cent at the end of June, before hitting 118 per cent at the end of the year.

News of the rights issue follows more than 18 months of cost-cutting and select redundancies at Hammerson, which expressed confidence yesterday that the cash injection would be enough to insulate its finances until the UK property market rallies.

Still, not all real-estate companies may be as lucky as Hammerson.

"Some companies will fail at getting rights issues off and will have to look for some less palatable alternatives like deals with their banks, distressed asset sales or a combination of both," a second investment banker said.

Deutsche Bank and Lazard advised Hammerson.