Global Financial Crisis - Valad Property Group - Case Study Example

Running Head: Valad Property Group Student’s Name: Instructors Name: Course Code and Name: University: Date Assignment is due: Valad Property Group Introduction The effects of the global economic crisis have caused deleterious effects on the Valad Property Group and hindered sustainable development of the company which was performing exceptionally well in the period before this upheaval. Like any of the company in the financial and property market, the subprime crisis left the company’s asset base badly scathed and new strategies must then be formulated to restore the company’s profitability. Not only did property prices fall thus affecting the company’s balance sheet significantly but the value of shares was also affected immensely. The value of the company consequently declined; a condition that was most definitely detrimental for the company. The value of assets held by the company has fallen to $9 billion; mostly due to the sale of certain assets within the company. This paper seeks to analyse the effects of the global financial crisis on Valad Property Group. The Global financial crisis Companies around the globe are in the process of recovering from the economic crisis that commenced in 2007 and is still considered to be ongoing. The origin of the financial crisis has been pegged on various economic conditions; with liquidity shortfall in the banking system being considered the main cause of the crisis (Brunnermeier, 2009). The collapse of the housing bubble in the United States property markets however can be considered to be the underlying cause of the crisis. The increasing value of houses and other property within the US led to great demand for mortgages. This led to unscrupulous lending practices by banks as they sought to maximize on the increased demand for funding. Subprime mortgages emerged; where banks could give cheap loans to borrowers who were not credit-worthy (Hunnicutt, 2009). At the time, this was not considered risky since the banks could gain even more by foreclosing property on unpaid mortgages and then selling them at high prices. Unfortunately however, the housing bubble collapsed and the value of houses started to decline. At the same time, mortgage defaulters increased by the day such that banks could not effectively recover their money (Brunnermeier, 2009). This led to a liquidity crisis which in turn affected all major sectors of the economy. Investors lost confidence in companies thereby leading to significant declines in share and security prices. Following the global economic crisis, bank liquidity reduced immensely due to unavailability of loans and the swelling number of bad debts incurred by the banks from unrecoverable loans. The resultant credit crunch led to a decrease in bank lending as well as the increase in interest rates (Hunnicutt, 2009). This to a large extent affected companies’ ability to obtain capital which further impacted on investment ability. A credit crunch resulted due to reduced bank lending and high loan interest rates. Notably, businesses greatly rely on banks for funding such that the unavailability of financial resources could lead to a decline of their activities. The financial crisis led to the liquidation of a considerable number of property companies. Valad Property Group and the Global Financial Crisis Valad Property Group like all its peers did not escape the effects of the global financial crisis. Its profitability was greatly affected and so was the price of the company’s shares (Fenner, 2008). Notably, the company’s intended investments were curtailed significantly such that the potential development of the company was derailed. In the absence of the global financial crisis, the company would be miles ahead from where it is currently. Even as the company seeks new strategies to improve on profitability in an attempt to recover from the crisis, the future of the economy is still uncertain such that desirable effects may not be necessarily realized. Prior to the global financial crisis, Valad’s profitability was sustainable. In 2005, the company recorded total revenue worth $70.1 million, a 68.4% increase for the previous year (Valad 2005 financial report). This was a tremendous improvement from $19.1 million in 2003 and $41.6 million in 2004.The net profit for the year was $30.3 million, a 56% increase from 2004’s $19.4 million. The net profit in the 2003 financial year was $9.2 million. The total number of assets under the company’s management was increased by 45% to $1.6 billion. VALAD was the top performer in the real estate sector in the S&P ASX200 having accumulated 57.8% total annual return (Valad 2005 financial report). In the same year, over $578 was invested in new property. Fund management growth for this year was $1.6 billion and over 65,000 square meters of office space was rented out. In 2006, Valad jointly, with Buckingham Group, acquired a premium grade office building known as the Maritime Tower in New Zealand for a price of NZ$75 (Valad 2006 financial report). Net profit after tax rose tremendously to reach $79 million; a 169% increase from $30.3 million in 2005. The total revenue increased by 49% to reach $105 million (Valad 2006 financial report). The underlying profit after tax was valued at $56 million. This was an alarming increase, given the previous year’s $36.3 million. These statistics indicate that 2006 was a year marked with tremendous improvements in all the aspects of the company. The company was reaching optimal levels in terms of profitability as well as the number of assets. During this year, the total assets under Valad’s management increased by 31% to reach $2.1billion. As the global economic crisis was setting off in 2007, Valad still managed to acquire a pan-European property platform known as Scarborough during this year (Valad 2007 financial report). The company also invested in an office fund, Crownstome, with an initial portfolio of €750. Underlying net profits for the year amounted to A$76.2 million; a 36% improvement from the previous year’s profits. The value of assets under Valad in 2007 was A$16.8 billion. This represents a significant drop from the previous years’ value. The effect may be associated with increased disposal of assets following the onset of the global financial crisis. In 2008, the firm’s expectations were not met due to the effect of the global financial crisis. Valad had foreseen a good year, especially due to the company’s expansion to Europe (Valad 2008 financial report). While the underlying net profit improved to A$169.6 million as compared to A$76.2 million in 2007, amounts resulting from unrealized property devaluations (A$120 million) and write-downs of goodwill related to the European platform acquisition (A$247 million), led to A$247 million headline loss. According to the Chairman, Trevor Gerber, this was the first time that Valad had failed in predicting its earnings. On June 23, 2008, Fenner (2008) reported that Valad’s shares recorded the lowest prices following the cut in earnings forecasts by the Australian real investment trust. The trust expresses fears about continued decline in the prices of property. As a result, Valad’s share value dropped by 6% thereby reducing the company’s value to A$1.2 billion. According to Fenner (2008), each member of the S&P/ASX 200 Property Trust Index declined and that Valad was the fifth-worst. Overall, the 21 members fell by 39 percent between June 2007 and June 2008. Strategies VALAD is recovering steadily from the global economic crisis as witnessed by the improvement in the company’s books of accounts. This has been done through increased capital raisings which have been used to purchase equities, with a special emphasis on ventures that are struggling after the GFC. There was a significant reduction in losses in the first half of 2008, with a $103.6 million loss recorded as opposed to $821 million witnessed in the second half of 2009 (The Australian, 2010). These results were inclusive of $46.2 million in property write-downs on the company’s investment portfolio and $58.6 million emanating from additional assets and co-investments (The Australian, 2010). Even though the company did not declare any dividend, this was a considerable improvement given the downward trend that had been recorded before. According to Peter Hurley, the managing director, the company could be considered stable and that growth was highly probable. He is optimistic that property interest rates will rise and so will the value of property. Valad’s share price has declined vehemently and the company is keen on improving it. In this respect, a 20-for-1 share consolidation will be undertaken (Cummins, 2010). VALAD’s intended growth has led to increased growth through additional acquisitions. As a matter of fact, Valad had purchased acquisitions worth over $2.7 billion between June 2007 and June 2008 (Fenner, 2008). It is notable that the global economic crisis helped the company in a way because as noted by Cummins (2010) over $396 billion credit losses and asset write-downs resulted from the collapse of the subprime-mortgage market in the United States. With an objective of restoring value to its investors, the VALAD Property Group is seeking to undertake asset sales combined with divestment of some of its business’ parts (Cummins, 2010). VALAD has already had talks with third parties with respect to the same. According to Trevor Gerber, the independent chairman, the move is aimed at strengthening the company’s balance sheet and enhancing its profitability. Further, the company also aimed at winning new investment management mandates. The company currently manages $9 billion in assets. Other prominent measures of the GFC effects on Valad Capital raisings Valad raised A$1.3 billion from investors in 2007 aimed at purchasing Scarborough Group Holdings (Valad 2007 financial report). The finances which were meant for increased investment however could not be used at that time. The company wanted to delay the investments as it was certain that property prices were bound to fall. In the same year, Valad raised a total debt and equity capital of A$1.2 billion (Valad, 2010). V Plus (Valad Core plus fund), which was launched in March 2007, raised A$215 million additional equity and $40 million in equity co-investment. Valad also raised A$340 million through the UK opportunity fund in January and A$470 million from its Nordic Aktiv Fund. The fifth fund towards ICA Property Development Fund raised a capital of $139 million while the Core Plus Fund raised $227 million (Valad 2007 financial report). In the year 2008, Valad raised equity and debt worth A$3 billion for their Funds Management Business; a figure that was higher than any other in history. Asset sales Valad has sold a significant number of assets since the onset of the global financial crisis. Major asset sales include selling of bulky of goods for $11.6 million at the Coff’s Harbour, the Airport Central Tower Mascot for $83.0m, Ruthven St. Toowomba for $24 million, Theobalds Rd for $38.9 million and Regent House, Dorkin for $16.3 million. Cummins (2010), notes that the company is continually reviewing its strategy in order to come up with alternative options so as to increase shareholders’ value. This could mean additional sale of the company’s assets. Refinancing As at the end of the 2008 financial year A$1.9 billion had been sourced through additional debt and refinancing since December 2007 (Valad 2007 financial report). The financial reports for 2008 indicate that the company had no material refinancing during the following year (2009). Gearing The company’s gearing ratio has exhibited fluctuating tendencies and is therefore difficult to predict. The gearing could also make it difficult to conclusively state the trend in the company’s leverage. The gearing in the year 2005 was 19% at the end of the year. This was a reduction from 32% recorded in the previous year. In 2006, the gearing ration for the company was 39% of the total assets. This was a decrease from the previous year’s figure. The gearing ratio for Valad in 2007 was 15%. This drop was attributed to the transfer of debt related to warehoused assets into the purchasing funds. The company’s gearing at the end of the 2008 financial year was 33%. This was said to be significantly low as compared to the company’s guidance range. Conclusion This discussion effectively establishes that global financial crisis had devastating effects on companies in the property investment sector. This is envisioned in Valad Capital Group’s decline in performance following the global financial crisis. Records indicate that the company’s profitability was affected significantly such that the company’s sustainability was threatened. Valad’s management is currently engaged in coming up with new strategies to mitigate the effects of the global crisis. It is notable that the company is recovering rapidly and is already engaging in property purchases. Capital raisings have responded positively and the company is therefore bound to do well in future. References Brunnermeier, M. (2009). Deciphering the liquidity and credit crunch 2007-2008. Journal of Economic Perspectives 23 (1), pp. 77–100. Cummins, C. (2010). Valad in sale talks. Retrieved November 19, 2010, from http://www.theage.com.au/business/valad-in-sale-talks-20101102-17cgl.html Fenner, R. (2008). Valad slumps in Sydney after cutting profit forecast (Update 2). Retrieved November 19, 2010, from http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a3PK02F9GY8A Hunnicutt, S. (2009). The American housing crisis. Farmington Hills, Michigan : Greenhaven Press. The Australian (2010). Valad Property Group’s focus on revenue. Retrieved November 19, 2010, from http://www.theaustralian.com.au/business/valad-property-groups-focus-on-revenue/story-e6frg8zx-1225834512254 Valad (2010). Valad’s V Plus grows to $40M of Equity with $215M second capital raising. Retrieved November 19, 2010, from http://www.valad.com.au/news/valads_v_plus_grows_to_$40m_of_equity_with_$215m.html Valad Property Group. Annual Report, 2004 Valad Property Group. Annual Report, 2005 Valad Property Group. Annual Report, 2006 Valad Property Group. Annual Report, 2007 Valad Property Group. Annual Report, 2008 Valad Property Group. Annual Report, 2009 Read More