Paul Bassi is fighting for landlords, if not the entire real estate industry.
With commercial tenants gifted various protections during the coronavirus pandemic, building owners are vulnerable. And Bassi is calling on the government and banks to take action.
“Landlords have a tough offer at the moment,” says the chief executive of Real Estate Investors, a Midlands-focused REIT. “What would help enormously is if the government could give the banking community some guidance on freezing covenants and capital repayments for 12 to 24 months.”
Occupiers have been bolstered by billions in support packages and the security of the government moratorium on commercial evictions, leaving landlords to pick up the bill. A freeze on debt could give businesses space to breathe without further costs to the public purse.
“Landlords have had no help,” says Bassi. “In the absence of any direct government support, that [debt repayment freeze] is where we want to be. If the whole real estate industry got behind that one action, it could comfortably weather this storm and come out the other end without any unnecessary casualties.”
‘Held to ransom’
Bassi has tended to steer clear of headlines, but has emerged as an unlikely rallying voice for the industry in turbulent times.
He speaks by phone from his home in Birmingham, a week after quarterly rent day, with the country in lockdown as the pandemic spreads.
It was that rent day that forced Bassi into the spotlight, with the announcement that REI would not offer rent-free periods or rent waivers to occupiers during lockdown.
“Normally I wouldn’t get involved in rent collection,” Bassi says. “On this occasion, because the world is upside down, as a landlord we’ve taken what I believe is a very responsible and mature approach. Tenants have to understand that this isn’t a moment for them to try to take advantage of anybody. It is a moment for them to shoulder their share of the responsibility.”
A small number of the firm’s occupiers had asked for rent waivers, despite having strong balance sheets and being eligible for substantial government funding. In the end, the business collected a “high percentage” of rents, offering flexibility in monthly instalments but no deferrals or waivers.
Bassi points to a well-known pub operator “for argument’s sake” that would have refused to pay rent. “Here we are a week later and they are paying all of their rent monthly for the next six months,” he says.
He adds that he has no cause for commercial concern and that the business is not overly exposed to any one area. REI’s £230m portfolio comprises 53 assets across 1.6m sq ft, with 280 occupiers and current occupancy of 96.1%. Offices make up 37.7% of its weighting by revenue, retail sits at 30.8%, with medical, food stores, restaurants, leisure, hotels, car parks, industrials and more.
Tenants have to understand that this isn’t a moment for them to try to take advantage of anybody. It is a moment for them to shoulder their share of the responsibility
“Diversity is our world, whether it is occupier, sector, bank, loan term, interest rate, and that is working for us,” says Bassi.
REI has spread its borrowing between six lenders. “That is by design, because we don’t want to be held to ransom by any one particular lender.” Though some banks are already offering capital repayment holidays, Bassi says REI doesn’t need it – but in the crisis others may do.
Real estate risks
“If I speak to other well-known landlords, they can pay their way,” Bassi says. “Interest rates are very low and most tenants will pay their rent. But valuations may be disturbed in the short-term which triggers covenants.”
REI’s loan-to-value at the end of last year was 46.7% and 42.2% net of cash. The REIT is still on track to pay a healthy dividend of 3.8p per share, up by 7% on 2018, representing the seventh consecutive year of growth. “We will review dividends going forward, but I believe we will continue to be in good shape,” says Bassi.
In almost 40 years, the business has weathered a number of downturns. But coronavirus brings fresh challenges. As the epidemic hit the UK, it coincided with REI’s year-end results, which saw pre-tax profits more than halve, largely due to revaluations and hedge costs. Between 11 and 18 March the share price plummeted from 50p to 34.5p, the lowest level in a decade.
Bassi’s direction saw the company regain almost half of that loss in the first two weeks of April.
“It’s just being honest,” he says. “I haven’t done anything in this likely downturn that I haven’t done in the past 10 years.”
The business employs just eight people and costs are low. The regional office market has seen sustained demand as major firms seek space outside of the capital. Some 250,000 sq ft of that office space has an additional safety net in the potential for permitted development conversion to residential.
“If my tenant decides to leave, we have upside on the residential value,” Bassi says. “If my tenant decides to renew his lease, we get upside on a lease renewal.”
Birmingham’s residential market has attracted major institutional investors, with Aberdeen Standard, Cording and Invesco all agreeing build-to-rent deals last year, with Greystar, Long Harbour and Legal & General in talks on other schemes.
This appetite has some developers in a frenzy, with opportunities priced out of REI’s reach. Does Bassi think people are paying too much? “Absolutely. And there will be casualties if they continue to do that,” he says.
These developers crowding the Birmingham skyline would arguably benefit from freezing covenants and debt repayments more than anyone else.
Eyeing opportunity in Birmingham
REI doesn’t develop, Bassi emphasises, warning that it is the developers that go bust. The REIT invests in mixed-use assets, spending between £2m-£20m on sites that offer the opportunity for active management.
Bassi started the year with bold promises of new acquisitions fuelled by recent revenue hikes. The REIT is still eyeing forced sellers and mispriced assets from retail funds.
“Having been through periods like this, cash is very much king,” he says. “We clearly have the ability to go out and buy, but in the short term we will take a pause. These funds who have closed shop are not going to release assets into a frozen market.”
He predicts that activity will return to “something near normal” in the final quarter of this year and early next. And REI, he says, will be ready to respond.
But the REIT won’t go outside of the Midlands. “There is more than enough for us to do,” Bassi says. “The reason why we are in good shape is because we live and work amongst our assets.”
Bassi is also the founder and chairman of Bond Wolfe, the largest auction house outside of London, which gives him market intelligence into what he should be buying in the area.
REI chairman John Crabtree also chairs the board of the 2022 Commonwealth Games (which he says is still very much happening) and they know every occupier by name. It’s fair to say they know their patch and that’s why Bassi can take such a strong stance in rallying the industry.
“We are not sitting in London in an office floor, managing buildings we’ve never seen,” he says. “I genuinely believe that property is best owned and best managed on your doorstep. There is a lot to be said for that and I think these present circumstances support that.”
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