Sensible heads are turning towards the next downturn. Sensible REIT bosses are looking to reduce borrowings, by selling to those who have not twigged that the time to buy may be passing. A sensible central banker is looking at ways to prevent stupid borrowing by those who think the time to buy is arriving.
The sensible REIT bosses know who they are.
Andy Haldane is a central banker: a director for financial stability at the Bank of England. His gaze has fallen upon A Vision For Real Estate Finance in the UK, a report published last September by the Investment Property Forum.
The report’s central recommendation is that valuers should take a 10-year, rather than a 10-day, view, then settle on a “sustainable” market value. Can lenders really be persuaded to slice 25% off the current value of an asset before doing their loan-to-value ratio calculation, just because a geek says the price looks peaky?
Haldane is being urged to ignore the idea by free-marketeers, who are opposed to the notion, and being urged by interventionists to signal his approval. The final version of the report is due soon. Let’s see who gets ignored by Haldane. Either way, 2014 looks to be turning into the year for him to issue an amber alert.
Reason one: “A stitch in time…”. In late 2004 the Old Lady of Threadneedle Street green-lighted the boom with the words “commercial property lending provides little immediate cause for concern”. Hardly a word of caution was uttered over the next three years, as outstanding loans climbed from £150bn to £234bn.
Reason two: “Here we go again.” A smallish developer of industry renown rang his bank a few weeks ago with good news: “I can now pay off that loan.” His bank received the offer as bad news. “They pleaded with me not to pay. They were afraid of losing me as a customer. I did pay off the loan. But only after they twisted my arm to take out a smaller fresh loan.” On much better terms, no doubt.
Values: more than a footnote
“Whoever thought it a good idea to introduce values into listed company results ought to be shot,” said the chief executive of a well-known listed property company a week or so back. We’ll spare his blushes, partly because the remark was made half in jest, but mostly because this blasphemy was uttered at an event held under Chatham House rules.
The case for demoting asset values to a footnote in the report and accounts has some merit. How much control does a board really have over asset values?
Examine the rise and fall in REIT gross asset values over a decade of ups and downs. Management actions appear to have no more than a marginal impact on the uniform ups and downs in gross asset values.
“It’s the economy, stupid,” as former president Bill Clinton said. A more relevant maxim comes from John Schreiber, co-founder of Blackstone’s real estate business. He’s a man who urged his troops to be cautious with the words, “Hey guys, remember: the macro always beats to micro.” Example: buy 50% of Broadgate in 2009 from British Land using £70m of equity. Then sell for 10 times that in 2014.
The results season looms
Imagine how hard it would be to spin the figures if asset value movements were consigned to a footnote. REITs would be reduced to talking about what matters: income, expenditure and the consequent profit or a loss. These numbers are, of course, given out by all listed REITs. But they become swamped by the spinning of figures connected to asset values.
These figures are likely to ?be good, going on great, this year. So why on earth would one REIT boss want to have values consigned to a footnote in the accounts? Because rising asset values make chief executives look like heroes on the way up – but villains on ?the way down.
A footnote: in 2009 Land Securities posted a loss of £5.2bn and British Land, £3.9bn. No guesses as to why.
www.planet-property.net
