UK banks this week passed stress tests imposed by the European Central Bank. Hooray. Now some questions: could your property business survive a downturn? Could your balance sheet stand a 45% fall in values without breaking loan-to-value covenants? Does profit turn to loss if interest payments double and the leasing market stops dead for 12 months? Running an agency? Any contingency plans if fee income falls by 20%? Apart from interest rate rises, these numerical guesses are based on pretty much what happened in the 2008 crash.
Responsible businesses stress test as a check against irresponsible expansion. Imagining rental values halving is about as stressful a test as can be imagined, at least for a developer. Land Securities boss Harold Samuel ordered one in 1987. “It was a mammoth exercise,” says Ian Henderson, who went on to run the firm between 1997 and 2004. “We thought, ‘What other company can possibly be doing this?’ The answer was, they weren’t. We actually implemented the strategy in the early 1990s, which enabled LandSec to come through.” Dare to imagine.
PS: A look at Land Securities’ balance sheet shows the company is in better shape today to cope with stress than it was in 2006 – at least if one uses the deeply unscientific stress test of halving gross asset values, then standing at £14bn. Halving that number and deducting debt leaves £500m of net assets. The same test today produces £2.4bn of net assets. Almost the same story at British Land, which had £13.5bn of gross assets in 2006. Halving that figure and deducting debt produces a negative £700m. Today the number is plus £1bn.
New York state of mind
Ever heard of Cecilia Benettar? Ask Derwent London chairman Robbie Rayne about the diminutive chain-smoking Mancunian whirlwind who pulled together New York’s largest real estate development in the 1960s for Rayne’s father Max, later Lord Rayne. Benettar, who died in 2003, was in her early 30s and working for the family when she bluffed General Motors into taking the anchor tenancy in a planned 50-storey tower on Fifth Avenue, overlooking Central Park. The bluff consisted of “borrowing” the senior staff of US developer Bill Zeckendorf and pretending they were her own people during a pitch to the automobile giant.
Benettar actually “worked out of a broom cupboard in Toronto”, according to The Liar’s Ball, an enjoyably racy book by Vanity Fair writer Vicky Ward published later this month (Wiley £19.99). The title was borrowed from the nickname of the annual dinner of the Real Estate Board of New York. The main subject matter is the US titans who fought like alley cats over the ownership of the GM Building over the next 40 years. Cecilia sold the completed building in 1971 for Max Rayne and parted company. “Had we kept it, it is now worth more than our entire portfolio,” says Robbie Rayne, whose company, London Merchant Securities, held £2.25bn of assets when acquired by Derwent in 2006. The GM Building is worth about that figure today.
Brookfield agrees City lets
Brookfield boss Martin Jepson and his head of leasing, Martin Wallace, were in a chipper mood on Monday during a presentation. No wonder. The Canadian giant has let 1m sq ft of London space in the past 12 months. A £500m construction programme is under way to build out two giant sites, one on London Wall, the other at Principal Place, north of Broadgate. Schroders is taking most of London Wall, Amazon most of Principal Place.
Make Architects has been appointed to look at the possibility of building a skyscraper on the site of Leadenhall Court, a seven-storey block in the City to be used as decant space by Amazon before it moves to Principal Place in early 2017. There was humming and hawing when the pair were pressed about how high the tower could rise. A long way, it turns out. Wallace admitted that the red line delineating the tall buildings zone makes a special detour to include the block.
