Grosvenor has revealed contingency plans that allow for a 40% fall in property values and the freezing of debt and transaction markets for 24 months.
Group finance director Nick Scarles said that each arm of the £9bn worldwide business owned by the Duke of Westminster needed to “be able to stand alone for two years using these assumptions and meet all their commitments, including expected dividends”.
“You need to put this in place before a crash,” said Scarles, who is also a member of the Bank of England Commercial Property Forum. He added: “It’s during the boom that the crash is won or lost. You need to know what will make you go bust. If you don’t, you don’t properly understand the risks. In 2015 we refreshed our action plan. Using these assumptions on a monthly basis gives you at least two years’ warning of a risk of insolvency.
“A secure macro balance sheet liberates us to take on as much risk as we feel appropriate on any individual project,” said Scarles. “You also need to know which assets you are going to sell. These things can take weeks to set up. Remember the Scouts’ motto, ‘Be prepared’. You can’t do these things perfectly. But think about them now.
He added: “All this prepares us for a downturn. You can never predict when one will come. Nobody rings a bell. The news spreads by delayed osmosis,” said Scarles. “Bubbles are irrational, and you can’t predict when irrationality will end. In a falling market everyone clutches to yesterday’s values. They undervalue liquidity.”
Scarles admitted Grosvenor was scarred by its Liverpool One experience. The shopping centre, completed in 2008, which was then valued at £364m less than the cost of developing it. “We took the vast bulk of the risk on the project. As a result, we understand development risk,” he said.
Scarles, a former head of risk at Centrica, was the author of the Bank of England-inspired Vision for Real Estate report in 2014.
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