The Great Panic is over. The 18-day period that shook the property world ended on Monday 11 July with the blessing by the Tory party of Theresa “Maggie” May as Britain’s 76th prime minister.
The commercial real estate sector can now slip gratefully out of the public eye. The plunge in REIT shares triggered by the Brexit result on 24 June has bottomed. The contagion caused by the closure of retail property funds is weakening. The sector is settling back into an economic cycle unspun by Brexit. Remember what that looked like? The curve crested last summer and has since been wobbling gently downwards.
Still panicking? Some reassurance. Between June of 2007 and June 2009 values fell by 45%. Land Securities, British Land, Hammerson and SEGRO were forced to raise a total of £2.5bn by selling hugely discounted shares valued at £8bn on the day before the rights issues. Why? Because in early 2009 net assets fell to the same level as net debt. The combined gearing of the four was therefore 100%. What City analyst Alan Carter labelled “the biggest destruction of equity value in the history of the sector” saw £5.5bn go up in smoke.
Numbers provided by analysts Mike Prew and Andrew Gill of Jefferies dispel the notion that this scenario could repeat itself – not even in extreme circumstances, such as a disastrous EU renegotiation.
The analysts say the current combined loan-to-value ratio of the four property giants is 30%: £13bn of debt held against £43bn of assets.
Now, my figures: in 2007 the combined LTV of the four was 40%; £18bn of debt held against £45bn of assets. Back to the Jefferies numbers. A 45% fall in values would raise LTV ratios thus: Land Securities from 22% to 41%; British Land from 32% to 59%; Hammerson from 35% to 64%; SEGRO from 38% to 69%. Hardly apocalyptic.
The effect of Britain leaving the EU will continue to be debated ad nauseam. Non-obsessives have frankly had a gut-full. The only question that remains to be answered is whether Theresa May’s repeated affirmation that Britain is to leave is a core belief, or simply a clever starting point for negotiations which will somehow end up with the country remaining in the EU.
It’s a year too early to answer that question. All that can be said is that 95% of business is still praying for the UK to somehow remain. And for a year of penitential silence from Boris Johnson and Michael Gove. But that may be asking too much.
PS: Medal for the most level-headed comment during the Great Panic goes to ratings agency Fitch: “A modest fall in [values] would have no further near-term impact on ratings. We rate commercial property companies based on their cash flows from long-term contracted rents rather than a short-term equity focus on capital values.”
Comfortable LTV covenant thresholds, limited exposure to property development spending and well-laddered debt maturity profiles mean these companies are unlikely to face cash calls.
Valuing uncertainty
When will the Great Panic officially end? The day valuers begin not to include “uncertainty” clauses.
From 24 June agents began to qualify their opinions along these lines: “We are now in a period of uncertainty. The probability of our opinion of the valuation being exactly as the price achieved is now reduced.” Clients are told that if they want to sell, “specific market advice” will be proffered. Section VPGA 9 of the Red Book says the clause can be invoked when the market is disrupted by “unforeseen financial, macro-economic, legal and political events”.
Rupert Johnson, global head of valuations at Knight Frank, said last week: “We are in a period of uncertainty, thanks to the turmoil surrounding the result of the decision to leave the EU. Clients, on the whole, have been very understanding of the need to incorporate a clause relating to the certainty of valuations.”
PS: Bad news for developers on Brexit from Michael Gallimore of Hogan Lovells: apart from a few “green” things, the planning system won’t be much affected if Britain leaves the EU. It will remain “business as usual”, says the eminent planning lawyer. Groan.
