Property fit to weather slump

by Erica Billingham Quoted property companies are entering a downturn in much better shape than they did at the start of the early 1990s recession, according to analysts at HSBC. In an 18-page report, What You See is What You Get, published this week, analysts Andrew Causer and Andrew Penny assessed the pitfalls that 17 companies could face if, as expected, the market slows next year (see box). They concluded that, although some companies have potential weak spots in their portfolios, none have problems of the same magnitude as the huge development exposures of the last slump. Like other analysts, Causer and Penny have again cut their forecasts for company net asset values. They have shaved 3% off NAVs for this year followed by 6% in 1999, reflecting the anticipated economic slowdown. Their last downgrade was in August. Causer said that City rents could fall by 10% to £431 per m2 (£40 per sq ft) next year and that, overall, the property market is likely to stand still. But they argue that investors should buy property stocks for their safe income. Causer and Penny said: “The sector has no black holes in balance sheets and the predictability and visibility of income ought to provide some comfort to investors. “The market will come to value more highly the long- term income streams available on some of these stocks.” The report points out that company portfolios are almost fully let, with vacancy rates below 3%, and development programmes are modest. They highlight Pillar, Chelsfield, Minerva and British Land as four companies with “extremely defensive” portfolios. According to the analysts, the safest sectors include prime retail parks, regional shopping centres and West End and M25 offices. POTENTIAL PROBLEMS AHEAD Land Securities – Average-quality retail portfolio, including £800m of high street shops that could fall in value. MEPC – could lose money on final sale of Australian property. A 15-20% fall in rents would shrink development surplus on 4,366m2 (47,000 sq ft) of speculative space. Hammerson – Bull Ring shopping centre development in Birmingham could be put on hold because of retail fears. Greycoat – Unlet City schemes vulnerable to fall in rents British Land – Falling City rents could squeeze development surplus on Plantation House. Chelsfield – £5m loss on sale of US joint venture, Laing Properties SOURCE: HSBC