A blueprint for Commercial property property disaster

Published 10th Feb 2009

It is hard to know which is the dominant emotion as Hammerson yesterday kicked off what threatens to be a tidal wave of rights issues for the commercial property sector.

Is it déjà vu because we have so recently been here with the banks? is it foreboding because, like the banks, this is so unlikely to be the end of the story? Perhaps it is both.

Anyone with any sense of history will know that in the last great deleveraging in the UK in the 1970s, the property companies were hit worst of all and went bankrupt in large numbers.

Six years after the bust, values were still down some 30% in real terms, an experience that destroyed the faith of a generation of institutional investors in the merits of the sector as an investment vehicle.

The similarities are alarming with what happened all those years ago and with the banks last summer.

The common theme both times is that the companies admit they need new capital because their asset values have plunged.

But they say they have tackled the problems, they have adjusted to the new reality, and have cut valuations to reflect it.

The danger, of course, is that management in these property companies may be in denial about just how bad it really is, just as the banks were.

They just cannot bring themselves to admit how far asset prices could fall, and just how much new capital they might really need.

And if they do get it wrong, if they do underestimate, it means they will have to come back again. So the first issue is not the last; each successive one dilutes the shareholders even more.

It may be different this time of course, but consider this.

Details of the issue over the weekend talked of a fall in the companies' asset value of between 20% and 25%, a figure the advisers think brutal enough to persuade investors that this is as bad as it gets.

But for the past month or more, there have been stories circulating about Hammerson's efforts to sell its one-third stake in the Bull ring in Birmingham.

Following its rebuild, this is one of the smartest and most modern shopping centres in the country.

Yet the rumours are that Hammerson is going to have to accept a sell on a yield of between 7.5% and 8%, which if true implies a decline in asset prices of almost 40% - and this for a genuinely prime asset.

We wait with interest, too, the price at which British Land may finally sell its half share in Meadowhall, the big Sheffield shopping centre, which is a deal the company hopes to announce with its results on Thursday.

It came close to selling that asset in Stephen Hester's day as chief executive, when he sensed the cycle was about to turn.

Back then, British Land could not quite get the price it wanted.

It seems prepared to settle for massively less now. Or consider the talk swirling around Westfield, the smart new retail centre in west London.

Here, in efforts to fill the remaining empty space, the rumours are that potential tenants are being offered up to five years rent-free - the deal being that they agree a public rent figure for the press release, but the money simply won't be collected.

Existing tenants have allegedly been offered the opportunity to double their space at no extra charge. The very least any potential tenant gets is a free fitout.

Now people don't make up these stories, even if they do get exaggerated, and in less-fashionable high-profile new builds it is even worse.

In some cases, tenants are being offered 10-year leases with the first seven or eight years rentfree. No one should be in any doubt that it is brutal out there.

Source: ' This is Money '

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