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Are we heading for property apocalypse?

Created:
20 August 2008
Written by:
Claer Barrett

Pestilence, famine, war, death... and the UK property market. You know things must be getting really bad when property companies emblazon their interim reports with lurid pictures of the four horsemen of the apocalypse. So why has Brixton, the industrial property Reit, decided to make such a statement?

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A postscript to the image reads: "The market may be in an apocalyptic mood, but there is some way out of here". Inside, chief executive Tim Wheeler has seen fit to reproduce "the apocalyptic opening lines" of the Bob Dylan classic All Along the Watchtower believing they "capture the beleaguered mindset of the UK commercial real estate market":

There must be some way out of here

Said the joker to the thief

There's too much confusion

I can't get no relief

Businessmen they drink my wine

Ploughmen dig my earth

None of them along the line

Know what any of it is worth

The last line is particularly pertinent for Brixton - Tuesday's half-year results saw 10 per cent wiped off the value of its portfolio, translating into a pre-tax loss of £237m. The company's net asset value (NAV) has plunged 26 per cent to 428p, and analysts expect it will tumble to 408p by December's year end.

The swirling mists of gloom are contrasted by relatively healthy occupational markets in Brixton's industrial heartland of West London, with rental income boosted by 13.5 per cent in the period. So why the crash in values?

DEARTH OF DEALS

The problem is the dearth of investment transactions. Property valuers have precious little market evidence to use as a benchmark to measure Brixton's assets against. An absence of done deals, tinged with brooding market sentiment, means valuers err firmly on the side of caution. In Brixton's view, there is "too much confusion" over pricing, particularly when it comes to its own "better quality and conservatively financed" assets.

"If the 'thieves' are the opportunist buyers, and the 'jokers' are the owners who won't sell, there is no 'way out' of this impasse yet," Wheeler warns.

EMPTY THREAT

Of course, he doesn't miss the opportunity to have a pop at the government, which has decreed that industrial landlords have to pay full business rates on empty properties. This is expected to cost Brixton £4.5m this financial year, and despite bitter protests, there is "no relief" in sight.

So what is the "way out of here"?

The true property apocalypse will not be upon us until the current vacuum is broken, and we start seeing distressed asset sales, which will establish a true - rather than assumed - level of valuation. Thus far into the downturn, banks have been working with borrowers to restructure debt, rather than calling in loans and forcing sales.

BLOOD ON THE CARPET?

Dawnay Day was the first major casualty, and administrators are now drawing up a shortlist of buyers for its 200-strong property portfolio. Then there was news last week that private property company Dunedin's vast Industrious portfolio of industrial property is likely to breach banking covenants in September.

Of course, the appearance of distressed assets will hammer property values further. But the sooner the sharp shock happens, the better - once the market has hit rock bottom, there's only one way it can go.

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