Now that property values are in freefall – the latest IPD figures show commercial property values plunged 26 per cent in 2008 – many of these loans are worth more than the properties they are secured on. Commonly, banks insist on a loan-to-value covenant. If this is breached, punitive fees will apply unless property companies can inject equity from elsewhere.
More worryingly, De Montfort’s research shows that £76bn of debts will require refinancing by the end of 2010 – and currently, UK banks do not want property business. Lenders’ aversion to property loans is so great, a property developer took out a full-page advert in the Times recently, appealing to Gordon Brown to put pressure on the banks to lend to property once more.
Having paid too much for assets of questionable quality, it is hardly surprising that Begbies Traynor predicts that 1,600 overstretched private property companies will collapse by the end of this year. Since the onset of the crash, big private property players including Dawnay Day and Castlemore have crumbled. Sadly, they won’t be the last.
Of the quoted property players, those exposed to development with little income-producing property are the most vulnerable.
Minerva, which is speculatively developing two office schemes in the City of London, has £544m of debt – that’s 30 times its current market cap – and expects to breach lending covenants in June. Its gearing (net debt as a percentage of net assets) is a whopping 1,639 per cent.
AIM-traded Ciref saw its Trinity Walk retail redevelopment in Leeds placed into administration this week when lender Anglo Irish withdrew funding. This follows the loss of its joint venture partner, Modus, which could not obtain necessary financing.
Although the property majors have far more conservative gearing levels, the sustained drop in property values shows no sign of abating. This is why the big real-estate investment trusts (Reits) – Land Securities, British Land, Hammerson and Segro – have all made fully underwritten cash calls in the past few weeks.
At the time of writing, indebted property Reits Liberty International and Brixton were expected to follow suit by announcing cash calls of their own. Brixton has seen its share price drop a savage 96 per cent in a year due to concerns surrounding refinancing bond debts maturing in 2010.
Elsewhere in the listed property sector, companies like Grainger and Quintain
Estates with high levels of gearing have seen their share prices plummet as the market fears the impact of punitive refinancings. In Quintain’s case, shares rose 25 per cent when a life-saving deal with its banks was unveiled.
Back to part 1: At debt's door
