CITY VIEW: Property sector aims to build on solid foundation

Published 26th May 2009

John Richards, Chief Executive of Hammerson


Reading the national press, one could be forgiven for thinking that the commercial property industry was dead and buried.

But the problem with real estate is that for many years it was viewed by inexperienced investors as a one-way bet with no risks. Meanwhile, more sophisticated investors saw it as a one-way bet where the bank took the risk and they took the profits.

The alchemists have been proven wrong, again, leaving everyone else to scratch their heads over the fundamentals. To me, they are simple. The value of commercial property is underpinned by availability of land, and tenant demand.

The UK is a pretty small place, and they're not making land any more. Not only that, but any Government is unlikely to forgo votes by allowing developers to concrete over green fields.

So land in city centres will conserve its value over the long term.

The shopping centres and offices built on this land provide a stable income stream for the investor - who are, in the main, still trading successfully by working hard to cater for their own customers.

So income remains solid. At Hammerson, over 95 per cent of our shopping centre space is occupied, and that includes two developments we opened in September as the UK was sliding into recession.

What none of us predicted was the scale of the collapse in capital values. A big factor is no new lending. Even potential buyers with lots of equity cannot finance acquisitions without a reasonable slice of debt.

If none of us can borrow, none of us can buy and if no one is buying, no one is selling. Add uncertainty and you have a recipe for a downward spiral in values.

It was not lending to public companies which caused the problem. Real estate investment trusts such as Hammerson generally operated on loan-to-value ratios - well under 50 per cent.

This mortgage metric falls very much into the ' prudent' category. Of course, with values some 35 per cent lower than 18 months ago, these once-prudent loans start to look more risky.

And with most companies agreeing a tight ceiling on indebtedness with their borrowers as a trade-off to secure a keen rate of interest, this can soon lead to banking covenant issues for the borrowing companies.

Enter the rights issue, asking existing shareholders to provide more equity capital.

At Hammerson, we were very clear this was the right solution and that the key to success would be to explain why the money was needed and demonstrate it was the right amount to fix the problem.

We reasoned shareholders would support a rights issue which safeguarded the inherent value they already held in the company and which was supported by a realistic outlook for the business going forward.

Shareholder support was very strong - over 98 per cent of the rights issue being taken up, raising just under £600million in new capital.

That puts us in a strong position, both to weather the economic downturn and to benefit from the recovery which will undoubtedly occur over the next two or three years.

Could we have done it differently? With hindsight we should have seen the risk that a boom in property values brought in on a wave of cheap credit was likely to end with a 'burst' bubble.

The mistake was to buy into the idea of a 'soft landing' - which found favour with economists, politicians and businesses alike.

If we had foreseen that, we at Hammerson would have been selling a lot more than £500million of properties we disposed of in 2007.

So how will the property industry look in five years' time? Development will have started again, and be profitably regenerating city centres across the UK.

It will be dominated by the same solid names that made their reputation in the early part of the decade. And, of course, anyone who bought into property in 2009 will be feted as a genius.

Source: ' This is Money '

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