British Land/Landsec: price drops raise risk of cash calls

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Keeping up with the Joneses usually involves flashy cars and tennis club memberships. British Land and Land Securities have pursued their rivalry via the alternative currency of UK office blocks. This has become a dangerous game due to the popularity of working from home.

The two big listed landlords updated shareholders on property values this week. British Land said on Wednesday that they had fallen 12.3 per cent in the year to March. The day before, Landsec reported an 8 per cent decline. A similar gap separates the shares of the duo.

Commercial real estate is in the spotlight as a potential source of financial contagion. High debts make property companies vulnerable to rising interest rates. Tenants are seeking smaller premises as more staff work from home. Fragile economic confidence compounds these difficulties.

Both companies raised equity during the financial crisis. Is history about to repeat itself?

Valuation declines lifted British Land’s loan to value to 36 per cent, from 33 per cent last March. Landsec got debts down over the same period with LTV falling from 34 per cent to 32 per cent. British Land’s LTV was 45 per cent in March 2007 before property prices crashed.

Valuations for offices and factories have dropped almost as much since last May as in the 20-month peak crash that began in September 2007. The pace of the fall should be a warning to anyone who thinks the market has bottomed. A deterioration in the economy could push valuations 10 to 15 per cent lower, says Peter Papadakos, of research firm Green Street.

There is already turmoil in parts of continental Europe. Swedish office owner Castellum has issued shares to reduce its LTV from 44 per cent to 38 per cent. Social housing owner SBB scrapped an equity raise. It is dumping assets to reduce its LTV from 47 per cent. German residential landlords may make their own cash calls soon.

But London skyscrapers are a different proposition to Berlin apartments. Demand remains strong for quality workspace in the UK capital. Both landlords reported occupancy rates of more than 90 per cent.

Neither company can afford to be complacent. But their disciplined approach to debt and their quality portfolios should keep them out of trouble. Never bet against London, even after Brexit.

The Lex team is interested in hearing more from readers. Please tell us whether you think UK property companies are riding for a fall in the comments section below.