Neil Collins Notebook – Dear Landlord: can pay, won’t pay

When a man knows he is to be hanged in a fortnight, as Samuel Johnson observed, it concentrates his mind wonderfully. Not so much a man as the entire commercial property industry has been served notice of its imminent demise, at least compared to the easy life of the past.

The scaffold was erected last year when the court upheld Debenhams’ Creditors Voluntary Arrangement, and the noose has been Covid-19, helpfully tied by the UK government’s Coronavirus Act. This has allowed commercial tenants to withhold rent until the end of this month, without penalty. As this week’s quarter day showed, they have seized the concession with enthusiasm, and many will be emboldened to carry on not paying.

William Hill, JD Sports, Primark, Boots, and Stonegate Pubs are among solvent companies that chose not to pay rent on the day this week. The tenants of Intu, the near-bankrupt owner of shopping malls, paid just 40 per cent of the rent due in the previous quarter, and the new figure will further deepen the collapsing company’s misery.

Government interference in the working of the market is bad enough for the landlord, but it is the rise of the CVA that has destroyed that bulwark of his power, the upwards-only rent review. Larger tenants are using the threat of the CVA to renegotiate leases downwards, or to walk away from stores that they no longer want.

The tenants are revolting. Greggs, though highly successful and solvent, has served notice that in future it will pay rent monthly, and quite probably less of it. Once the dam is breached, others will pour through. Intu’s incompetent, Pollyanna bosses have already departed. The crisis may also do for Hammerson, which plumped for shopping malls in 2013 when it sold its office portfolio.

This was a disastrous call, and the shares collapsed from 700p to 40p in the depths of the market panic in March. The promised arrival of Rob Noel, formerly of Land Securities, has helped a recovery of sorts, although Mr Noel was hardly an unqualified success there. We must await the accounts before learning the going-away reward for failure of chairman David Tyler and CEO David Atkins, but we can be sure they will be generously rewarded for the destruction of billions of shareholder value.

The damage is less apparent, but no less severe, at those popular homes for retail investors, the property funds. Nearly all of them have trapped holders by suspending redemptions, with the excuse that valuing the assets is too hard right now. More likely, the truth is too painful to contemplate.

An indication of what is to come is provided by the share prices of Land Securities and British Land, the UK’s leading property companies. Both are trading at half their heavily marked-down net asset value, on UBS estimates. The broker rates both shares a buy, but the ratings reflect the damage the holders of property funds can expect when they can finally get the remains of their money out.

Across the industry, many commercial property developments are no longer commercial, either as offices, high street shops, restaurants, malls or leisure centres. Some will have no use at all, a few can become distribution centres, and many will surely be converted into the only sector that has so far avoided a collapse in value – residential.

Just as the commercial landlords were addicted to upward-only rent reviews, so we are hooked on the idea that house prices always go up, even if you have to wait. We have become so used to the idea of a housing shortage that we struggle to grasp the possibility that new forms of residential, from the ruins of commercial developments, may close the gap.

The big house builders, who certainly do not want that to happen, show signs of grasping this new reality. They are buying land alright, but they are generally not building faster, and some have cut back production. The last thing they want to see is a falling market, undermining the value of their land banks.

There will always be areas of the housing market that are hot spots, but the prospect of a dramatic rise in supply, albeit in unconventional, post-covid form, may be enough to break the cycle of ever-rising housing costs. If it makes a home more affordable and ends our obsession with property as investment, then some good will have come out of the virus after all.

How to spend £109 billion

In the eyes of some who have known him for a long time, Boris Johnson is a coward, scared to take tough decisions even in the face of overwhelming evidence. The evidence that HS2 will be a financial disaster on an epic scale is now overwhelming. Even BC, every study had concluded that the railway was not worth building. In today’s brave new world, where we are being urged not to travel, and to keep our distance when we do, it is a ruinous waste of £109bn (and counting).

Until the virus destroyed the public finances, such a figure seemed almost beyond comprehension. It is getting on for £2000 for every man, woman and child in the UK, few of whom would ever use the line. Put another way, it is the equivalent of £5bn for each of 20 cities north or west of Birmingham with £9bn left over for the Brummies.

Give each of them the money (pro rata with their population) with instruction to spend it on transport. Their choice. That might be enough even for Andy Burnham in Manchester to drop his support for this benighted project. It would take real courage from our PM to pull the plug. Well, you never know.

Why BaFin bought the Wirecard lies

Here’s the best explanation I have seen for the shocking behaviour of Germany’s regulator in the unfolding Greek tragedy that was Wirecard, courtesy of realclearmarkets.com

“BaFin’s focus on market manipulation by investors needs to be seen in a broader intellectual climate that despises investors, and shareholders in public companies in particular, as ruthless speculators, while corporate managers, academics, bureaucrats and politicians are deemed responsible disinterested decision takers working for a good cause. This climate is also reflected in domestic press coverage which parrots BaFin press releases without independent investigative reporting, which in turn further reinforces the prevailing intellectual climate.”