Neil Collins’ Notebook – Shock coming to the great British property obsession

A proper property bear market

The British are obsessed with property. From the single buy-to-let, to property funds, to real estate investment trusts, putting capital into this market often seems to rank second only to buying a place to live. So far in 2020, it has proved to be a swift way of losing rather a lot of that capital, and this week Land Securities, the biggest beast in property town, warned that it is likely to get worse.

Landsec’s new CEO, Mark Allan, revealed a £1.2bn writedown in the company’s portfolio. This was bad enough, but it was his remarks afterwards that did the damage to the share price. He told a story of empty offices and redundant shopping centres, with far too many tenants failing to pay the rent, even those who could afford to do so.

Here’s JP Morgan Cazenove: “Landsec’s conference call should serve as a wake-up call to investors perhaps looking through the COVID-19 impacts ending with the lifting of lockdown…tenants are going to remain challenged. Rent collection in the first quarter of 2021 is going to fall. Valuation declines are going to continue.”

Meanwhile, Landsec’s biggest rival, British Land, wants more time to report, perhaps reflecting the old City adage that bad figures always take longer to add up than good ones. Others are in a much worse state. The ridiculously-named Intu (shopping centres, geddit?) is still afloat, just, but the shares are essentially worthless, while its rival Hammerson is gasping, having just failed to sell a portfolio of seven of its shopping centres.

It has been clear for years that there are more shops in Britain than the market can support, but the trend towards internet shopping has been given a mighty boost from lockdown. In future, physical shops will have to fight over a smaller share, while the space surplus now extends to shopping centres, few of which will return to prosperity even if the nation does. It’s grim in the office too. Allan’s are currently 10 per cent full, implying that many of them will never reach capacity again.

At least some of these new truths are now in the Landsec share price, halved in three months. The hidden losses are in property funds, which are aimed at retail investors on the promise that they could always sell at the value of the underlying properties. This has turned out to be untrue. Most have now closed to redemptions, in part because the reality of the underlying property values is just too ghastly to admit. When the funds do reopen, the bid prices are going to administer a nasty shock to the investors.

The only area of property seemingly unaffected is residential, but this too may be about to change. The lockdown stalled the market, so there is not enough activity to establish price levels. The new post-lockdown rules on viewing – no touching, no family groups, no more than 15 minutes inside – will force hasty decisions from would-be buyers, who may back off or repent at leisure.

Lower volumes usually mean lower prices, and some in the industry see a 15 per cent fall in house prices. We are constantly told there’s a terrible housing shortage, although it is mostly of decent property for those who work in London. Perhaps a violent change of use from retail and leisure will show us the way forward, while a reversal of the seemingly inexorable process of house price inflation might dampen our national obsession.

Converting shopping centres and offices into flats is neither quick nor easy, but if the alternative is dereliction, a developer will find a way. Here’s his slogan for a start: WeWork at home.

It’s no Gilbertian joke

So a slow-motion farewell to Martin Gilbert, former joint CEO, then vice-chairman of Standard Life Aberdeen, who quit the board at this week’s annual meeting. He finally leaves the company in September to spend even more time with his salmon rod, always assuming the Scottish government has eased the lockdown by then.

It has been quite a ride since he started Aberdeen Asset Management in 1983. He survived the split capital trust scandal at the turn of the century when a parliamentary committee called him “a sophisticated snake-oil salesman” and the Aberdeen share price fell from 715p to 18p over two years.

He stayed in the saddle and recovered to forge one of the decade’s least likely alliances. Staid old Standard Life, with ambitions to be more than Scotland’s biggest life office, was merged with Aberdeen to form the UK’s largest asset management business.

Alas, despite Gilbert’s talents at survival and his enthusiasm for deals, this one cannot be described as a success.  When the merger was announced in May 2017, the businesses were valued together at £11bn. Today, after what seems like an endless churn of the assets, and a programme of buying-in the shares, “Staberdeen” is worth just £5bn. From 500p the shares have sunk to 210p. Despite the (presumed) double-digit yield, they are still not obviously cheap.