Updated: 4th March 2009
Begbies Traynor’s Red Flag early warning system shows 304 property companies currently facing critical financial problems, many of which are at severe risk of an ultimate insolvency. This represents a considerable escalation from 185 companies with critical problems in the third quarter of 2008 and 221 in the fourth quarter. These latest troubled companies are not major groups, but mainly middle and lower market players with total asset values in their last published accounts of £1.1bn, an average of £3.6m per distressed company.
Nick Hood, Senior London Partner at Begbies Traynor, commented:
“We’re seeing a build up of problems in the commercial property sector, as the real economy in which their tenants operate continues to unravel. The only upside has been the fall in interest costs; however this offers little relief to landlords dealing with escalating tenant defaults and unprecedented difficulty in raising or preserving business funding.
“There has been a sharp rise in our caseload in the sector, as lenders are forced to take control of commercial property right across the UK or landlords seek protection from their creditors to allow them time to restructure. In the past three months alone, 171 property companies have started insolvency proceedings, and we believe these numbers will rise sharply as we progress through 2009 and into 2010. We estimate that the number of insolvencies in this sector could reach between 1,200 and 1,600 in 2009.
“Companies in distress should seek professional advice and assistance as soon as possible – lenders are willing to renegotiate covenants and repayment schedules particularly if they see a sensible business plan that includes a restructuring and asset disposal programme at the very least. The next two years should see the survival of the smartest as well as fittest.”
Meanwhile, Hammerson, British Land and Land Securities are all mid way through significant rights issues, totalling a c.£2bn cash call on institutional investors. Smaller quoted companies such as Workspace have also been forced to raise significant new cash from the markets. And, in a further indicator of troubled times ahead, Warner Estates has announced that it is in talks with its bankers to address covenant breach issues, a trend which could accelerate through the forthcoming results season as many listed companies are expected to confirm that the fall in their asset values has brought the gap with their loan to value ratios down to very uncomfortable levels.
Falling values in January
Last week CB Richard Ellis published bleak figures on commercial property values, revealing that prices fell by a further 3.5% in January, on top of a 27% fall in 2008. While the rate of decline may be slowing, few commentators expect the market to see any meaningful recovery in the short or medium term.
Tenants in the news
As financially challenged tenants push landlords to concede lower rents, landlords face knock-on problems with their bankers, as basic rental cover covenants are breached. Sir Philip Green’s efforts to lower the rental obligations of some of his Arcadia stores tell this tale, while last week’s failure of the Stylo CVA reflects the determination of landlords to avoid setting damaging precedents, no matter how many voids this might create.
The retail sector is not alone in needing help. A recent major hotel restructuring left a stubborn landlord with ten empty properties in serious need of refurbishment or a rapid change of use. The huge number of pub closures and the failure of such signature businesses as Anthony Worrall-Thompson’s restaurant chain show further distress in the troubled leisure sector.
Major property companies may be uncomfortable turning to shareholders for help, even if they hope to use at least some of the cash to take advantage of distressed asset purchase opportunities. But the issues for the huge numbers of medium-sized and smaller property players are much more serious.
Julie is a law graduate who qualified with Price Waterhouse in 1994. Julie joined Smith & Williamson in 1997 and became a partner in 2001. With Mike Stevenson, Julie set up Middleton Partners offices in Salisbury and Southampton, both of which are now part of Begbies Traynor.
Julie is a member of the Insolvency Practitioners Association and is a Fellow of The Association of Business Recovery Professionals. Julie deals with all aspects of Corporate Recovery and turnaround work and takes all form of personal insolvency appointments.