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The banking crisis hits commercial landlords.

 

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Share prices in London’s big listed property companies have been hit as the repercussions of the banking crisis that began in California begin to make themselves felt in the UK. British Land, the owner of £10 billion of offices, retail parks and warehouses, saw its share price drop by 13 per cent in March, as did LXi Reit, owner of the land that Thorpe Park in Surrey and Alton Towers in Staffordshire sit on. The stock of the shopping centre specialist Hammerson fell by 14 per cent. The MSCI Europe Real Estate Index, which tracks the share prices of European property companies, hit its lowest level last week since 2009 and the aftermath of the global financial crisis.

The effect of a creaking banking system on the UK commercial property market is indirect, John Cahill, a real estate analyst at Stifel, the US investment bank, said. Cahill’s base case is that a full-blown banking crisis is avoided, although stock market investors seem less convinced. Such a crisis, if it came, would probably result in banks reining in lending when commercial property values are falling rapidly. They have declined by 10 per cent from their peak last summer, according to the MSCI Europe quarterly property index.

The chief executive of one big commercial property landlord explained how that combination could affect those with loans that are about to mature and need refinancing. «Let’s say you bought an office building for £10 million five years ago. You’d have been able to borrow £6 million. When you ring up the bank, they might lend you 40 per cent against an £8 million valuation, just over £3 million. »

Now, most are at 30 per cent, if not lower. A vital feature of this downturn has been the rapid writedown in commercial property values, which reflects the listed companies’ healthier balance sheets. «In a market where everyone’s highly leveraged, companies are all incentivised not to adjust their valuations because they’ll default on their bank debt,» Ben Green runs Supermarket Income Reit, which owns £1.2 billion of supermarkets across the UK, said. As a result, the feeling in the City is that the listed landlords look capable of withstanding the turmoil in the commercial property market.

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