CEO Update: May 2020

Since our previous announcement on 30 March 2020 (read here), Property Partner has worked intensively to mitigate the effects of the COVID-19 crisis on the performance of the property portfolio.  Today we are providing an update on that performance and announcing further special measures to protect the value of our clients’ properties.

To ensure that all clients have the opportunity to review and consider these announcements, the Resale Market will be  suspended for 3 working days, re-opening at 11am on Wednesday, 3 June 2020.

In light of today’s announcement, we will not be providing an update on 30 June 2020 as previously planned, and instead, will provide an update on 31 July 2020.

Today’s announcements include the following:
1. Performance of property portfolio
2. Temporary suspension of all property dividends – extended to 30 September 2020
3. Temporary suspension of all 5-year anniversary processes – ongoing
4. Resale Market update and launch of the Property Partner Share Trading Index (PPX)
5. Update on development loans

It has been a long 2 months since our last update.  Despite some initial signs that the health crisis is improving, the initial steps toward re-opening the economy have highlighted the enormous challenges that lie ahead.  

It remains too early to understand the impact of the crisis on the UK residential property market, but transactions were 57% lower in April than the same month last year as a result of government restrictions on movement and business activity.

The stock market provides a real time gauge of market sentiment and typically demonstrates greater volatility than property prices.  The FTSE 100 has recovered some ground since late March but is still valued 18% below its February pre-crisis peak.

UK listed REITs, predominantly invested in UK commercial property, are down 26% since mid-February, following reports of substantial rental arrears, and uncertainty over the future of the retail and office sectors.  Large UK commercial property funds, managed by L&G, Aberdeen Standard Life  and others, remain closed to withdrawals.

Whilst the government has recently allowed real estate offices to re-open and property transactions to progress, there is no reliable evidence of the current state of the property market.  But for as long as the wider economy faces current levels of disruption and uncertainty, the property market will be adversely impacted.

Last week, the Treasury and the FCA announced extensions of mortgage holidays to homeowners (by agreement and where warranted) until 30 September 2020 and the ban on lender repossessions until 31 October 2020.  Our properties are not covered by these extensions and we await potential further announcements relating to investment properties.

1. Performance of the property portfolio

The last 3 months have represented the most intense period of property management activity in our history.  This has involved working closely with our managing agents to maximise rent collections and keep outgoings to an absolute minimum.

It has also involved extensive work with our four mortgage-providing banks, to agree mortgage interest payment holidays.  We are pleased to report that we have achieved formal agreement from those banks for all of the mortgages in our portfolio, substantially reducing the risk of the crisis leading to insolvency for our geared property investments.  Those holidays are 3 months in duration (April to June 2020) for mortgages with two of the banks, and 6 months in duration (April to September 2020) for mortgages with the remaining two banks.  For the two banks that have provided 3-month holidays, we will be seeking an extension of a further 3 months.  Of course, all mortgages rank ahead of the equity holders of the properties (our clients), so the mortgage holidays are strictly conditional on the suspension of dividend distributions to our clients.


The most immediate risk to the residential portfolio has been rent arrears, where tenants withhold rent (many with genuine reason, others less so).  Rent arrears are running at significantly higher levels than prior to the crisis.  Below is the trend over the last 5 months of current arrears as a  % of monthly rent:

In recent months, these month-end positions mask substantially higher arrears levels during the month, that have been ameliorated by the work of our managing agents.  We have seen many instances where, in chasing overdue rent, a rent holiday has been requested but once it has been made clear that the holiday is only a deferral and the tenant remains liable for the outstanding rent, they have elected to pay.  We are, of course, adhering to Government guidance in agreeing to rent deferrals for tenants who require this for genuine reasons of financial hardship.

Clearly the deteriorating trend needs to be arrested and returned to normalised levels, but we do not yet have visibility on when this will be.

Purpose Built Student Accommodation

In the student accommodation portfolio, the most immediate issue has been that of universities closing their campuses and some students returning home (domestically or internationally).  As we discussed in our 30 March 2020 announcement, this led to industry-wide pressure and precedent to release those students from their final term commitments.  Across all student properties to date, we have released students from £190k of rent, representing approximately 40% of contracted 3rd term rent.  Whilst that is a significant loss of income, of greater importance is the uncertainty that remains over demand from students for the coming academic year (2020/21).  Which, when and how universities will offer on-campus services is not a clear or consistent picture.  Together with our managing agents, we are creating bespoke plans to maximise occupancy for the next academic year for each property.  In the short term, we continue to work on alternative uses for the accommodation.

In this update, we have not released information that is specific to individual properties.  Property performance is a combination of a large number of factors e.g. contracted rent, voids, rent arrears, regular and irregular repairs & maintenance, capital works, mortgage terms & covenants, changes in valuation, etc.  Each of these factors has an historic pattern that needs to be well understood and, more importantly, an outlook that needs to be estimated.  In these extraordinary times, these factors are more volatile and unpredictable than usual.  We are seeing examples of properties previously showing strong performance, suddenly deteriorate under crisis conditions; and vice versa.  This is a picture that has shifted constantly in the last 2 months and we expect will continue to do so in the months ahead.  Reporting on this is simply not practicable.  That being the case, it is even more crucial than in normal times, that any new investments made (e.g on the Resale Market) contribute to portfolios which are as widely diversified as possible.

2. Temporary suspension of all property dividends – extended to 30 September 2020

On 30 March 2020, we suspended dividend payments on all property investments for April, May and June 2020 (read here).  We are now extending that dividend suspension for a further 3 months: July, August and September 2020.

We remind clients that net income that is earned during this period of dividend suspension is accumulating within each property’s bank balance, for the benefit of that property’s capital reserves.

As discussed in the 30 March 2020 announcement, the financial provisions held within each property, and the portfolio as a whole, were insufficient to deal with the current crisis.  In the last 2 months, despite significant disruptions to rental income, no properties in the portfolio have become insolvent and the financial provisions have begun to strengthen.  This is due to the significant impact of 3 measures (i) crisis management to reduce or defer property costs, (ii) mortgage interest payment holidays and (iii) suspension of dividend distributions.  As discussed above, a contractual requirement from our mortgage-providing banks, in agreeing to mortgage holidays, is that dividends remain suspended.

Whilst all banks have agreed to mortgage holidays for either 3 or 6 months, those holidays are, of course, only a deferral of payments and we have not yet agreed on the repayment plans.  For some banks, the mortgage interest holidays may be rolled-up and added to the principal; for others, the mortgage interest holidays may have to be repaid prior to dividends re-starting.  We will seek to reach agreement with each bank in the coming months, once the economic dimensions of the crisis and performance of our properties become clearer.

An additional complication in finalising the position of the mortgages (a pre-requisite to re-starting dividends), is that we and the banks need to reconsider the position of each property against its mortgage covenants.  Our mortgages each have two covenants: the first is interest coverage afforded by a property’s rent, which requires visibility of rental income in preceding months and reasonable confidence in future rent levels; to achieve this will require (at a minimum) greater clarity of rent arrears in the months ahead.  A further consideration, as has been widely discussed by industry commentators, is that higher levels of unemployment and lower incomes across the country, may inevitably place downward pressure on overall rent levels.

The second covenant is the loan-to-value ratio; prior to the crisis, our properties enjoyed good headroom to this covenant, but to be sure of this in future, we will require evidence that property values are not significantly lower than pre-crisis levels; again, this may take a number of months to verify.

Whilst mortgages are a significant reason for ongoing dividend suspensions, there is a segment of our portfolio that is ungeared.  These properties also held insufficient capital provisions for a crisis of this magnitude and are subject to similar levels of rental income uncertainty, so it is necessary for prudence that their dividends remain suspended.

3. Temporary suspension of all 5-year anniversary processes – ongoing

As discussed in detail in our 30 March 2020 announcement, current market conditions do not allow for the orderly operation of our 5-year anniversary processes.  As such, this suspension will remain in place until conditions allow for those processes to be conducted effectively.

4. Resale Market update and launch of the Property Partner Share Trading Index (PPX)

Since the start of 2020, prices on our Resale Market have decreased, from peak (mid-February) to trough (late-March), by 12%.  Since the low in late-March, prices have been relatively stable, recovering slightly by 1-2%.  Whilst the price decline is significant, it is not unexpected given, and relative to, the severe pressure on all asset classes across the economy.

The marketplace is trading at approximately an 18% discount to the underlying fair market value of shares (based on independent surveyor valuations at March 2020, prior to the full impact of the crisis), the largest discount in our history.  To help clients better understand these discounts, both at a market-wide and individual property level, we have made improvements to the Resale Market to better display important and additional information needed to make trading decisions, including:

• Property Partner Share Trading Index (PPX), showing average daily price changes of all properties trading, with history from 2015; there is the option to view the Independent Share Valuation Index to compare trading prices to the underlying fair market value of the shares, and the Independent Property Valuation index to view the average change in property values
• Improvements to property cards and the “trading data” view to show the share price at which a property last traded compared to the 7-day weighted average trading price
• Top daily share price risers and fallers, identifying which properties are subject to the largest movements
• Addition of markers to property cards that display whether you hold shares in the property and whether you have open bid or sell orders on the property
• Improvements to the ‘Bid orders’ and ‘Sell offers’ sections of the Dashboard to better compare outstanding bids and offers to the current highest bid and lowest offer on every property

As discussed above, in this period of extreme uncertainty, it’s more important than ever to have a widely diversified portfolio.  Accordingly, we have adjusted the Capital Discount Investment Plan to now include a minimum of 20 properties.  The Investment Plan identifies properties trading at a minimum 15% discount to latest share valuation and takes account of the discount available when our stipulated disposal strategy is to sell individual units at “vacant possession” value. The minimum investment is £5,000.

5. Update on development loans

The crisis has had a direct impact on the UK property development industry.  Many building sites were forced to close during the lockdown, and the speed of construction at most sites continues to be affected by social distancing requirements and/or supply chain issues.  Similarly, the sales market all but disappeared between late-March and early-May with surveyors, estate agents and potential buyers all unable to visit properties.  It is too early to judge when and to what extent the sales market will recover now that restrictions on visiting properties have been eased.

Progress has been impeded to some degree at all the schemes against which Property Partner investors have outstanding loans.  It is prudent to expect that there will be delays to the repayment of capital and interest on these investments, irrespective of what stage they were at before the crisis began.  Loans scheduled for repayment in the coming months are expected to be delayed. 

Since late March, Proseed Capital has worked closely with each borrower and senior lender to assess the impact of the crisis on each scheme.  It has been necessary to support borrowers to ensure that they are as well placed as possible to ride-out the crisis and complete their projects.  While the situation continues to develop, we have been encouraged by the feedback we have received to date, indicating that Proseed Capital and their senior lending partners are taking a pragmatic approach, focused on finding flexible solutions to support borrowers and minimise the risk of failure.

Proseed Capital has recently recommenced site visits and is in the process of updating strategies for each loan.  We will provide more information on individual loans in the next scheduled update on 31 July 2020.

If you have questions about these announcements, please email

Thank-you for your continued support.

Warren Bath