Portfolio update, 31 July 2020

Today we announce an update on portfolio performance and the special measures currently in place in response to the Covid-19 crisis. Our previous update on 29 May 2020 is available here.

To ensure that all clients have the opportunity to review and consider this announcement, the Resale Market will be  suspended for 3 working days, re-opening at 11am on Wednesday, 5 August 2020.

Our next quarterly announcements and close period dates are as follows:

  • 30 September 2020; market closed 11am that day until 11am, 5 October 2020
  • 18 December 2020; market closed 11am that day until 11am, 23 December 2020

Today’s announcements include the following:

  1. 1. Property Partner’s residential portfolio performance
  2. 2. Property Partner’s student accommodation portfolio performance
  3. 3. Suspended property dividends – ALL PROPERTIES UNTIL 30 SEPTEMBER 2020
  4. 4. Suspended 5-year anniversary processes – RECOMMENCING 1 OCTOBER 2020
  5. 5. Resale Market and PPX update
  6. 6. Update on development loans

Since our last update on 29 May, markets have been relatively stable compared to the early months of the Covid-19 crisis, with the FTSE 100 remaining within the range of 6,000 to 6,500 during June and most of July. The 6,000 level is 22% below the 2020 YTD high of 7,675.

Listed property companies known as REITs, typically invested in commercial property, have continued to suffer the impact of tenant rent arrears and a weakening business outlook, with the FTSE REIT index 26% below its 2020 YTD high point. REIT regulation dictates that REITs must distribute 90% of net rental profit to investors, but three of the five largest UK REITs, have cancelled dividends.

Given continued uncertainty over future rent levels, valuations and sales market conditions, 9 out of the 10 largest UK commercial property funds, including the three largest managed by L&G, M&G and Columbia Threadneedle, remain closed to investor withdrawals.

Whilst residential property has not suffered to the extent that commercial property has, it remains too early to judge longer term transaction levels, prices and rents. HMRC transaction date data shows that residential property transactions in Q2 2020 were 48% below Q2 2019.  House price data released today from Nationwide shows that prices rose strongly in July to produce an increase of 1.5% for the 12 months to 31 July 2020.

The picture for higher education has become marginally clearer, as many universities have declared their autumn term start dates and recent figures from UCAS show that overall applications have increased by 2.3% relative to the same point in last year’s cycle. Student accommodation booking activity is well below typical levels at this point in the cycle in most locations. Both domestic and international students are reluctant to commit to their places, particularly with many universities offering increased online/remote classes, and while uncertainty remains around restrictions on university life once the term begins.

The prospects for student accommodation (PBSA) over the next 12 months will become clearer during August and September, when booking numbers for the start of term are known and the first installments of rent are paid. Until then, high levels of vacant rooms remain a potential outcome. 

  1. 1. Property Partner’s residential portfolio performance

We experienced an increase in arrears during the early stages of lockdown, reporting that current arrears as a  % of monthly rent had risen as high as 30% in May.  Since then, we have managed arrears down to 23% at the end of July. With the furlough scheme coming to an end and the longer-term impact of the crisis still to be revealed, our outlook on rent arrears remains cautious.  Vacant properties have been similarly difficult to manage during the lockdown, but having risen in April and May, these have now reduced to relatively normal levels.

  1. 2. Property Partner’s student accommodation portfolio performance

With widespread uncertainty surrounding the next academic year beginning in September, we are in the middle of the critical months for student bookings. Our initial priority for each property is to reach the level of bookings required to safely meet next year’s operating costs and mortgage interest payments.

Contracted bookings have been slower than usual at this point of the cycle, currently at 45% of total occupancy. As is typical for student accommodation, but presenting a greater risk than usual given Covid-19 uncertainties, only a small proportion of this rent is backed at this stage by upfront payments.

We are taking a highly flexible approach to pricing, marketing and contract length. We have also explored alternative uses at every property, considering private lets and working with short stay accommodation providers to fill empty rooms. 

  1. 3. Suspended property dividends – ALL PROPERTIES UNTIL 30 SEPTEMBER 2020

Whilst property dividends remain suspended, all net rental income for each property continues to accumulate within that property’s accounts, strengthening its financial reserves.

The primary hurdle to restarting dividends are the challenges to net rental income described above for our residential and student properties respectively.

Since our previous announcement, all of our mortgage-providing banks have agreed to 6-month mortgage deferrals for all properties. A second hurdle to restarting dividends is agreement with those banks on how and when mortgage interest deferrals will be repaid. Repayment will fall into one of 3 categories (i) deferred interest roll-up into the capital repayable at the end of the term, (ii) deferred interest to be repaid prior to dividends restarting, or (iii) deferred interest to be repaid over an agreed period, but dividends can restart in the meantime.  Properties falling into categories (ii) and (iii) will experience a challenge in restarting their dividends.  Prior to our next announcement on 30 September, we expect to have reached agreement with all banks on all properties.

A final hurdle to restarting dividends is the level of financial reserves within each property. As discussed in previous announcements, at the start of the crisis, reserves across the portfolio had reduced to levels that needed strengthening – simplistically, this means that dividend payout levels pre-crisis were, on average, higher than was sustainable. These reserves have increased during the last 4 months and will continue to do so in the next 2 months to 30 September.  However, based on current forecasts, at 30 September, properties will remain in a range from those with more than adequate reserves to those with less than adequate.

At this stage, we do not intend to extend the blanket-suspension of all property dividends beyond 30 September.  However, because of the combined impact of the hurdles described above, any properties that have their dividends restarted in October will be in the minority. At the time of our next announcement on 30 September, we will be announcing property-specific information.

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, deteriorate under crisis conditions; and vice versa. It is even more crucial than in normal times, that any new investments made on the Resale Market contribute to portfolios which are as widely diversified as possible.

  1. 4. Suspended 5-year anniversary processes – RECOMMENCING 1 OCTOBER 2020

Since our last update, the early signs of residential property market activity have suggested relative price stability.  In addition, the Government’s announcement of the partial stamp duty holiday is expected to have a positive impact on the market.  We have therefore decided to recommence our 5-year anniversary processes from 1 October 2020.

Given the unpredictability of the crisis, we will be monitoring market conditions closely and, of course, the decision to resume these processes may need to be reviewed if conditions change materially.

We will be working through the backlog of properties that have already passed their anniversary dates in sequential order, before beginning the processes for the later properties.  The first 9 properties set to go through their 5-year anniversary process are the following:

Property Date
Boyd Street, Whitechapel, E1 01-Oct-20
Northfleet Lodge, Woking, GU22 01-Oct-20
St James Road, Sutton, SM1 01-Oct-20
Sherringham Court, Hayes, UB3 02-Nov-20
Chipping Lodge, Romford, RM1 02-Nov-20
Woodgate Court, Hornchurch, RM11 02-Nov-20
Kentlea Road, Thamesmead, SE28 01-Dec-20
High Court, Byfleet, KT14 01-Dec-20
Richmond Court, Romford, RM1 01-Dec-20

If you are a shareholder in one of these properties, you will receive an email notification from us when the process begins.

Investors can view the 5-year anniversary date of every property trading on the Resale Market on each property’s specific property page, above the Investment Case. Depending on market conditions and the speed at which we can work through the backlog, all 5-year anniversary process dates remain subject to review. Read more about the 5-year anniversary process here

  1. 5. Resale Market and PPX update

Immediately following our previous portfolio update (29 May 2020) announcing the suspension of dividends being extended for a further 3 months, prices on our Resale Market fell by 4%. Since then, there has been relative price stability for the last 2 months, with the PPX increasing from approximately 79.2 to 81.3. This represents a fall of 12.2% from the year to date peak of 92.6 in February.  For reference, in the same time period, the FTSE 100 has fallen 22% and FTSE listed REITS 26%.  

The PPX trading data is compared to our March 2020 Independent Share Valuation Index, based on independent surveyors’ valuations. The Independent Share Valuation Index demonstrates properties underlying value, on a pre-crisis basis.

PPX closed at a value of 81.3 on 30 July. This represents a discount of 19.3% to the Independent Share Valuation Index.

In this period of uncertainty, it is more important than ever to have a widely diversified portfolio.  Our Capital Discount Investment Plan provides this diversification by identifying 20 of the most significantly  discounted properties on the Resale Market. The 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.

View Investment Plan

  1. 6. Update on development loans

The easing of restrictions on business activity and social distancing has enabled activity to recommence across UK construction sites. The direct impact of these measures on construction projects, including disruption to workers and supply chains, has delayed ongoing projects at every stage of the process, whether that be initial site clearing, building superstructures, fitting out or marketing properties for sale. 

The effects of lockdown and the closure of the housing market are evidenced across our outstanding development loans, and all either have or are now likely to overrun their pre-crisis timetable. The repayment of three of the more mature loans is now overdue; these will continue to accrue interest. 

In all cases, we continue to be reassured by the work that Proseed Capital is doing with borrowers and the senior lenders to get projects back on track under difficult conditions.

You can find the latest update on each outstanding loan here.

If you have questions about these announcements, please email support@propertypartner.co.

Thank you for your continued support.

The team at Property Partner

Capital at risk. The value of your investment can go down as well as up. The Financial Services Compensation Scheme (FSCS) protects the cash held in your Property Partner account, however, the investments that you make through Property Partner are not protected by the FSCS in the event that you do not receive back the amount that you have invested. Past performance is not a reliable indicator of future performance. Forecasts, if stated, are not a reliable indicator of future performance. Interest and capital returned may be lower than expected. Gross rent, dividends, and capital growth may be lower than estimated. 5 yearly exit protection, exit on platform, exit in line with a specific investment case or fund strategy, subject to price and demand. Property Partner does not provide tax or investment advice and any general information is provided to help you make your own informed decisions. Customers are advised to obtain appropriate tax or investment advice where necessary. Financial promotion by London House Exchange Limited (No. 8820870); authorised and regulated by the Financial Conduct Authority (No. 613499). See Key Risks for further information.