Martin Allen at Morgan Stanley asked the question on Thursday:
We understand that it is obligatory for quoted companies to disclose debt covenants in the US; we think that it is an anomaly that such disclosure is not compulsory in the UK, because from time to time, in conditions such as are currently prevailing, this information becomes material to share prices, and by non-disclosure of material price-sensitive information companies could be accused of creating a false market in their shares.
The matter is pretty pertinent right now, for obvious reasons. While it is doubtful that breaching a debt covenant would lead to administration for any of the British property majors, such an event would certainly move regular shareholders out of the driving seat.
In fact, Morgan Stanley is leery of British property, full stop. Mr Allen has slashed his forecasts across the sector and says we should expect a further 42 per cent fall in the majors’ share prices. He cites a range of factors:
- Peak-to-trough falls in City and West End office rents are now forecast at 34 per cent;
- the ‘denominator’ effect, whereby institutional investors are under pressure to cut their direct exposure to property, because its relative weight has risen as the price of other assets (such as equities) have fallen;
- German institutional buyers have all but disappeared; and
- firesale disposals are now a reality, given the issues at Lehmans, Dawnay Day, Dunedin Industrious and Invista Plantation place.
There’s also the little matter of the lending banks getting to grips with their own problem portfolios. The two UK banks with the greatest exposure to UK commercial property happen to be HBOS and RBS, where new management now has an incentive to recognise existing problems at the earliest opportunity. But back to that issue about covenants and the attendant secrecy. Here’s the key MS table:
Related links:
Demand for new offices in London tumbles – FT
Need for property benchmark intensifies – FT