The ripple effect from the withdrawal of mortgage products continues to make itself felt across the market, and disappointed buyers are taking to social media to complain about withdrawn products and crushed dreams.
While these consequences can be immediately observed, the commercial fallout for specialist lenders, brokers and other companies that are reliant on debt funding for their work in the property market, such as real estate investment trusts (Reits), is less immediately obvious, but many will be looking warily at the year-end after what had been a reasonable first half.
The key question now is whether the disruption in the property market will translate into significant loss of earnings if the slowdown in both mortgage offers and borrower uptake accelerates. Judging by some early reactions, the market is betting on bad news. There will be winners and losers, but for the moment it looks like mainly losers.
LendInvest us a quid
One of the most brutal early signs that no prisoners will be taken is the treatment handed out to lending platform LendInvest (LINV), which endured a 30 per cent fall in its share price after its interim trading update this week. LendInvest’s own operational performance was respectable, though notable for being based on the first couple of quarters of this year before the turmoil in the lending market. Clearly, the fear is not where LendInvest has been but where it is going. The company said it now expects FY2023 pre-tax profit to be merely in line with the previous year,citing an expected growth slowdown for buy-to-let. It releases its interim results on 30 November.
Other specialist property lenders, whose higher margins and ability to lend rely on relatively less stable sources of deposits than the High Street banks, are looking on nervously. There are signs that other specialist lending companies are trying to get ahead of market sentiment to keep shareholders sweet. For example, late in September specialist lender Paragon (PAG) suddenly upped its share buyback program by £25mn to a total of £75mn. This makes eminent sense given that Paragon’s shares are down a quarter for the year and buying larger quantities of shares at a reduced price will have a greater beneficial effect on earnings.
Also assessing the situation will be OneSavings Bank (OSB) with the southeast-focused mortgage lender nervously eyeing up the weaker property market in London and surrounding areas, where it lends to buy-to-let investors. Shareholders will have to wait for its next trading update to assess where the availability of mortgages has also affected the rental market, where business had previously been brisk. One question for OSB and Paragon is whether the funding will stay in place to allow the loan book to expand?
Lacking the Reit stuff
Reits and housebuilders have been hit hard by the “mini” Budget fallout, and things are not set to get any easier. Shares in the Reits plummeted after gilt yields exceeded the investment yield for many listed property companies. Housebuilders also suffered as a jump in mortgage rates caused investors to worry about house prices falling – with many experts predicting a 10 to 15 per cent drop is likely.
Reits will struggle to raise cash from equity because their share prices are falling but will also find asset sales unappealing due to commercial property’s illiquidity. Higher interest rates mean debt is not a good option either.
This is a danger for Reits rather than the housebuilders, who have plenty of liquid stock to sell. Though Reits often like to think of commercial property as a liquid asset, the reality is that office, warehouse or shopping centre deals can take months or even years to complete.
What’s more, even if Reits are able to sell assets at speed, one real estate financier said such firesales would be controversial with shareholders as they amounted to a change in strategy, something which investors should be consulted on beforehand.
Landsec (LAND) has been open with investors about its plans to sell off low-yielding assets for the last two years, but not many other Reits are in this position. This is also a clear investment strategy rather than being driven by a need for capital. Unannounced and fast sales also smack of desperation, which often means selling the assets at a discount and – worse still – causing an even deeper sell off of shares from concerned investors. This kind of spiral could hurt Reits with high debt loads, as net asset values fall and refinancing gets far more expensive. CLS Holdings (CLI), for example, currently has a 70 per cent net debt to net assets ratio and 49 per cent of those assets are UK offices in non-prime locations.
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