In response to the COVID-19 crisis and actions taken by the Government, Property Partner today announces special measures to protect the value of our clients’ investments. The measures will take immediate effect and will be reviewed in 3 months, with an update provided on 30 June.
The special measures are announced alongside our regular quarterly announcements, about the performance of all property investments on the platform. That announcement was scheduled for 6 April – we have brought it forward to today given the urgency of events.
To ensure that all clients have the opportunity to review and consider these announcements, the Resale Market will be suspended for an extended period of one week, re-opening at 11am on Monday, 6 April 2020.
Today’s announcements include the following:
1. Temporary suspension of all property dividends
2. Temporary suspension of all 5-year anniversary processes
3. Resale Market update
4. Q1 independent revaluations of all residential properties
5. Progress reports on development loans
6. Fire safety updates on affected properties
All asset classes in the economy are under severe pressure. Equity markets are volatile and have fallen approximately 30%, and dividends from public companies are being heavily reduced or cancelled. Property markets are suffering too, with most open-ended commercial property funds once again gating their investments and many REITs experiencing similar falls to equity markets.
We continue to believe in the long term strength, stability and attraction of UK residential property assets. Our focus is on the management of our existing portfolio, with the potential to recommence new acquisitions when conditions allow.
Following significant changes to our business model in July 2019, Property Partner is well capitalised and well placed to operate in this extraordinary new environment. The team has been working entirely from home for a number of weeks with no business interruption; all of our technology systems are cloud-based; our lean cost structure is suited to this time when revenues across many sectors in the economy are under threat. That said, we are actively pursuing further measures to reduce or defer overhead costs and, where appropriate, access Government support, to strengthen our position.
1. Temporary suspension of all property dividends
Following an intense month of working with our managing agents on escalating property management issues, we have taken the decision to suspend April, May and June dividend payments on all property investments.
This decision will be reviewed in June and a further announcement will be made on 30 June 2020.
Net income that is earned in the next 3 months will accumulate within each property’s bank balance, for the benefit of that property’s capital reserves and that property’s investors.
Whilst we endeavour to hold reasonable financial provisions within each property for normal circumstances, those provisions are, of course, insufficient to deal with the current crisis. To ensure that our clients can realise the long term value of these properties, it is necessary that all properties remain financially solvent. Therefore we need to significantly strengthen the capital reserves of every property in the portfolio, until we clearly understand the impact of the crisis on the economy and the specific finances of each property.
To provide context for this decision, below is an overview of the immediate landscape regarding our residential and purpose built student accommodation properties.
As many of you are aware, the Government has intervened in the residential rental market. Tenants are protected from eviction and landlords are required to provide rent holidays where appropriate. This is a fast-changing set of circumstances, but based on the feedback we already have, there will be substantial rent arrears. These arrears could originate from a combination of those that are granted rent holidays and those that fall into arrears without being granted, or even applying for, rent holidays. The extent of arrears is unknown and there is no way of predicting their distribution across individual properties in our portfolio. We are currently working with all of our residential mortgage providers to agree a 3-month mortgage payment holiday.
The situation for our student accommodation properties is potentially worse. The student accommodation sector is working with Government, universities and students to deal with these unique circumstances. This academic year, universities have been closing their physical campuses, and both domestic and international students are divided between those returning home and those remaining in their student accommodation. For those returning home, there is sector-wide pressure to release students from their final term commitments. Next academic year, there is uncertainty about the start to the year – whilst that uncertainty remains, bookings and receipt of financial commitments, which in an ordinary year are well advanced by this time, are far from assured. In response, we are working on alternative uses for the accommodation, including with the NHS Additional Accommodation unit. In a significant boost to our student accommodation portfolio, we have confirmation that all student accommodation mortgages will receive a 6-month mortgage payment holiday. The interest payments saved by the holiday will be rolled-up and added to the capital value of the mortgages, adding approximately 1 percentage point to the loan-to-value ratio of each mortgage.
It is critical that we strike the right balance between protecting the immediate interests of our clients that are shareholders in these properties, and the fair treatment of both residential and student tenants. In striking this balance, we will act responsibly, continue to follow Government rules and guidance, and be consistent with industry best practice.
Across both residential and student accommodation properties, we are also working with our managing agents to avoid, defer or reduce every cost line in every property, to strengthen the capital position of each property.
2. Temporary suspension of all 5-year anniversary processes
When each property reaches its 5th anniversary of purchase, we conduct a process that is an essential opportunity for all investors in that property to exit their investment (read more here). The integrity of that process relies on (i) a robust, independent valuer’s survey, (ii) reasonable market conditions for primary launches and resale trading on Property Partner and (iii) the ability to obtain vacant possession and sell the property on the open market.
For reasons that are discussed further below (see items 3 and 4), at this time of crisis, none of those three conditions exist. It is therefore necessary to immediately suspend all 5-year anniversary processes until conditions return that allow for those processes to be conducted effectively.
This decision will be reviewed in June and a further announcement will be made on 30 June 2020.
3. Resale Market update
Up until 17 March, our Resale Market had remained resilient to the wider effects of the crisis. In the month prior to 17 March, our index of average share prices for all properties had declined by approximately 5% and volumes traded were well above averages for the preceding 6 and 12 month periods.
However, since 18 March, the impact on our Resale Market has been more acute: the index of average share prices has fallen a further 5% and volumes traded have declined steeply.
Whilst currently suspended for clients to review these announcements, our Resale Market will resume trading at 11am on Monday, 6 April.
In the coming months, the broader effects of the crisis will become better understood and specific information about property performance will be available. We believe that as that happens, amongst our large client base, there will continue to be a range of views and potentially great value opportunities for those that believe in the long term characteristics of property investment.
4. Q1 independent revaluations of all residential properties
Every six months, Allsop LLP, an independent, RICS-accredited surveyor, re-values our residential property portfolio (student accommodation properties are re-valued annually in September).
In the period to 31 March 2020, those revaluations resulted in a marginal increase of 0.2% in the value of the residential properties since 30 September 2019.
These valuations took place in the weeks before the escalation of the crisis, and do not take account of the current expected impact on the economy and the property market. We have disclosed these revaluations to ensure the completeness of our regular disclosures, but investors should not rely on these revaluations whilst the market is disrupted by the crisis.
For a full discussion of the revaluations and our historical returns performance, read more here.
5. Progress reports on development loans
The past quarter saw one new loan funded on platform and a further two repaid early with interest, leaving an outstanding loan book of £5m across 11 loans.
We remain committed to offering new ISA eligible development loan investments in the future, but current market conditions mean inevitable delays and problems for the property development industry.
Government restrictions on activity and travel across non-essential businesses are likely to cause a slowdown in the progress of most construction projects. Similarly, it will be some time before the residential sales market is able to function as normal and projects reaching completion this year may take longer to sell than originally anticipated.
We will continue to report each quarter on the development progress of each loan, but it is prudent to plan for greater risk in these investments and to expect delays in the repayment of loans. We are working closely with our partners, first charge holders and developers, with enhanced loan monitoring to navigate the potential difficulties that may arise.
An update for each outstanding development loan will be posted on their respective investment pages in the coming days, click here to view.
6. Fire safety updates on affected properties
A number of our properties continue to work through fire safety issues relating to their cladding. Read more here.
These are important announcements with significant implications for our clients’ capital and income returns. If you have questions about these announcements, please email support@propertypartner.co. We will work to minimise response times, but please bear with us during these challenging times.
To ensure that all clients have access to the same information, we will be posting answers to client questions below.
Thank-you for your continued support.
Warren Bath
CEO
FAQs
Property Partner AUM and account fees during the suspension of dividends
The AUM and account fees will continue to be collected by Property Partner. These fees provide essential recurring revenue to cover operating costs at this critical time. This enables us to manage the property portfolio, maintain the investment platform and provide customer services.
Where clients do not have sufficient funds in their Property Partner account to cover the account fee, from 1 April 2020, this will be recorded and deducted from future account balances.
Suspension of 5-year anniversary processes that were already in progress
At 30 March 2020, the 5-year exit process was in progress on two properties, Boyd Street, Whitechapel and Northfleet Lodge, Woking. As part of the wider suspension of the 5-year exit mechanic across the platform, the process has been suspended on these two properties. These properties will re-commence trading on our Resale Market when the market reopens at 11am, 6 April 2020.
When property market conditions permit the 5-year exit processes to re-start, the process will begin again from step 1 for these two properties, with a new valuation and shareholder vote.
Click here to learn more about the 5 year exit mechanic
Availability of Investment Plans during the dividend suspension
Investment Plans give clients the opportunity to create a diversified property portfolio, where the properties are selected automatically from the Resale Market, based on fixed criteria.
Investment Plans will be available when the market reopens at 11am, 6 April 2020. Previously, we offered 3 Investment Plan strategies: Income, Capital Growth and Balanced. Under the current market conditions, we will only offer a single plan with a Capital Discount strategy. The primary metric that determines investment for this plan is discount to latest share valuation. In addition, the discount available when our stipulated disposal strategy is to sell individual units at “vacant possession” value, will also be taken into account. Portfolio discounts of up to 20% to latest share valuation and 25% to net asset value (taking into consideration the disposal strategy) were available on the Resale Market prior to the current trading pause.
Dividend suspensions for properties with secured leases, such as Ramsay Place, Aberdeen and Cubbington Road, Leamington Spa
Dividend suspensions apply to all properties in the portfolio. The breadth of this measure reflects the extremity of the COVID-19 crisis and how quickly circumstances can change, even for businesses that appear to be secure. For any properties that do earn full rental income, we will use the 3-month dividend suspension to bolster their provisions and financial position.
All the rental income earned in the next 3 months will accumulate within each property’s bank balance, for the benefit of that property’s capital reserves and that property’s investors.