Bank fears as British Land unveils £3.2bn writedowns

Published on Thursday 21 May 2009 21:29

COMMERCIAL property giant British Land has posted £3.2 billion of markdowns in property values, triggering further fears for banks exposed to the retail property market.

The firm said the record slump in UK property values had knocked 28 per cent off the value of its assets, which include retail parks Fort Kinnaird and Meadowbank in Edinburgh, reducing the portfolio value to 8.63bn.

The news comes just days after Land Securities, with which British Land has a number of joint ventures, including the St Nicholas and Bon Accord malls in Aberdeen, wrote down 4.7bn of value on its developments. British Land, the UK's second-largest property company, reported underlying pre-tax profits of 268 million, excluding the revaluation losses – broadly in line with last year. Revenues fell 14 per cent to 554m.

The company said yesterday: "Financial turmoil and market stress continues to adversely affect the property market, resulting in challenging conditions."

New chief executive Chris Grigg, who took over from Royal Bank of Scotland chief executive Stephen Hester after he was drafted in to head the troubled Scottish bank, said he was upbeat about the future, despite the latest numbers.

He said: "We saw underlying profits at 268m, which I think is a very strong performance under the circumstances. Our performance has shown real resilience. Our asset valuation has declined in line (with market benchmarks], but we have benefited from actions we have taken to mitigate the impact of market dislocation."

The writedowns follow a portfolio reduction of 1.56bn in the previous year.

Jonathan Jackson, an analyst at Killick & Co, said the company's report reinforced his negative view of the sector. "Even when the market bottoms out, we are concerned the recovery will be very subdued as the banks look to unwind their property books," he said.

British Land recently shored up its balance sheet with a 740m rights issue and has also had a three-year disposals programme, which has led to 6.5bn of property sales. The initiatives have helped to cut the group's net debt to 3.24bn from about 5bn last year.

Financial institutions such as Lloyds Banking Group and Royal Bank of Scotland have large swathes of cash in commercial property, including retail sites.

UK institutions have so far broadly turned a blind eye to breaches of loan-to-value covenants caused by the two-year downturn so long as interest payments are being met by landlords.

An uncertain economic outlook has cast doubts on their ability to collect rents from tenants struggling to cope with recession, ramping up the risk of default.