Who is going to go bust?

was the topic of our LAI London Chapter's luncheon presentation (Thursday, October  9, 2008) by Héléne Demay, Head of Rental Information Service at IPD (Investment Property Databank), the world leader in performance analysis for the owners, investors, managers and occupiers of real estate.

Timing is all! If she had given her talk two or three days earlier the answer might have been easy – almost anyone. Fortunately, by our Lunch on 9th October 2008 the British financial situation seemed to have stabilised somewhat and Héléne was able to focus on her original ideas.

Her task within IPD is to identify and track, over time, the financial resilience of around 60,000 commercial tenants in the UK. Her target audience is largely institutional landlords who, in today’s more difficult times, have come to realise that they have a vested interest in understanding the status of their tenants, and that such understanding can be a crucial element of their investment decisions. The core of her work derives from close study and analysis of the product of credit agencies, particularly, in her case, Dun and Bradstreet. This data is supplemented by also looking at IPD data on rent payment history, by study of County Court judgements and other, more local data. The interest lies, of course, not in the snapshot images, but by the patterns that emerge over time.

As with all such endeavours, the quality of product depends upon the quality of inputs. Héléne admitted, for example, that her data would have offered no insight to the fall of Lehmanns. There is inevitable degradation of input where published accounting allows significant ‘off-balance sheet’ activity (the author wonders if the days of this are numbered). Nevertheless, her time series do give valuable insights that can assist landlords by giving early warning of impending trouble, and perhaps the chance to take ameliorating action.

In the current market there are clear signs of distress. For example rent unpaid after 30 days has doubled over the last year as has the level of default. However, Héléne was keen to emphasise that, given the severity of the ‘credit crunch’, default rates for investment grade commercial property were still extremely low.

Some discussion of names took place, but, under the ‘Chatham House’ convention of Lambda Alpha, these have been censored from my notes. Nevertheless two detailed comments might be appropriate. On the positive side, Héléne had noted the positive performance in her regime of retail warehouses. On the negative, there was some discussion of whether we should be watching more closely some semi-governmental and local government tenants.

Discussion also took place about how her data related to and impacted upon valuers. Whilst warnings from her data are clearly relevant to valuers as well as to landlords, there was some concern that, in difficult times such as the present, valuers might be over-defensive, over-cautious.

Ending on a positive note, a note that might have been more jarring a few days ago, Héléne argued that her data did not show the world to be ending next Friday, or even shortly after.

Michael Mallinson