Building Safety and Portfolio Value Update
13 April 2022
Ground Rents Income Fund plc
("GRIO" or the "Company")
Building Safety Reform, Leasehold Reform and Portfolio Value Update
Ground Rents Income Fund plc ("GRIO" or the "Company"), the real estate investment trust ("REIT") investing in long-term ground rent assets across the United Kingdom, provides an update on the effect of Government-led building safety reform and leasehold reform on its independent external portfolio valuation ("the Valuation") as at 31 March 2022, prepared by Savills Advisory Services Limited ("Savills").
In February 2022, the Government proposed amendments to the Building Safety Bill (the "BSB") that aim to clearly assign the responsibility for costs of building safety remediation (on all affected buildings between 11 and 18 metres in height) to the original developers with freeholders being ultimately required to meet the cost of remediation where the developers, contractors, cladding manufacturers, cladding suppliers, and relevant professional service providers are untraceable, insolvent, or no longer exist. As set out below, we have applied to the Government's Building Safety Fund for all affected buildings over 18 metres, which is expected to fully cover all material costs of remediation.
The Government's stance in relation to buildings between 11 and 18 metres appears, at this time, to intend to over-ride the repairing obligations contained within lease agreements between freeholder as landlord and the individual apartment owners as tenants. This approach by the Government has led to many large, listed, residential developers recently announcing increased provisions in their latest accounts for these liabilities, along with signing up to a commitment to carry out the required BSB works at their own cost.
Importantly, GRIO did not act as developer of any of the buildings within its portfolio. However, if enacted, we understand that the proposed amendments would mean that, as the current freeholder, GRIO may be subject to BSB remediation costs in the event that the original developers are untraceable, insolvent, or no longer exist, and actions under new BSB provisions to facilitate recovery of the cost of remediation from the other aforementioned contracting parties are not successful. As noted in our most recent full year results, the Board, together with Schroders as Investment Manager, are highly focused on understanding and managing building safety issues to protect leaseholders and improve the value and liquidity of the portfolio.
As the proposed amendments to the BSB described are not yet enacted in law, it creates a level of uncertainty such that Savills, and other independent valuers, have decided, in discussion with the Royal Institution of Chartered Surveyors ("RICS"), to adopt a Material Valuation Uncertainty Clause ('MUC'). In the Valuation, the MUC will apply to all assets where there is a building safety valuation adjustment, including buildings over 11 metres tall.
The uncertainty has resulted in Savills valuing GRIO's portfolio at £110 million as at 31 March 2022, which represents a fall in value of £9.4 million or 7.9% compared to the value at 30 September 2021 (£119.4 million). Savills have confirmed that approximately £8 million of the £9.4 million valuation decline over the six month period, relates to assets with negative valuation adjustments for fire safety risk. The aggregate valuation adjustment for fire safety risks, within the Valuation as at 31 March 2022, including adjustments made in prior periods, now amounts to £13.9 million.
Savills have confirmed that the majority of the valuation adjustment is not attributable to specific building issues, but instead reflects a general discount to the value of affected buildings where building safety remediation issues or costs are unknown or uncertain, whether this is likely to be a GRIO liability or not. To provide shareholders with a summary of all relevant information currently available, we have set out below our current understanding of the building safety remediation issues across the entire GRIO portfolio:
Buildings above 18 metres
£11.6 million of the £13.9 million negative adjustment relates to 28 buildings over 18 metres tall. Applications to the Government's Building Safety Fund to carry out remediation works have been made, and Government funding should therefore be available to carry out these works without a material shortfall in professional fees or remediation costs needing to be funded by GRIO. Affected leaseholders have been kept fully informed.
Buildings between 11 and 18 metres
The balance of the negative adjustment totalling £2.3 million relates to buildings between 11 and 18 metres tall. GRIO currently owns 60 buildings within this range and, of these, 41 were developed by large residential developers that have already publicly committed to carrying out the required BSB remediation works at their own corporate cost.
As part of managing building safety issues across the portfolio, inspections have been carried out for the Company (by third party building consultants) on 49 of the 60 buildings, with the remaining 11 to be inspected shortly. Based on these inspections, our current assessment is that, of the 49, there is only one building with a significant issue relating to insulation materials, and two smaller buildings that are less affected. In all cases, leaseholders have been informed and mitigation measures are in place. The building with the significant issue was developed by a large institutionally owned developer that is expected to make a financial commitment (similar to its peers) to BSB remediation, with investigations ongoing into the status of the developers of the two smaller assets. The Company will report on the remaining 11 assets in due course.
In summary, the Board and Manager expect to mitigate a material quantum of the risks and costs associated with known building safety issues. This approach should lead to an improvement in the relevant asset values. However, as stated in our 2021 Annual Report, the Company is operating in a complex and rapidly evolving Government-led regulatory landscape and there is always a risk that further building safety issues are identified or legislated.
Net Asset Value ("NAV")
The Savills Valuation (of £110m) will be used for calculating the Company's net asset value ("NAV") in its unaudited interim results. Based on the valuation, the NAV as at 31 March 2022 is estimated to be in the region of £89.5 million or 93.6 pence per share (30 September 2021: £99.7 million or 103.1 pence per share).
The NAV calculation also reflects a £4.6 million negative adjustment due to the possible impact of current Government proposals for leasehold reform that, if enacted, may cap the ground rent assumed in enfranchisement calculations, allowing leaseholders to acquire GRIO's interest at a discount to current value. Further background to these proposals was set out in the Company's 2021 full year results that are available on the following website link https://www.schroders.com/en/uk/private-investor/fund-centre/funds-in-focus/investment-trusts/schroders-investment-trusts/ground-rents-income-fund/investors/.
The Company will provide further details on the Valuation, together with Building Safety Reform and Leasehold Reform issues affecting the Valuation, in its half year results for the six month period ending 31 March 2022 that are due to be released in June 2022.
For further information:
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Schroder Real Estate Investment Management Limited Matthew Riley / Nick Montgomery / Chris Leek |
020 7658 6000 |
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Singer Capital Markets (Broker) James Maxwell / Kailey Aliyar |
020 7496 3000 |
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FTI Consulting Dido Laurimore / Richard Gotla |
020 3727 1000
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