Ground Rents Inc Fnd - Building Safety and Portfolio Value Update

Ground Rents Income Fund

13/04/2022 07:00

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RNS Number : 1830I  Ground Rents Income Fund PLC  13 April 2022

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/
(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:

 Schroder Real Estate Investment Management Limited   020 7658 6000

 Matthew Riley / Nick Montgomery / Chris Leek
 Singer Capital Markets (Broker)                      020 7496 3000

 James Maxwell / Kailey Aliyar
 FTI Consulting                                       020 3727 1000

 Dido Laurimore / Richard Gotla

 

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