TIDMGRIO
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 GBP110 million as at 31 March 2022, which represents a fall in
value of GBP9.4 million or 7.9% compared to the value at 30
September 2021 (GBP119.4 million). Savills have confirmed that
approximately GBP8 million of the GBP9.4 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 GBP13.9 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
GBP11.6 million of the GBP13.9 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 GBP2.3 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 GBP110m) 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 GBP89.5 million or 93.6 pence per
share (30 September 2021: GBP99.7 million or 103.1 pence per
share).
The NAV calculation also reflects a GBP4.6 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:
Schroder Real Estate Investment Management Limited
Matthew Riley / Nick Montgomery / Chris Leek 020 7658 6000
Singer Capital Markets (Broker)
James Maxwell / Kailey Aliyar 020 7496 3000
FTI Consulting
Dido Laurimore / Richard Gotla 020 3727 1000
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END
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