UK listed sector heading for negative equity, JPMorgan warns

The UK's listed property sector is set to run into negative equity territory by the end of 2009, real estate analysts at JPMorgan have warned.

In a property stocks note entitled 'The Phantom of Recovery', analysts Harm Meijer and Osmaan Malik say that Loan-To-Value ratios for the UK commercial investment property market - excluding owner-occupier buildings - could rise to 102% by the end of 2009. They base their hypothesis on their expectations for further capital declines. 'We estimate that at November 2008 the LTV for UK investment property stood at 79%, but we expect this to rise to 102% based on our expectations of a further decline of 22%,' they said in the report.

As the increase in LTV to above 100% implies negative equity, JPMorgan says this could have severe implications as banks may move to recover cash. While many companies may breach their LTV covenants, JPMorgan believes real estate investment trusts - which account for the lion's share of the UK listed sector - would be comparatively better placed due to their better capital structure.

The analysts and JPMorgan's Banks team say this may result in a debt restructuring involving the creation of a good and bad bank.

Separately, independent corporate finance adviser Close Brothers has issued a statement urging banks and investors in the UK property sector to develop alternative financing solutions in the face of a potential £140 bn (EUR 155) price fall and a £125 bn debt refinancing bill over the next four years.

Drawing on calculations that banks are exposed to approximately £250 bn of UK commercial property debt, of which 50% needs to be refinanced in the next four years, Close Brothers said it believes the scale of this issue has not been fully appreciated and is likely to trigger further write-downs and, combined with the impact of a worsening wider economy, a second credit crunch.