£564m written off as Home REIT portfolio shrinks 58% in revaluation

According to a regulatory update today (20 December), the portfolio of 2,473 properties as of 31 August 2023 was worth £412.9m, a reduction of £564.1m (57.7%) from the unaudited historical acquisition costs, excluding purchase costs.

The update comes following the “substantial completion” of Jones Lang LaSalle’s (JLL) external inspections, which has so far covered 2,391 (97%) of the trust’s portfolio, however just 1,079 properties have been inspected internally.

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Of these, 195 have been inspected by JLL, with 884 internal inspections carried out by Vibrant Energy Matters, which was appointed on 28 July 2023 to “inspect all properties and report on condition”.

Combined with the preliminary findings of Vibrant and Countrywide Surveyors, which was appointed on 28 July 2023 to “provide building surveys in respect of required repairs and refurbishment on a selection of… properties”, JLL has issued Home REIT with its draft valuation reports of the portfolio.

The material reduction of £564m in valuation has been tied principally to a “reassessment of the quality of assets”, alongside the “covenant strength of the tenants”, many of which have entered liquidation.

As such, 88% of the portfolio was based on a vacant possession basis as of 31 August 2023, and where properties were valued on an “investment basis”, limitations on the duration of income streams and the rent levels have been applied.

This was a severe reduction from the valuation report’s findings for 31 August 2022, which valued 39% of the portfolio on a vacant basis.

The inspection programme has also revealed the need for “extensive renovation” across a range of properties before they can be occupied, while some properties require reconfiguration to provide an “appropriate number of rooms to suit the local market”.

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Home REIT also cited the “deterioration in the housing market” and rise in interest rates as contributing factors.

Shrinking homeless accommodation

Alongside JLL’s valuation efforts, the initiatives of newly-appointed investment manager AEW have indicated that a “larger than expected” proportion of the portfolio is private rented sector, as opposed to homeless accommodation backed by exempt rents from local authorities, but is “unable to provide definitive percentages at this stage”.

With the completion of the audit process, internal inspection programme and the application of revised accounting policies still ongoing, Home REIT has confirmed it is not yet able to publish an estimated net asset value.

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Home REIT chair Lynne Fennah said the board was “extremely disappointed” by the “significant value reduction” brought by the information regarding the quality of the trust’s tenants and assets.

“This information is in contradiction to reporting provided to the board during these periods,” she added. “The company reserves all of its rights in respect of the matters referred to in today’s announcement and is still considering the conclusions and implications of the revaluation exercise with its advisers, and what consequential actions it may take.

“The publication of the company’s portfolio valuation marks an important step in the stabilisation strategy and ongoing work being done to publish the company’s annual results for the periods ending 31 August 2022 and 31 August 2023.”

Properties sold at 66% loss

Home REIT has also continued its sale of properties at auction, with the most recent exchanges set to complete at 33% of purchase price.

Over the past five days, the trust has sold 80 properties, representing 3.6% of the portfolio by number, for a total £16.2m, due to complete in roughly a month’s time.

The majority of sale properties are vacant and are “expected to require significant capital expenditure”, while 48 were subject to leases with tenants in liquidation, which will be surrendered prior to completion.

Proceeds of the sales will be used to reduce borrowings and provide working capital.