Ground Rents Income Fund values slashed by leasehold reform

Ground Rents Income Fund has reported large valuations declines having released delayed full year results to September 2023 and updated to March 2024.

Portfolio values fell 20.7% to £81.5m in the six months to 31 March 2024, having fallen 2.7% in the year to 30 September 2023.

The decline included a negative valuation adjustment of £7.2m for building safety and £4.9m for leasehold reform risk, with 97% of the portfolio valuation subject to the industry-wide material uncertainty clause.

This is mainly due to increased uncertainty relating to leasehold reform, notably the November 2023 government consultation regarding restricting existing ground rent, without compensation to freeholders. This potential outcome represented a significant shift in the government’s approach to leasehold reform.

The company has been selling off assets in its portfolio as part of its new investment strategy of an orderly asset realisation, completing the sale of freehold ground rent interests in Bristol and Exeter, for a combined price of £3.45m, achieving a 4% premium to the 30 September 2023 independent valuation and reflecting a net initial yield of 3.1%.  Further disposals are planned and in progress.

Barry Gilbertson, the company’s chair, commented: “The company continues to face significant challenges that are largely outside of its control, with the ongoing management of complex building safety projects relating to assets developed by third parties, and uncertainty relating to leasehold reform. Despite these headwinds, we continue to make progress in important areas, including loan refinancing, disposals, and securing very strong shareholder support for our new investment policy.”

At 30 September 2023, the company’s NAV was £86.2m, or 90.1p per share. Group loan to value (LTV), net of cash, was 18.3%, with £21.0m of drawn debt and an effective interest rate of 3.5%.

It has since refinanced the existing £25m loan facility with Santander, which was due to expire in January 2025. A new £19.5m facility extends the loan term to 10 July 2026, and has a margin of 2.75% per annum. Group LTV at the point of refinancing, net of cash, was 17.9% based on the independent portfolio valuation as at 31 March 2024, with an effective interest rate of 3.5%.