TheChek News Flow

Landlords who have delayed writing down property values will have to take losses despite wider recovery

Blackstone president Jonathan Gray said an accelerating recovery in most of the commercial property market would not be enough to save some over-indebted owners from having to take losses, mainly on offices.

Gray said he believed the commercial property market had reached the bottom after a two-year downturn caused by higher interest rates, and that values for most property types were now rising. Blackstone holds real estate assets worth $603bn worldwide.

But some investors who have so far held off from recognising falls in the value of office buildings are likely to have to take writedowns, which in some cases will have a knock-on effect on lenders too.

“Most of the losses will happen in the equity market, but there will be banks,” he said. “Could a regional bank show up next month and say: ‘I have to take a $500mn or $1bn writedown’? Yeah. There are still some losses that will work their way through the system.”

Building owners can often avoid acknowledging the value that their properties have lost until forced to sell by a debt deadline, meaning declining prices drip-feed into the market for years.

“It takes time,” said Gray. “A lot of these buildings might be leased. The debt might get extended.”

Offices, which make up 20 per cent of commercial real estate, have suffered especially steep price declines as the effects of higher debt costs have combined with the rise of hybrid working.

The Blackstone president, a real estate veteran who oversees the private capital group’s day-to-day operations, said more workers would return to offices. But he added: “It doesn’t feel like we’re going back to five days a week. So there is less demand.” 

Although debt levels in commercial real estate were lower in recent years than during the global financial crisis, Gray said some investors neglected interest rate risks during the period of ultra-low rates after the pandemic. 

“When rates fall below some sort of long-term natural rate — which they did after Covid — pricing that in as a more permanent state of affairs can be riskier,” he said. “There are still deals that have too much leverage, particularly office deals.” 

However, he cautioned against taking negative headlines about particular over-indebted buildings as a sign of ill-health for the commercial real estate market.  

“You’re going to read . . . about those [buildings] and people will say values are now declining,” Gray said. “But that’s actually in the past. It’s a little bit of separating the storm from the wreckage, which takes some time to work its way through the system.” 

The broad index of commercial property values from analysts Green Street rose 3.3 per cent in the year to August. But the index remains 19 per cent below its 2022 peak. 

Gray in January said the real estate market was “bottoming”. Blackstone has started buying more real estate this year as it tries to invest in cheap properties before prices rise significantly. It has large holdings in warehouses, housing and hotels and a smaller allocation to offices. 

One challenge for investment managers has been the sluggish market for property transactions, which has made it difficult to sell properties and generate cash. Gray said there were already more buyers in the market and that the pace of larger deals would pick up over the next few months.

He predicted the acceleration would be boosted by real estate investment trusts (Reits) — publicly traded landlords.

“I think there will be some Reit IPOs,” Gray said. “But I also think you’ll see existing public companies who will issue equity to sellers and/or do secondary offerings. I would expect the Reits will end up being fairly acquisitive.”

The US needs to act to avoid Eurosclerosis

Draghi’s report holds lessons for America on the dangers of overregulation

“Eurosclerosis.” That was the term German economist Herbert Giersch coined in 1985 to describe Europe’s economic stagnation — at that time, a stark contrast to the American economy. Why the disparity? Giersch said structural rigidities in Europe made the difference. Labour markets were sclerotic, excessive regulations hampered businesses, and high taxes disincentivised people from taking risks.

Fast forward almost 40 years and it seems that Europe has caught another bad case of Eurosclerosis, with growth at a mere 0.4 per cent last year. That is one of the key takeaways from former Italian prime minister Mario Draghi’s sobering report on the future of European competitiveness. This should be required reading for all US policymakers as a cautionary tale of where things could go if we don’t get it right. In the absence of pro-growth policies, the US may be headed in the same direction as our European allies.

Where did Europe go wrong? According to Draghi, a significant part of the explanation lies in the proliferation of “inconsistent and restrictive regulations”; a problem the US Chamber of Commerce has also consistently flagged. Draghi points out that, since 2019, the EU has passed around 13,000 pieces of legislation, while the US has adopted 3,500 laws and 2,000 resolutions. The tsunami of regulations has been so great that even European officials increasingly acknowledge that Brussels needs to pump the brake.

Such measures disincentivise business and hamper innovation. In the past five decades, no EU company worth more than $110bn has been created from scratch. Close to 30 per cent of Europe’s unicorns left the bloc between 2008 and 2021 because they could not scale up on the continent. Given all of this, is it any wonder Europe’s growth has stagnated? Government micromanagement and regulatory overreach kill innovation and drive economic decline. And Europeans are paying the price: on a per capita basis, real disposable income has grown almost twice as much in the US as in the EU over the past two decades.

Unfortunately, we are also now witnessing more of the same government-knows-best approach on this side of the Atlantic. The Biden administration is on track to enact a record-breaking 2,524 regulations this year. As of late May, the administration had issued 273 economically significant rules, outpacing what any of the past six administrations did during their first terms. Look no further than Federal Trade Commission chair Lina Khan, who has heard the siren song of EU regulators.

That is worrisome because the US is also facing slower economic growth. Since 2010, growth has averaged only 2.2 per cent a year. The non-partisan Congressional Budget Office projects it will average just 1.8 per cent for the next decade. 

The US Chamber is calling on candidates and elected officials to pursue policies that will restore growth to at least 3 per cent annually to secure a better life for all Americans. To get there, we need to develop a larger, more skilled workforce, encourage investment in cutting-edge technologies and seize the opportunities of international trade and investment, all while refraining from the temptation of tariffs.

The US and Europe enjoy the world’s largest commercial relationship, so what happens in Europe matters to the American business community and vice versa. Draghi is right that Europe is losing ground to the US and China, but we should be equally worried that Europe and the US are falling behind together.

The transatlantic alliance is an anchor for democracy, peace and security. But with authoritarianism challenging the rules-based order, we cannot afford complacency. The warnings are clear. Turning inward is not an option. Now it’s time — on both sides of the Atlantic — to pursue policies that will grow our economies and strengthen our alliance.

Anglo American chief says not ‘inevitable’ buyer will emerge after group slims down

Wanblad plays down prospects of new bid after failed BHP takeover attempt

The chief executive of Anglo American on Thursday said it is not “inevitable” a new buyer for the group will emerge after it has sold off four major parts of its business following BHP’s failed £39bn takeover attempt.

Duncan Wanblad played down the prospects a suitor will make a bid after it accelerated plans to slim down the group following the hostile move by its Australian rival, which collapsed in May.

He intends to offload Anglo’s De Beers diamond arm, coal, nickel and platinum units, that will leave a copper, iron ore and fertiliser business at the end of the process.

Speaking at the Joburg Indaba mining conference, Wanblad said even though Anglo will earn 60 per cent of its revenue from copper, this would not necessarily make it irresistible for potential buyers, as some analysts had speculated.

“I don’t believe this is inevitable at all,” he said. “To the extent that we are valued in the context of the sum of our parts and fully valued, we will be a very viable, standalone company.”

Wanblad said the company is still on track to finalise the restructuring by next year, but cannot predict what will happen after that.

“I cannot say what other people are going to do from a corporate action point of view and I don’t really care about that — what I care about is delivering on the strategy,” he said.

This underscored the sentiment he expressed last week at the Financial Times Mining Summit in London, where he said that should Anglo become a takeover target, would-be buyers would need to “pay the right number” for the company.

Anglo’s stock price has fallen about 12 per cent since BHP made its takeover offer in April.

After the demerger, Anglo would be a much smaller operator, with a streamlined portfolio geared towards commodities that analysts say have much better prospects.

Wanblad said Anglo’s remaining businesses provide “a very compelling option on what the world is desperately going to need for decades to come”.

This view is shared by his rivals, such as BHP, that expect copper demand to surge in the coming years because it is a vital for the clean energy transition.

Anglo’s copper assets were central to BHP’s offer — and some experts expect it to make another bid for the company.

However, takeover rules specify a six-month cooling-off period, which means BHP cannot return with another offer until November 29.

Italy seeks to raise more windfall taxes from companies

Finance minister says ‘everyone must contribute’, not just banks

Giorgia Meloni’s government will seek to raise more taxes from companies currently earning windfall profits, as Rome struggles to plug a budget deficit that has raised alarm bells in Brussels.

Italian finance minister Giancarlo Giorgetti said Thursday that the upcoming budget “will require sacrifices from everyone”. He did not clarify whether that meant increased tax rates or how they planned to avoid a repeat of last year’s failed attempt to slap banks with a levy on windfall profits.

“There will be a general call for everyone to contribute, not just banks,” Giorgetti said. “We’re all part of a country that has been called to put its accounts in order . . . and everyone must contribute.” 

He mentioned defence companies as possible targets, noting that they had been doing extremely well owing to growing conflict in the world, like Russia’s war in Ukraine.

“Paradoxically, today, one could say that with all these wars, companies that produce weapons are doing particularly well.”

Share prices of Leonardo, the state-owned Italian defence company, fell 2.56 per cent just after the minister’s comments, while bank stocks also fell slightly.  

“There won’t be a repeat of the narrative or a discussion on banks’ extra profits because at that time, banks were making extra profits,” he said in reference to last year’s surprise move put forward in August and then significantly watered down after bank shares tanked.

Italy is under intense pressure to raise additional revenues to bring its deficit — projected to be 3.8 per cent this year — down to the EU target of 3 per cent. Meloni has so far resisted to cut back on electoral promises that require extra spending, including plans to grant a €100 Christmas bonus to low income families. Her government says it is still on track to reach 3 per of GDP by 2026.

In recent weeks, government officials have held talks with banks, insurance companies and other financial companies about raising more revenues, sparking speculation that companies were under pressure to make “voluntary contributions” to public coffers. 

Giorgetti on Thursday dismissed such suggestions, saying: “Companies don’t engage in charity, so voluntary contributions don’t exist.”  

The Italian Banking Association said last week that it was evaluating “further measures that may make greater liquidity available for the state budget”.

It added that such measures should be temporary and not be applied retroactively “so as not to penalise the competitiveness of banks operating in Italy” compared with their European rivals. 

The Italian parliament is also set to approve a tax amnesty for small businesses to encourage them to declare incomes they received between 2018 and 2022 which would be taxed at a discounted rate.

Participants in the so-called “repentance scheme” will also be obliged to commit to pay a fixed amount of taxes on their expected earnings for the next two years — regardless of how much they actually earn.

Meloni has long vowed to improve the tax system, which she said this year should not “oppress families with obtuse, incomprehensible rules, and an unjust level of taxation that often does not correspond to the level of services that the state provides”.

However, critics, including members of the opposition Democratic party, have described the amnesty schemes as a reward for tax evaders and say it will incentivise further cheating. 

Analysts also warn that the measures may be poorly received in Brussels, where Italy is expected to make long-term structural changes to its taxation and spending policies rather than look for piecemeal solutions to raise revenues year by year.

Ex son-in-law of F1’s Ecclestone on trial in £200mn money laundering case

James Stunt is one of five men accused of allowing Mayfair offices to be used for criminal purposes

Socialite James Stunt allowed his offices in London’s Mayfair to become a “trusted hub” for criminality, prosecutors claimed on Thursday at one of the UK’s biggest money laundering trials.

The former son-in-law of Formula 1 head Bernie Ecclestone was accused of being part of a scheme that allowed criminals to funnel more than £200mn of “dirty money” into the banking system over two years.

Stunt, 42, is one of five individuals standing trial at Leeds Crown Court charged with money laundering alongside Gregory Frankel, 47, Daniel Rawson, 47, Haroon Rashid, 54, and Arjun Babber, 32.

A Bradford-based precious metals and jewellery dealer owned by Frankel and Rawson, Fowler Oldfield, was a financial “gateway” for criminals between 2014 and 2016, the court heard.

Prosecutors said that the scheme allowed the criminals, whose identity was unknown, to circumvent financial due-diligence checks. This allowed them to hide the illicit sources of their funds as it “appeared to be a legitimate source” and most of it was used to buy gold, jurors were told.

“A reputable bank or trader would have insisted on proper due diligence being carried out before accepting the cash or exchanging it for gold,” said Jonathan Sandiford KC, opening the prosecution case.

The barrister claimed that Stunt & Co, owned by Stunt, took the “lion’s share” of profits — about 70 per cent — from the scheme. Tens of millions of pounds in cash was dropped by couriers at the offices in Mayfair and deposits were made into Fowler Oldfield’s NatWest bank account, he said.

Sandiford told jurors that Stunt, the former husband of Petra Ecclestone, allowed the location “to be used for the delivery of criminal cash and some of the gold that had been purchased with it” and it “became a trusted hub for money laundering”.

The court was told that Stunt denies knowing or suspecting that the cash was criminal property.

It heard that while Frankel accepts that at least part of the cash delivered to Fowler Oldfield was criminal, he denies knowing or suspecting it to be criminal property. Rawson, along with the two other defendants, dispute that the cash was criminal property.

Sandiford said the most likely source of the cash was drug dealing, although it could also be other illegal activities including fraud, human trafficking or illegal gambling.

The case continues.