We wanted to let you know about the emerging impact of external wall surveys (EWS) in the UK residential property market, how they’re affecting Bricklane’s property portfolios, and the measures we’re taking to safeguard your investment.

As a result of new legislation, certain high-rise buildings are now required to undergo a new safety test. Most buildings are failing this test and subsequently incurring considerable repair costs. The Regional Capitals fund owns properties in some of the affected buildings and has been impacted in the following ways:

We understand that this is an unexpected and frustrating development for all investors and are working to resolve these issues as far as possible.

Please read on for a more detailed explanation from our Chairman, Oren Peleg, of what this means for your investment.

In response to the Grenfell Fire, the Government has introduced several new fire safety regulations in order to protect residents of high-rise buildings. Consequently, all buildings over six storeys are now carrying out an EWS, a new industry-wide process, which is intended to reassure leaseholders as to the fire safety of the building.

The first iteration of this process focused on removing the specific type of cladding that caused the Grenfell disaster, which was expected. Since then, the concerns over fire safety have widened to include other forms of cladding, as well as different aspects of buildings’ construction, such as insulation.

It’s estimated that approximately 90% of buildings over six storeys are now failing this survey, which means that remedial work will be required in order to satisfy the new regulatory standards. A large proportion of the costs of these works are expected to fall on the owners of the impacted flats.

It is currently proving difficult to fully quantify the issue as there are fewer than 300 qualified surveyors available to carry out the necessary tests, which has led to delays in assessing many properties across the country and introduced a level of uncertainty into the market.

This issue is expected to affect 1.5 million flats across the country, and will create considerable hardship for many families and homeowners in what is already a very challenging time.

While the Government has created a £1bn Building Safety Fund to pay for these remedial works, there is widespread expectation that this fund will be significantly oversubscribed, and most owners will not be able to access government funds.

The London portfolio is currently unaffected by these new regulations and 56% of units in the Regional Capitals portfolio have either passed an EWS or are located in buildings that are below the six storey threshold.

However, 44% of units in the Regional Capitals portfolio are located in buildings that have failed an EWS or have the report outstanding, and are therefore likely to require remedial works, bringing costs to the fund as leaseholder.

Based on discussions with building managers, who are responsible for commissioning EWS forms and ensuring that remedial works are carried out, as well as our valuers and the Government, we have estimated the total cost of remedial work in these units to be £950k-£1.8m. However there remains material uncertainty around this estimate as we await firm quotes, as well as outstanding inspections in other units, which has introduced a degree of uncertainty and impacted our valuation partner’s ability to accurately value affected units.

In the meantime, the units continue to generate rental income. Our current occupancy rate is 90%, which is quite high, and the rent collection rate also remains high, with 100% of rent collected in Q3.

While the Government’s Building Safety Fund is likely to be oversubscribed, the level of support accessible to the Regional Capitals fund is also capped to €200,000 due to EU State Aid restrictions. This €200,000 is included in the cost estimates above.

Additionally, due to increased insurance costs and ‘waking watch’ monitoring, service charges have increased on some affected units. This particularly impacts the units which have mortgage debt on them, and we are currently in discussions with Barclays to ensure we fall within our interest coverage covenant, which will likely be achieved by adding additional properties as collateral.

As a consequence of these factors, the Regional Capitals fund has experienced a fall in net asset value of approximately 11%, which aligns to the upper end of current cost estimates and will be reflected in customer dashboards in the next few days. The impact on the fund’s share price may be greater however, due to the recent introduction of discount share trading which, while providing investors with increased flexibility, can also result in greater price fluctuations.

We are in discussions with senior civil servants and policy advisors at the Ministry of Housing, Communities and Local Government about potential access to additional support from the Building Safety Fund, but this process will take time.

We hope to be able to resolve this issue as quickly as possible. In the interim period, the Regional Capitals fund, including the affected units, will continue to generate rental income and investors will be able to offer their shares for sale and purchase shares as normal. As more clarity emerges on individual units, whether they pass/fail on outstanding EWS, or more specific costs for remedial work are obtained, the net asset value will be adjusted.

We will do everything possible to protect your investment and will be working closely with building managers to ensure works are carried out as promptly and cost effectively as possible. We are also reviewing whether any legal action may be taken.

In order to be prudent with cash holdings in the Regional Capitals fund, we are going to pause dividend payments to shareholders. We will review this in the new year.

We will keep you updated over the coming weeks with next steps and actions, including providing greater clarity on cost estimates, government support and timing around when we will be allowed to begin remedial repairs.

Yours,

Oren Peleg

Chairman of Bricklane Technologies Ltd