About us

With minimal valuation movements in our investment portfolio, and in advance of significant completions from our development and trading assets, we report a pre-tax loss of £1.3 million for the six months to 30th June 2011, compared to a profit of £0.8 million for the equivalent period last year.  After swap revaluations and dividends paid, net assets reduced by 1.0 per cent to £329.6 million from £333.1 million at 31st December 2010, equivalent to 269 pence per share as compared to 272 pence per share as at 31st December 2010.  The Directors have declared an interim dividend of 2.4 pence per share payable on 27th October 2011 to those shareholders on the register on 30th September 2011.

The UK economy is struggling to achieve any meaningful forward momentum. It remains the case that the Government, the consumer and the banking sector are deleveraging as they seek to redress the excesses of the previous cycle. Not only is the fiscal tightening on the UK through cuts in Government benefits, public sector employment and tax increases not yet fully implemented, but the consumer is also bearing a reduction in real pay since inflation has risen to circa 5 per cent per annum without a commensurate increase in take home pay. With mounting gloom over the prospects for global growth, the UK economy will struggle to generate any meaningful growth for the next few years. If pay growth does indeed remain muted, interest rates may well continue at their current low levels for a few more years as the economy seeks to recover. Unquestionably, low interest rates have supported asset values in the real estate sector with yields for prime property in Central London now back at levels that were pertaining prior to the crash in 2007. A considerable element, perhaps the majority, of the capital for investments into both the commercial and residential sectors of Central London has flowed in from overseas with investors taking advantage of what they see as an opportunity to acquire high quality assets at a devalued sterling exchange rate.

The speed with which the banks are able to reduce their exposure to real estate lending is necessarily constrained by the UK’s weak economic reality, which affects a significant element of their portfolio located outside Central London. Given their need to reduce their real estate exposure, it should be of little surprise that net new loan origination to the real estate industry has remained negative for the last two years or so, and is likely to remain so for a while yet. 

Since 1st January 2011, property values in the market have drifted sideways, with only a 1.0 per cent increase in the IPD All Property Capital Index to 30th June 2011 with the All Property Total Return for the same period recorded at 4.4 per cent.  In our view, property remains fairly priced as against the main competing asset classes of equities and bonds. Property rental values have also drifted sideways in the six months under review, with the exception of certain Central London sub-markets which have performed well due mainly to supply constraints. The lack of any meaningful economic growth will continue to restrict the ability of landlords to achieve rental growth in the wider market.

During the last two years, your Company has cautiously invested the majority of the net proceeds of £187.7 million which it raised by way of two share issues in July 2009 and August 2010. Since July 2009, when this investment programme commenced, we have secured more than 40 investment, development and trading projects, making this one of the busiest and most intense period of acquisition deal flow that we have seen in the last 15 years. Our acquisition strategy continues to seek out those transactions where we can commit our significant expertise and cash resources with the maximum leverage.

Whilst we continue to seek out large-scale development projects in Central London, it seems to us that the weight of money seeking to enter this market has driven land values to a level where we are rarely able to justify the rental tone and exit yields that would be required for an economic, risk adjusted return. The sheer weight of money can often distort a market in both the near and medium-term. However, different forces are at work in the area of the market where we have been able to apply our expertise and cash, namely selected properties and projects, whose fundamental characteristics are sound, but which have been constrained by lack of capital and expertise. As intimated at the time of our capital raises, it is in such conditions that terms of trade move towards us.

It is never part of our strategy to acquire real estate simply to wait for market momentum to capture improvements in value, be it through rental growth or yield compression. Our aim is to identify opportunities to transform secondary assets, whether through change of use, refurbishment or redevelopment, into higher quality real estate that will appeal to the ultimate cash investor. Implicit in our approach to the creation of value is that, on average, it takes a period of some three years to achieve the necessary physical upgrade or change to the property itself. Notwithstanding this, some of our projects are accelerating at a faster rate than we had initially envisaged and in those instances, we anticipate an earlier and profitable conclusion to our endeavours.

The majority of our development activity has focussed on London, albeit mostly on the outer districts rather than the core central locations. In addition to our two major projects at PaddingtonCentral and Hammersmith Grove, our new development projects on which there has been significant activity this year are in Greenwich, Ilford, Abbey Wood, Hayes, Kensington Church Street and Westminster. In Greenwich, we secured a resolution to grant planning consent for a new, sustainable and mixed-use community development to comprise residential, student apartments and a hotel alongside extensive community infrastructure. The Section 106 agreement is under negotiation. In May, we secured a 3.7 acre site in close proximity to the Abbey Wood Cross Rail Station, also in South East London, and simultaneously entered into a joint venture agreement with a neighbouring land owner to develop our combined nine acres of land for a mixed-use project. On the opposite side of London, in Hayes, we acquired together with our joint venture partner Cathedral Group, a 17-acre partially developed and partially derelict business park site to be transformed into a mixed-use scheme led by residential and office uses. In Ilford, North East London, we acquired an office property yielding close to 6 per cent in a location designated by the local authority as an opportunity area and which, in our view, has interesting options for a food anchored, mixed-use project. In Central London, together with our partner Brockton Capital, we acquired a one acre office and retail block in a prime location on Kensington Church Street, Notting Hill. We are in the early stages of evaluating our strategy for the site which could range from a refurbishment of the existing office tower and asset management of the retail accommodation to a comprehensive mixed-use development. At Hale Barns in Manchester, we obtained planning consent for our retail and residential scheme and secured Booths as the anchor for a 30,000 sq. ft. food store. At Sandbanks, Dorset, construction of the five luxury apartments is progressing on schedule. We have not yet commenced marketing, but have been encouraged by the level of off-market interest in the development. At Lichfield, Staffordshire, we have entered into a 50/50 partnership to develop a 395,000 sq. ft. mixed-use complex with the new Friarsgate Shopping Centre at its core, with practical completion anticipated in 2014.

At Westminster Palace Gardens, following the consent for change of use from office to residential, we have now entered into a contract for sale of the completed residential units and commenced the conversion works. We anticipate a profit of circa £4.0 million and an IRR of 45.0 per cent. In February, we sold a property at High Road, Tottenham, originally acquired as part of the Rock portfolio in 2010, for £1.5 million, generating an initial profit of £0.2 million and an IRR of 15.0 per cent. Since the period end we have completed the sale of Red Lion Court, an 11,000 sq. ft. office building in London EC4, which was also part of the Rock portfolio. The sale price was £5.0 million, in line with our expectation at the time of acquisition, generating a gross profit of £1.1 million and an IRR of 38.6 per cent.

Within our flagship London developments, Rio Tinto took space at our prime PaddingtonCentral mixed-use scheme in April, leaving 132,000 sq. ft. of accommodation available. In March, we achieved a resolution to grant planning consent at our Hammersmith Grove site, for the development of 275,000 sq. ft. of prime office accommodation and high quality restaurants and cafes alongside a new public open space. We anticipate a full planning consent imminently. We are in advanced negotiations for institutional forward-funding of the development, and expect to commence works on site in the second half of 2011.

In June we added to our investment portfolio, with the £7.6 million acquisition of Colston Tower in Bristol yielding 10.1 per cent. Elsewhere within the portfolio, we have continued with our programme of asset management initiatives to enhance value for the medium and long-term. At our Broughton residential site near Chester, our Appeal against non-determination by the local authority will be heard before an Appeal Hearing on 28th September 2011 and we are pleased to note that the local authority is now publicly supporting our proposals subject to resolution of the Section 106 Agreement. Once the Inspector has prepared his report, it will be placed before a Welsh Assembly Government Minister who will make the final decision. Accordingly, we are now hopeful of reaching the end of this long and complicated planning process to provide circa 280 housing units into a market where supply is constrained.

Within the completed portfolio, which is located entirely outside Central London, there was a small valuation uplift for the six month period of 0.6 per cent (including our share of the Manchester Arena Complex), which compares with an increase of 1.0 per cent in the IPD All Property Capital Index. With IPD growth driven almost exclusively by Central London, we are pleased with the positive movement in our portfolio, which was achieved through continuing asset management initiatives.

At our wholly-owned HDD subsidiary, the notable new development commenced during the period was at Llanelli, where we are developing an £18.0 million, 110,000 sq. ft. leisure complex in the centre of the town. The scheme is 47 per cent pre-let and debt finance is being provided by Santander. Following the completion of the sale to Morrison at Stanground, Peterborough, we have significant interest in the adjacent retail units, and in April sold the pub plot to Marstons. At Lawley, Telford, we secured a pre-let to Morrisons of a 39,000 sq. ft. supermarket and are close to securing a forward-funding partner for its delivery.

In the 24 months since July 2009, we have invested or committed over £150 million of the net £187.7 million raised in the two issues, acquiring assets to the value of £331.4 million (both directly and with partners). As one might expect, there are a number of further projects under review and negotiation and we are hopeful that some of them will come forward for acquisition.

Since the beginning of the year, acquisition activity has further reduced our cash balances, taking our net debt to £155.9 million (including share of joint ventures) as at 30th June 2011, representing net gearing of 47.3 per cent against our net asset value as at that date.  In June, we were pleased to finalise a new £22.5 million 14-year term loan with Aviva Commercial Finance, carrying an interest rate of 5.5 per cent. This loan in part refinanced earlier property acquisitions which, in the interest of speed and certainty, were initially acquired with cash.

The first six months of the year have continued an exciting period for your Company and we remain deeply appreciative of the support our shareholders have given to us. It would be remiss of me not to record how grateful my Board and I are to the management and staff of the business for their commitment, professionalism and sheer hard work in a particularly productive phase of this cycle.

D S Jenkins
Chairman