Copyright: David Lawson - appeared Property Week, October 2000Home page
For a brief moment the beaming smile dissolves. ‘This is not what I ordered,’ says Nigel Kempner, striding off to discover what happened to his curry-flavoured crisps. Across a lunchtime bowl of these delicacies and salmon sarnies, followed up with a Kit-Kat, it is hard not to think of the ruddy-cheeked face across the table as some schoolboy showing off his marble collection over tuck in the dorm.
Yet these marbles are worth almost £700m and include gems once rejected by some of the brightest collectors in the business. ‘He’s always like that,’ one fund manager warned. ‘He’s such a happy little bugger, but don’t underestimate him. He’s a survivor – and sharp as a razor.’
Surviving is a Kempner speciality. Parts of Benchmark trace back to Randsworth, a major victim of the last crash. Kempner and Stephen Musgrave (now with Grosvenor Estate) helped assemble the London-based portfolio then stayed to pull Citibank out of the quicksand. It was a classic case of US over-confidence worth remembering during today’s hysteria. When JMB, rated the world’s largest real estate group, had thundered in to buy Randsworth at the top of the market before retreating whimpering as Citibank called in its loans.
Hubris struck again in the early Nineties. The rescuers were days away from re-floating as London Capital Holdings when the market went back into reverse. Instead, Citibank offloaded to Friends’ Provident. Kempner never really left his babies, however. He persuaded Malaysian Group Hong Leong to join forces with FP, creating Benchmark, and moved back into the driving seat.
What appears to be a series of crisis moves was actually part of a grand plan, according to Kempner. ‘I saw the need for a large central London specialist,’ he says. ‘Lots would be so large that it would need a solid capital base, so it had to be listed. The downside of specialising carried risks if that market weakened, which demanded at least two strong shareholders.’
It might appear rationalisation in hindsight but the ‘grand plan’ has turned Benchmark from pipsqueak to powerhouse in four years. Returns on net assets per share have boomed from 168p to 343p – averaging more than 20% a year. The portfolio swelled from a miserly single building in Birmingham to a mainly West End estate worth £696m in the year to last June.
The City remains only mildly impressed, of course. The share price languishes at a discount of around 20%, despite a 27% jump in net asset value to 343p in the last year. But that is only half the gap suffered by most of the sector. It also proves the worth of having two powerful shareholders looking at the long term, says Kempner. That might change, as FP faces the upheaval of demutualisation but again Kempner says having a second large shareholder means it can buy out the partner.
What about escaping these pressures by delisting? After fighting for so long to be a public company, Kempner is not going to let go now. He points out that Benchmark is a specialist – which is just what the City wants – and no longer swimming among the small fry. These tiddlers are on a hiding to nothing, as institutions invest in them through small company funds which demand short-term performance.
He is also sceptical about whether private companies can handle the revolution sweeping through the market. ‘You need a strong capital base to make major changes. Let’s see how good the banks are at backing them,’ says Kempner, who remembers the snubs he received when trying to set up a central London fund with private capital before Benchmark emerged.
The company is not thrusting wildly into this brave new world, however. Kempner’s skills are really those of an old-fashioned developer: spotting undervalued property, assembling strategic sites and massaging leases. ‘The difference is that we don’t fall in love with buildings and hang on past their sell-by date,’ he says. Only a handful of his Randsworth babies are left and he got through £167m of sales last year alone.
Paradoxically, this boosts net assets. While the company has introduced six-monthly revaluations, the only way to prove these are right is to sell some of the property, feeding through evidence of achieved prices to the rest.
Set against that were £186m of purchases – a hefty figure considering the stranglehold the big estates hold in the West End. The secret is that Benchmark is comfortable about taking leaseholds that institutions and rival property companies reject. ‘That has put him top of the shopping list of all the big landlords,’ says one leading West End agent. ‘He works with them rather than having shouting matches.’
Stirling Square in St James’s, for instance, was bought from Chelsfield in September 1999, a new lease arranged with the Crown Estate, planning consent improved and the whole 8,830 sq metres (95,000 sq ft) let by the following April at rents as high as £731/sq metre (£68/sq ft). The whole process hinged on the fact that Kempner had spotted the fact that Kohlberg Kravis Roberts had raised billions of dollars and realised it would be desperate for space.
A similar pro-active approach worked by offering to cut the space held by ailing Aquascutum in Glasshouse Street and moving the firm’s offices to one of Benchmark’s growing portfolio of City buildings. The store was squeezed into less space and the surplus renovated. It is now producing £1m rent a year.
The development is also part of a learning curve into the new world that Kempner says private firms may struggle to handle. One tenant is New Media Spark, which ‘incubates’ many of the IT start-ups that could make Benchmark’s future tenants. The company has also backed the serviced office firm Nexus, first in the City and now with a ‘wired’ building on Grafton Street – one of the ‘estates’ accumulated as part of what one analyst has called Kempner’s ‘strategic land banking’.
Nexus is also a learning experience. ‘It tells us what dynamic firms need in the way of flexibility,’ he says. This need to change with tenant demands is why Benchmark has switched from secured borrowing with HSBC to unsecured facilities with Barclays. ‘I no longer have to go running to the bank for permission for every change,’ says Kempner.
But he has no intention of transforming Benchmark into some kind of new-order hybrid and is seeking a financial partner to help take the idea forward.
There is plenty of conventional running in the West End, although he does not see the stupendous growth of the last couple of years. ‘They can’t keep rising by 20% a year or they will be out of sight soon,’ he says. In any case, much of the pressure came from US venture groups like KKR and Blackstone, which have now eased back.
He also has options in the City, where Benchmark is gradually building a presence through schemes like Mitre & Computer House, a Cheapside site bought for £37.5m from Hammerson with potential for 13,900 sq metres (150,000 sq ft) of offices.
But the company’s heart lies in the West End, and Kempner sees dangers as Westminster planners become even tougher. ‘Everywhere I go in the world I come across bright young people who want to come here because it is seen as the ‘hip’ city and the centre of the Internet revolution, but they need space to work, live and play.’