Old lions return to hunt real estate bargains

Copyright: David Lawson 1996

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Confucius he say:  'When old lions return, check that you don't look like a deer.' The property industry seems to be entering a time warp as almost-forgotten names re-emerge, salivating with excitement.  'It is inevitable,' says Richard Upton, who made his millions building up  Ashville in the Seventies before retiring to Jersey. 'Falling property prices and interest rates mean the industry is back where it was in the post-war years when people like Cotton and Clore made fortunes.

 'Money no longer costs more than you can get back in yields. And any upturn in the market will see disproportionate profits.' That upturn has already started, he says. Demand exists for the right property from both occupiers and investors. But they are not being offered the goods.

  So this old lion is back on the prowl. He paid  more than £4m to take a 30% stake in Clarke Nicholls & Coombs, the Uxbridge-based investment group  which has struggled out of a financial pit over the last few years.

  But that has not settled his appetite. Like many an experienced carnivore, he can sniff  an abundance of prey. While the Godfrey Bradmans, Ronnie Lyons and their ilk chase individual big developments, however, Upton is one of a group with different appetites. He wants whole companies. If things go according to plan, CN&C will not long remain among the sector's minnows, with a market capitalisation of less than £11.5m.  'There are too many companies out there with directors drawing six-figure salaries that do not reflect performance. And a lot of big shareholders who want to do something about it.'

 The message has a familiar ring:  a clutch of similar midgets have aspire for mergers which will give them more bargaining power. Big investors  like Alastair Ross-Goobey of Hermes and Chris Turner at TR Property Investment Trust have also called for rationalisation of the overcrowded sector.  Upton believes he has a crucial advantage. 'Investors bet on people, and I have a track record. They are also keen on people who put money where their mouth is.'

  Ashville, which produced 280,000m2 (3m sq ft) of industrial space, is not the only factor. Upton never really retired, and has made a few million more since then setting up Wallbrook Estates (sold to Property Trust) and Fairoak Securities. But why choose CN&C for a public comeback? One reason was an encounter with David Kirch, a fellow Jersey exile, who bought into the company as part of its financial reconstruction after  a 7,000m2 (75,000 sq ft) business park outside Uxbridge, left the company struggling with £15m of debt. But Kirch is the archetypal private dealer, unhappy with restrictions of a public company. So he passed the responsibility to Upton.   That would never have happened unless the company was sound. 'I looked at dozens, but so often there are skeletons in the cupboard - mistakes which companies often do not recognize themselves.'

 After a few weeks as hands-on chairman, nothing has emerged at CN&C. 'The main thing is that I am not going to lose money even if I do nothing. Loans are capped at 7% on 70% of the portfolio and  96% of the portfolio is let. This is producing income of £6m to £7m a year.'   The company has been skilfully steered out of trouble by long-serving managing director Richard Mais, boasting a 20% increase in the most recent interim pre-tax profits to £617,000 on a portfolio worth more than £43m. It also has £20m of tax losses to exploit.  But doing nothing would defeat the whole purpose.   The company is intended as  a dual springboard for development and corporate expansion. Funds are looking for new investments in the £1m to £10m bracket because their portfolios are grossly out of balance, says Upton. Meanwhile, he has occupiers asking for space, particularly office users seeking around 1,400m2 (15,000 sq ft) in the south-east.

  CN&C has given up speculative development but returned to its old role of pre-letting and pre-funding schemes. These are  on a strictly non-recourse basis -  virtually joint ventures where CN&C  acts as project managers for funds. Again, this relies on investors trust in Upton and Mais to deliver the goods. One major difference to the old days, however, is that the company finally believes in itself. After evolving from roots as a sweet manufacturer, it never really committed to this role under a family-controlled board happy to tick along taking income.

  Perhaps the most important factor in Upton's choice of vehicle is that funds appear to like CN&C's paper - a vital factor where new shares are needed to pay for expansion. M&G raised its stake to 15% in the restructuring. Glaxo Trustees also has more than 3% after accepting more than 5m shares recently as part-payment for Queens House, a 2,800m2 (30,000 sq ft) office block in Twickenham. Hong Kong & Shanghai Bank holds almost 2% as part of a £3.9m deal for shops and industry in the north, where CN&C has extended its territory to escape the tradition of working only within the south-east. 'That was a typical example of how we can find off-market deals,' says Mais. 'It took months to negotiate and then we were able to cherry-pick the portfolio.'

                       95(Int)      94       93           92

Gross rents             3.0m       7.6m      3.2m         3.0m

Pre-tax profit(loss)  617,000      1.2m      9,000     (711,000)

Net Asset Value         9.11p       9.9p      7.7p        6.7p

    Major Shareholdings

Longworth Investments (Upton)         29%

M&G                                   14%

NuSwift plc                           10 %

Dresdner Bank                          9.7%