Occupiers find opportunities as real estate developers

Copyright: David Lawson /Financial Times February 2000

Home page

Non property companies have always been ready to act as developers. Victorians built their own mills and  department stores while insurance giants tailored grandiose headquarters between the wars. The tradition continues as household names like IBM, SmithKline-Beecham and Microsoft construct shiny new headquarters. 

It is a big step, however, from creating your own building to developing for others. Most companies buy sites rather than exploit surplus assets. They also know what they want; calculating the requirements of others is more of a problem. A few exceptions stand out. NatWest converted its landmark tower in the heart of the City after devastation by an IRA bomb and  sold it to Greycoat, Hermes and MAM for 226m pounds. Guinness is using  surplus land around a new brewery in west London for a 500m pound office park.  Alfa-Laval is doing a similar job on its  landmark HQ a few miles further out, while on the other side of the country ICI is creating a major distribution park on 1500 acres of spare land near Bristol.

    Some observers believe this  trickle of owner-developers could become  a torrent as  new accountancy rules and increasing pressure to provide shareholder value drive companies to re-assess surplus assets. Most large groups have accumulated a rag-bag of spare property and land which has remained hidden over the years. Most will  sell rather than get involved in what can be a messy and drawn-out process of development. 'Just because you discover a spare car in the garage, it does not mean you want to set up a taxi firm,' says one of the many  real estate consultants now targeting these big names.

  NatWest, ICI and Guinness also have strong in-house property teams. Many  firms are shrugging off these skills as they outsource non-core activities. ICL, JP Morgan and Lloyds Bank have already declared their intention to emulate the government's PFI program and hive off all property. Others are eagerly waiting to join the queue.

  Trevor Silver, development director of Akeler, is all in favour of this trend as it will provide him with a rich source of material. But he points out that handing over development to others could see occupiers lose potential profits. Alfa-Laval was set to abandon its 120,000 sq ft headquarters next to the M4 at Brentford but after 18 months  on the market found no takers. 'It was a classic example of a company unable to capitalise on a  valuable asset,' says Adrian Hill of consultant Healey & Baker.

 He suggested buying in expertise, the same advice he gave Guinness for its Park Royal development. Both firms set up joint ventures - Alfa Laval with Akeler and Guinness with London & Regional - and came up with similar solutions. Silver won planning permission for 300,000 sq ft of offices which would give Alfa Laval a new HQ and leave plenty for letting out to other occupiers. 'It was inevitable there would be few takers for the existing site because potential occupiers would not see the potential,' he says. 'But it is a landmark location on the way into Heathrow which has enormous value.'

 In this kind of joint venture the owner contributes the site leaving the partner to pay for development. It then  takes a slice of the profit without having to shoulder any risk. Akeler is doing a similar project for the Daily Record in Glasgow. The site has great potential  because of its strategic location but required hefty investment. The JV will produce a new headquarters for the newspaper plus a 500,000 sq ft business park.

  It does not always need a property expert to see potential value, however. Tony Cooper, general secretary of the Electrical Managers' Association, describes  in the current issue of the new magazine Unions Today how he raised almost 50,000 pounds a year by reshaping and sub-letting space in his modest Surrey headquarters building. Branch offices are following a similar plan, helping boost income hit by declining membership. A former headquarters site is also being redeveloped, but this  needs an institutional partner to provide investment resources and market expertise.

 Buying in such skills is  not new. British Rail transformed the  City when it teamed up with Rosehaugh to create the 3m sq ft Broadgate office complex back in the 1980s. Its successor, Railtrack, aims  to repeat the process at London Bridge and Waterloo, with more modest developments of stations around the country.

  BAe went even further, paying almost 300m pounds Arlington, the country's leading business park developer, with the sole purpose of exploiting its surplus airfields. Arlington  was recently sold  for almost the same price to private investors after producing more than a decade of cashflow.  Associated British Ports took the same path, buying Grosvenor Square Properties to develop its spare land. The new subsidiary Grosvenor Waterside has been the driving force behind the Cardiff Bay redevelopment and has schemes in nearby Barry, Grimsby and Portsmouth. Property investment generated more than 8m pounds of profits in the six months to last June and development surpluses could contribute   an additional 5m over the full year.

 BAA has become so immersed  in development since buying Lynton Properties that many see the company as much a real estate company as an airport operator. In the nine months to September it generated 34m pounds from  investment sales. A similar amount came from  the partnership set up with McArthur Glen to exploit BAA's retail property expertise to create a chain of factory outlets.

  Like Arlington, Lynton was to  be floated off, but BAA changed its mind and is absorbing the subsidiary to continue exploiting land and buildings around Heathrow and Gatwick. BAA will extract the value from its 400m pound hotels portfolio by feeding them into a  joint investment fund with institutional investors.

  The success of these partnerships went largely unnoticed by  major groups while they ignored  their own hidden liabilities. Exposure under the new accounting rules could see interest in takeovers revived - particularly when the shares of property companies are running at discounts of up to 50%.