Flair in monochrome world of real estate

Copyright: David Lawson 1996

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No Aston Martins outside the front door. No pictures of pop stars on the walls. That's a disappointment. In the monochrome world of high finance, a little flair and colour brings merciful relief.  And the 'Grantchester boys', as they seem universally known among the pin-striped City elite, are said to be as colourful as they come. After all, they race Astons,  named the company after a Pink Floyd song and - horror of horrors - the chairman has a ponytail.   But these 'boys' have salivating pinstripes queuing to get in the door of their new offices. Moving in  from the wilds of  Essex to salubrious Cutlers Gardens has helped. But more relevant is a stunning deal with City favourites Burford which launched them on the market this week[NOV25] boasting  more than 80m pounds worth of retail warehousing, perhaps the most sought-after assets in the business.

  Chairman Paul Whight's flowing locks would not have shocked Burford chief executive Nick Leslau, who has not let a dislike for ties and hairdressers' scissors get in the way of stockmarket stardom. More impressive was Grantchester's track-record of more than one million square feet of development and a similar potential on already-spotted sites.   'Boy' Whight is actually 45, and has been building retail warehouses for 15 years. His chum Nick Hewson was a public company finance director as long ago as 1985. In six years they  have built Grantchester into one of the leading names surfing the rising tide of interest in  retail warehousing.

  In other words, they are their own men and had  no grand plan to go public. 'In fact we were dead against it at the start,' says Hewson. That was understandable after the boys saw their old playground collapse. Like many other stars in this market, they are graduates of Citygrove, which launched retail warehousing into the big time  a decade ago. Watching that company crash in flames - even though they had already gone off to work on their own - left  an aversion to the idea of being in hock to the City.

  'But we became such big players that we had to change,' he says. By 1993 they began holding onto the prime assets being developed. The next step had to be a flotation to attract the kind of funds needed for major schemes.  There was no shortage of potential partners or paths onto the market, ranging  from straight takeover through asset sales to special tax vehicles. They were six months down the line with one potential partner when Leslau came on the scene.

  Burford is effectively buying Grantchester's expertise by merging the two companies' retail warehousing interests. First it became an active shareholder, taking  25% of Grantchester. Then it swapped a 20 million pound Falkirk estate plus an option on a Huddersfield scheme for further shares and cash as part of a demerger. This  leaves institutional shareholders with 46% of the company, Burford itself with 24% and the Grantchester management team with the rest.

 'It was a stroke of genius,' says Whight. In one fell swoop the company  more than doubled net assets to 24.5 million pounds, acquired a classy list of shareholders and a partnership with one of the most respected entrepreneurs in the business. But the founders still remain firmly in the driving seat. While Leslau and Burford chairman Nigel Wray are on the board, Whight is executive chairman and Hewson chief executive.

 Now for the hard bit. How can a new company  flourish  in a market already  fished  by sharp outfits like Helical Retail and former Citygrove colleagues Nick Vetch and Phil Burks at Edge Properties. Is there enough to go around? Will returns continue to grow at the exponential rate seen in the last decade, hitting 13.6% a year compared with 9.4% across the property sector?  None of this stirs a hair of Whight's natty ponytail. 'Firstly, we are not jostling with people like Edge. In fact we only seem to see them when they gatecrash our parties,' he grins. ' Capacity is not a problem. We have the biggest asset base in the sector but this is such a massive market that we have not even scratched the surface.'

   Nor is there likely to be a repeat of the Citygrove fiasco, where a high-flier which doubled and redoubled profits year by year suddenly crashed  when interest rates soared and retailers retreated into their shells. 'That was trading in a market driven by the City. We are investors drawn along by retailer demand,' says Hewson.  They both refer constantly to reams of figures produced by Verdict, the leading retailing research group, which forecasts  explosive growth in superstore sales from 44.6 billion to 63.7 billion pounds between 1995 and the end of the decade. That implies a 25% rise in the number of units required. All this at a time when   finding sites is becoming tougher as planning policies  become more restrictive.

 'It is an entirely different picture to the Eighties when the floodgates were opened to development. That is why we are holding onto so much of the space we build,' says Hewson.  You only have to look at deals being struck to see how the sector stands apart. While commentators crow about the death of the institutional lease, this remains a fixture for retailers. 'They want the security of good locations,' says Whight. The odd incentive may lurk in the background but this  means Grantchester can sit on assets with average unexpired leases of 24 years, upward-only reviews and mainly unencumbered with privity clauses.

  'We could have stopped work for 10 years and lived comfortably,' says Hewson. But that would have been boring. Instead, they are spreading risks by growing. The firm will raise its tally from half a dozen to around 10 schemes by next year.  It holds an  option on Burford's Leeds Road Park, Huddersfield, and is already figuring how to play it. After that is  a reserve of sites identified for development.    The tightly-run management team boasts a feral  ability to sniff out land  and wrestle  planners into submission, plus an instinct for knowing what retailers want before they realise it themselves. But  the future does not hinge on developing new space. 'The main thrust is identifying underperforming existing  assets,' says Whight.

  Some as little as two years old can be ripe for redevelopment, either because it is badly managed or because occupiers want something different.  Retailers have changed out of recognition in the last few years, altering space in line with new markets. The only thing  relatively constant is location - one  reason why long leases are in demand.   'Bear in mind that it requires only a 2 pound increase in rent to justify redevelopment,' says Whight.

   That gives a massive asset base  to exploit.  But they want more. Burford is likely to throw up prospects for further partnerships but it is shareholders who could provide the most exciting innovations. Hewson's accountant's eye lingers over the prospects for turning Grantchester into the kind of tax-transparent vehicle  institutions are working to establish. Whight also  wants their assets. 'As a specialist company we know we can manage retail warehousing better than them, so why not swap their assets for our shares?'  Somehow, you get the feeling that these boys don't need Aston Martins to race ahead of the pack.