Copyright: David Lawson - Property Week December 2001
Poor management, lack of information, inadequate yields and sparse product are trotted out as excuses, yet when Bradford Property Trust [BPT] put itself up for sale last year, the market yawned. Here was a listed company with a quality portfolio and specialist management ready for bolting on to a commercial balance sheet. But it ended up with a financial engineer backing the only other large listed residential investor.
Was it the 6,000 homes producing a pittance in regulated rents? They must have appeared almost Dickensian to firms used to fast-paced commercial development and upward-only rents. But they couldn’t be more wrong according to Grainger Trust, the minnow which took charge of its giant competitor.
The little-known landlord might have appeared even more entrenched in the past, with deep roots in north-eastern and Midlands industrial housing. The fact that it promised to dump £100m of assured shorthold tenancies didn’t help. Weren’t these the very products everyone thought would drag residential investment out of the 19th century?
‘It even had the right family in charge,’ joked one City analyst, referring to veteran managing director Stephen Dickinson and his deputy Rupert. The ‘Dickinsian’ approach is a lot different than a single errant vowel might suggest, however. Grainger may have spent much of the last century as a sleepy rent collector, founded by frockcoated solicitors to accumulate sturdy income from Coronation Street terraces. But times have changed.
Dickinson Senior sparked the transformation with a listing in 1983 to give generations of shareholders a market for their equity. A land deal near Basingstoke then took the firm out of its provincial heartland and showed it could unlock value through development skills.
Profits from sales helped Grainger broaden its base even further, funding the £31.5m purchase of Atlantic Metropolitan and Channel Hotels & Properties. Legendary dealer David Kirsch would buy back the name but it left Grainger with a rich cashflow from rents and development potential in central London apartments, which helped keep the highly-geared company alive during the recession.
This illustrates the industry’s blindness, according to Rupert, who arrived around this time to help write Grainger’s latest chapter. ‘We were criticised in the City because net rents did not cover interest charges,’ he says. ‘They wouldn’t listen to the fact that we had an income from tenancies that fell vacant every year and was just as certain as rents.’
Grainger gave in to the pressure, however, by strengthening its commercial operations. Buying Frincon Holdings brought secondary investments in Essex which added around £9m a year to rental income. Most have now been sold because the Dickinsons still refuse to concede to convention and build a commercial investment portfolio.
‘Secondary property just does not perform well enough unless you are a market leader with specialist skills,’ says Rupert. That disillusion does not appear to limit Grainger’s development abilities. Dolphin Park, a 14,600 sq metre [157,000 sq ft] warehouse park at Thurrock, Essex , won the top speculative development prize at this year’s IAS/OAS Awards. But it is a funding operation backing Astral Developments. So is the 15,800 sq metre [170,000 sq ft]. mixed use Landmark Place in the centre of Slough, with partners Frontier Estates.
‘We fund or trade because we want to get in and out. We want margins rather than wait for the market to make us money,’ says Rupert. Development can pop up anywhere as a century-old network of contacts generates off-market deals. An 8365 sq metre [90,000 sq ft] office scheme in Greycoat Place, Victoria, for instance, has just gone to appeal.
It all seems a world away from Geordie terraces, no matter how much these have been iced with Eaton Square flats. But residential investment skills are becoming essential in a new world of mixed-use development on brownfield sites. Cash returns of more than 10% on regulated rents also provides the cashflow to nurse complex commercial schemes through planning battles or fund speculative development.
This is why Grainger pitched for BPT. Regulated tenancies normally come in dribs and drabs through auctions and private sales. Here was a ready-made chunk of 6,000 homes run by what is considered the best management team in the UK. They are also a good fit, consisting mainly of suburban southern property compared with Grainger’s northern stock.
Winning must have been something of a surprise, however, as the initial aim was to sell advice about handling the giant former rival.. ‘We were hoping to pick up crumbs from the table,’ admits Rupert. Deutsche Bank Private Equity thought otherwise and pulled Grainger into a 50:50 joint venture called Bromley Property. It meant going out on a limb to raise £60m – almost half Grainger’s market value at the time. But commercial sales and a £17m injection from land sales provided the muscle. There were complications, such as squabbles over how much Warner was being offered for its hefty slice of equity. Talks dragged on so long that most of the City lost what little interest it had. But six months down the line the benefits have begun to show through.
Some £275m of borrowings have been replaced with a new funding from Nationwide. Grainger has shown that enthusiasm for residential does not mean stockpiling for the sake of it. Around £60m of property has been sold and another £50m is on the market as Grainger packages up portfolios for private buyers.. The Lifetime Tenancy business could raise another £50m. Shares have risen from around £6 to around £8 since the start of the year, almost touching £9 before the September 11 crash and easily outperforming both the All-share and the sector. The market is still waiting, however, for the main event. the sale of up to £100m of shorthold tenancies. But why dump what was expected to drag residential into mainstream investment portfolios? After all, BPT had made a point of changing direction to acquire this property over the last decade.
‘They just don’t make enough money,’ says Rupert. Rents rise with average earnings, which is the same as betting on the market. ‘The bigger you get, the closer you get to the index, which is not what we want. We want to outperform.’ But ASTs are perfect for institutions looking for indexed returns. They have shied away because of dismay over the cost and standards of management but Grainger sees a trump card in the established infrastructure it took over in BPT. And with Deutsche as a partner, the odds are on some kind of pooled vehicle like a limited partnership.
Old prejudices remain a stumbling block, however. Valuers insist on discounting tenanted property, which gets up Grainger’s collective nose as much as it does all residential investors. ‘We could hold it and wait for it to work as vacancies arise,’ says Rupert. But he is more eager to move the resources across into commercial development and regulated tenancies. Surely these terraces are a dying resource, though? Apparently not. Grainger and BPT together own only a tiny fraction of the 200,000-plus across the UK. And as long as the rest of the big names remind blind to their attractions, a rich future beckons.