Helical Bar admits mistakes

Copyright: David Lawson may/Nov 1996

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Mike Slade is not the sort of chap who normally shouts about  mistakes. The Helical Bar managing director  is more likely to be found bantering with journalists  about how the company's  performance brought him tabloid attention as one of the country's highest paid executives. Even  investors and analysts are likely to find dry company briefings  illuminated by tales of sailing escapades and jokey impersonations of other developers.

 All the more surprising that the industry's clown prince should  bare his soul recently   about the wrong turns he has taken. But a shrewd strategist hides behind such joviality and like any good communicator, Slade  read his  audience perfectly. He spiked potential criticism of asset growth and investment returns  by using them to illustrate why the company has changed direction. And it worked, sending analysts away to issue buy notices and keeping the share price close to its annual high.

 In hindsight, he says he would not have plunged into refurbishing shopping centres. 'They proved much more difficult than expected,' he said, after revealing a 9% drop in  values. But he insists that jam is due when the work is finished. Selling retail warehouses a few years ago also proved a mistake - which has been more than rectified by investing heavily in major schemes with the former Sears property team. At Leicester, for instance, £24m has just come in through pre-sales of 20 acres to Rank, topping up an earlier sale to Safeway.

 Industrial property problems he blames on a knee-jerk reaction after poor sector ratings from the IPD Index, even though Helical's holdings were doing well.  Most of all, however, Slade accepted  the error of holding a large investment portfolio, which has produced 'disappointing' results  and can expect little better in future.  Such openness is unusual in an industry where executives gloss over misjudgements, confident that they will be rescued by rising capital values. But the sector has irrevocably changed, he says, and like any good sailor, he is altering course  to catch the new wind. 

 'It became clear a couple of years ago that we were in for a bout of low inflation,' he says. Such conditions  bemuse some operators, but much of the Helical team cut their teeth under similar circumstances in Germany during the late 1970s. 'The lesson we learned this is that when values are static, investments are not worth holding,' he says. A third or more of the £180m portfolio will be sold as the company switches back to development. This is no short-term blip, but a pattern for the rest of the decade. 'There is no catalyst waiting to restore values; no Big Bang, no loan hungry banks, no demand surge.'

 Meanwhile, a  dark shadow hangs over the industry. Occupiers and investors want new premises rather than much of the stock held by investors. And the underlying threat of obsolescence has still not been tackled. 'Some Sixties buildings are now worth little more than their site value,' says Slade. Helical will remain an investment company, but the rump of the portfolio will mainly be seen as providing for overheads and dividends. 'That way we start every year ahead of the game.' Development will be the driving force, however.

  Profits more than doubled to £6.6m last year and should continue to grow under the eye of Gerald Kay, who came in from LET to handle a £500m development programme. Perhaps as important to the tabloids, he will also  knock Slade off his perch as the highest paid director. 'He is more important than me now,' quips the MD.  Stephen Padmore has  joined from Heron as a partner for  developments in the Thames Valley, where Slade predicts booming growth and Helical Retail is thundering on from the Leicester deal with another 2,300m2 (250,000 sq ft) already 60% pre-let in Middlesbrough and 75% of the 1,100m2 (120,000 sq ft) Newbury rugby ground site also reserved. Contracts have also been exchanged with RMC for leisure and retail next to Sainsbury in Norwich and another A1 user scheme is on the cards at Rugby.

 The  secret behind this burst of activity lies in liquidity. Ready cash is all-important, says Slade. 'One reason why Helical Retail has been so successful is that we are are  able to slap money money on the table. 'We just went for a site in Maidenhead and out of the 10 bidders, only two had the resources. That is what I call the running-dog syndrome. The dog runs after the car but what does it do if it catches up? Nothing. The site is frozen until it comes back on the market. That is what it clogging the industry today.'

 Finding money to buy sites is one thin. But how do you follow that up with finance from funds increasingly reluctant to dabble in property?  Helical appears to have few problems here either, as two thirds of its program is pre-funded and Slade wants to bring it all into that net. 'People make the mistake of thinking institutions don't want to be involved in the sector. They do, but not all the time and only for new space.

 'You have to catch each one at the right time. One may be looking for City deals one month, but not the next. Another wants Thames Valley offices until it gets its quota, and then it goes quiet again.'  That means a constant round of tapping and renewing the contacts a long-term player like Slade has been able to cultivate over the years. The successes also help open doors. Merseyside Superannuation, for instance, has just benefited from what Slade calls a 'cracking deal' where 2,800m2 (30,000 sq ft) of offices at Weybridge, Surrey, were let for almost £237/m2 (£22/sq ft).

 This area around the west of London is a potential goldmine because so little space has been built over the last few years, and  potential tenants are finding letting incentives getting tougher by the week. Potential demand is strong enough that the three buildings at Watchmoor Park, Camberley, totalling almost 11,000m2 (117,000 sq ft) will be let by the end of the year at more than £242/m2 (£22.50/sq ft). That compares with pre-funding by Friend's Provident at less than £205/m2.

  Slade's other big asset, the 16.700m2 (180,000 sq ft) Old Broad Street development in the City with ScotAm/Barclays is a longer-term project and he won't comment on potential rents, but again the lack of new space should push these well over the break-even £377/m2 (£35/sq ft).

 There have been some wrong notes in this symphony to success. The office building in Leeds, still unfunded, remains stubbornly empty, and Slade was forced to take a hit of £1.3m on a conversion in Edinburgh's Charlotte Square after planning delays.  But he insists that this must be the pattern for the modern company working to create a margin. 'Accept that development is a gamble, take your losses and get out rather than hang around and expect the market to rescue you,' he says.

  It can all be very confusing for the City. Kleinwort Benson conclude that 'all this activity' means future profits could be 'anything', although they predict a rise to more than £10m next year if it all comes off.  Helical's brokers Credit Lyonnais predict more than £11m in 1997 and £14m the following year, with development profits adding more than £1 a share to asset values.  The old sailor appears to have found a safe new course - although it would be wise of passengers to remember the risks of development. Slade has famously encountered both sandbanks and pirates in the past.

Helical Bar

              Pre-tax      Net Asset

              profit(£m)    Value

1996             9.2          330

1997(est)       11.5          385

1998(est)       14.0          435

Main Development Projects

                 sq ft      completion   funding   est value(£m)

Old Broad St  180,000          97       ScotAm/Barclays    95

Camberley     117,000            96/97      Fr Provident  28.5

Leeds          80,000             95          -           13.5

Cardiff        69,000             96        CIS           14

Slough         30,000             97        Scot Mutual    9

Theale         60,000             96        Fr Prov       6.7

                                                       (1st phase)

Bristol        33,000             96           -          7.5

Helical Retail

               sq ft             rent         yield      est value

                                  (£/sq ft)

Leicester      175,000              -            -          -

Middlesbrough  255,000              10           8          31.9

Newbury        116,000              11.5         7          19.1

For a brief, glorious period last month [OCTOBER], Helical Bar could lay claim to be  the biggest UK developer with  around 186,000 sq m (2m sq ft) of projects under way.  Then along trundled a thoroughly miffed Land Securities to reclaim supremacy with plans for more than twice this amount.   One rather large difference remains. Helical has a market equity value of £65m; Landsecs hovers around £3.7 [ITALIC]billion[END ITAL].  It is not a paradox  that worries flamboyant managing director Mike Slade. He actually revels in the role of a big player again after an unusually  quiet few years.

  But everything about Slade is big: his permanent smile, his  6ft 4in frame, his 80ft yacht, his headline-grabbing salary, his views about  the property industry. And he sees no problem in a minnow swimming with the whales. Why should he, when development contributed 75% of Helical'  £4.3m profit in the first six months of this year?  And there are bold predictions for  annual surpluses of between £5m and £10m for the rest of the decade.

  But surely  we have heard all this before? Merchant developers blitzed the market during the last upturn - only to spectacularly implode when times turned tough. Slade knows  because he was among those stars, coining £50m in the late Eighties.  The difference is that he was among the few who got out in time. 'We were lucky,' he says. 'Everyone who got out intact was lucky, and don't let them tell you different.' Such modesty is not just out of character; it is disingenuous. Behind the  charm, the jokes and the smart clothes is good old-fashioned developer instinct.

 Helical got out because Slade was  getting 'nasty feelings' about ludicrously high prices.  He put everything into high-yielding industrials and weathered the storms of recession like an  experienced sailor.  Now the time is right for developing again as space runs out. 'The next couple of years are going to be very good for property,' he says. That means ditching ballast. Out go the trusty industrial estates; out go provincial offices; all to raise money for offices in a broad sweep from the City, through the West End to the Thames Valley - plus a special niche for  the bubbling retail warehousing sector. 'I would even sell at a loss to become more liquid,' says Slade.

  He is not giving away secrets. The comeback started more than two years ago  with  a £30m site-buying spree. Helical follows a simple rule: you can't get customers without a product, so he found schemes that investors  would be willing to back. And Helical was beefed up when Gerald Kaye was enticed in as development director fresh from  clearing up the European portfolio of  LET/SPP. Stephen Padmore,  at a loose end after a stint at Heron,  became Mr Thames Valley, working up joint ventures through his company Averley Wood.

 'We have been successful because we got in first,' says Slade - a staggering understatement when the rest of the market was convinced that investors had minimal interest in property. But Slade and Kaye preach the heresy that funds are always looking for a little bit of speculative development on the side - partly to bring some excitement to their dull lives but also because they get in at such a soft yield.

 Kaye picks out a site at Weybridge bought with Averley Wood and massaged to produce   2,800 sq m (30,000 sq ft) of B1 space. It was not on the market, but Tony Pidgley of Berkeley was given a persuasive £2.8m to hand it over. The development was funded within three months by Merseyside Pension Fund and let  at more than predicted rents. That generated £2.2m profit for Helical and an asset the fund bought at 8.5% and could now sell at 6.5%.

 Similar paths were followed at Newbury and Camberley, both now funded by Friends Provident.  The technique seems simple: get in early, slap money on the table, tidy up the planning, pre-let, find a backer and get out. 'We don't like to be tied up for more than a year,' says Slade. In fact he can't, when Helical's money comes from 'erosion' deals, where development profits leak away the longer a scheme waits for tenants.    He is surprisingly ready to admit these  skills are not infallible.  Timing has been out on  some schemes leaving  offices in Bristol and Leeds that hung around eroding potential earnings far too long. But the gold mines outnumber the black holes.

  This Midas touch has got  around the market. 'Funds talk to us because we have a track record. And we get sites because vendors know we can put money on the table,' says Slade. He is fond of quoting the 'running dog' metaphor as a clue: 'When a dog chases a car,  what happen if it catches the thing? In the same way, competitors bid for sites and then can't fund it.'   Nowhere is this more obvious than in retail warehousing, where Slade backed the former Sears development team led by Jim Kelly to create  Helical Retail. The parent's  cash has won  a series of sites like the Cattle Market, Leicester, which was almost completely taken by tenants like Safeway and Rank before a brick was laid.

 But sometimes retail warehousing is not the answer. Helical  switched the former Unigate depot in Bracknell to  11,600 sq m (125,000 sq ft) of offices to suite a hot market. Again with Averley, it stole the site away from a top-drawer bidder like Pillar Properties by putting up more than £6m, knowing that  much of the profit margin will go a fund.

  Sometimes Slade hankers to hand over less. Kaye put together the 18,500 sq m (200,000 sq ft) renovation of 33 Old Broad Street purely on the logic that the area was ripe for revival after the IRA bomb. That meant introducing  owners Barclays Bank to  a fund. One phone call to David Hunter of Scottish Amicable and he  was keen enough to grab it within three days, leaving a wistful Slade wishing he had kept more than an 'erosion profit'.

  But such thoughts pass quickly. Helical has no intention of building an investment portfolio. The message may have been blurred by the battle with Greycoat to acquire a £100m portfolio from London & Regional, but Slade saw this as trading and development stock. He strongly believes the future lies with firms nimble enough to bag sites, stitch together tenants and funding - then get out.

  He is currently in love with  the City, working closely with several tenants to manufacture big new buildings. The affection is not reciprocated by some of its inhabitants. The City  prefers nicely predictable  recurring income rather than  development profits. Brokers  find it hard to value a company like Helical, which lives on its wits.

  But the rules will have to change when securitisation comes in, says Slade. 'Property companies face a 16.5% tax disadvantage over exempt trusts. Those sitting back and collecting rents will not be able to climb this hill.'   The day of the merchant venturer, constantly working to leap this tax gap, is set to return. A hyperactive Helical looks likely  to be among  the survivors.