Copyright: David Lawson– appeared Property Week Feb 1998
Home pageInvestors disappointed by the failure of housing investment trusts to take off will be offered an alternative route into the sector. Fast-growing company London & Henley aims to go public with a portfolio of worth around 150m pounds within the next 12 months.
This could more than compensate for the let-down when Savills admitted defeat over creating the first HIT. Institutions have finally overcome suspicions about residential investment but are not convinced that trusts can offer enough performance or liquidity.
As a listed company, L&H would would provide a straight equity option to rank alongside other property players. The size of the portfolio - created from a proposed merger of L&H and two business expansion schemes - is important.
It would offer a scale and risk spread matched only by Bradford Property Trust, still the sole major listed residential investor. L&H also concentrates on central London, providing a niche play in the most buoyant residential market.
A net asset value of around 100m pounds is still small beer for institutions and analysts which rarely bother with companies at this level. But managing director Kerry Kearton-Gee, has no intention of remaining a tiddler.
'We proved the value of gearing up residential investments at a time when banks would send for the men in white coats if you asked for money,' he says. Buying, renovating and letting flats then borrowing against the income stream has led to spectacular growth. He now wants to boost this through resources available only to a public company.
Lack of tax breaks built into HITs are brushed aside. 'We can boost yields instead by taking the developer's profit rather than buying investments off the shelf,' he says.
In any case, investors are more interested in quality of management than the questionable yields promised by HITs - which is why the company has been building a track record for the last few years.
Kearton-Gee, finance director Tariq Cader and construction director Kevin Cook started their education with City Gate Estates, a BES company floated on the unlisted securities market in 1988. They anticipated the crash, selling out to Swedish investors.
The team came back in 1993 to launch Cavendish Assured Tenancy Companies. This involved a different kind of BES setup, relying on investment and gearing rather than trading. 'We learned that the only way to gain respectability was to hold assets,' says Kearton-Gee.
The 9.5m pounds raised from BES shareholders will mature into around 50m worth of property by this autumn, effectively doubling their money before tax. Investors will be looking for a way out but the Cavendish board is writing to suggested merging with L&H, setting the scene for a float by next spring.
By taking shares instead of cash, investors could sell at their convenience. There is also the chance they may be able to roll over their tax breaks if Cavendish is the lead company in what becomes a reverse takeover.
L&H has emerged as a separate force since 1995, when it moved beyond management of Cavendish assets to set up its own investment/development program. The team, joined by acquisitions director Chris Eccles and sales director Nicholas Herrtage, showed an early ability to interest institutions which bodes well for next year's float. Four big names - Kleinwort Benson, Foreign & Colonial, Gartmore and Gresham Trust - came up with 13.5m in equity and loan stock.
This paved the way for a 25m pound credit facility from Bank of Scotland and 5m pounds of development capital from Barclays. The first deal, a former school in Swiss Cottage bought for 1.1m pounds, set the pattern by doubling in value after conversion.
A steady stream of further deals since then has produced a portfolio worth a potential 60m pounds once built out. This performance was enough for the founder institutions to put in another 6.6m pounds they held back from L&H's original business plan.
The company now has 329 flats, almost 200 held for investment. The rate of acquisition is also accelerating as schemes get bigger. Net assets almost tripled to 8m pounds in the year to July 1997and pre-tax profits jumped 35% to 377,000 pounds. More than 100 flats have been added since then.
The company has made a move into conversion of offices to flats has taken on its largest project with the conversion of Bombay and East India Wharves in London Docklands to 65 flats. Not everything is held: some property has good uplift but poor yield, says Kearton-Gee. A modest sales program also provides for development expenses.
But can things go as well when the housing market falls away? 'Absolutely,' says Kearton-Gee. 'We are contra-cyclical: a good yield at poor times.'
He also insists that unlike HITs - and some other residential landlords - the company is strongly entrepreneurial. 'We can't just let property and sit back. We have to add value. Isn't that what all good property companies are supposed to do? '
It is an attitude to warm many a fund manager's heart. Whether it unlocks their wallets remains to be seen.