Unlikely marriage ceates ultimate active manager

Copyright: David Lawson - Property Week April 1997

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There is a widely-accepted stereotype of the  successful secondary property specialist. Behind the top man stands an equally successful father, grandfather, several siblings, as well as assorted uncles and cousins. After all, the traditional route to the top comes through generations building from the obligatory first little house to a network of commercial holdings.

   Adrian Wyatt short-circuited that tradition. Two decades of professional practice, much of it at the esoteric heights of fund management with Jones Lang Wootton, created the basis for his move into the sector. When he and former City analyst Chris Walls set up Quintain in 1992, a new image was created for the secondary sector. A hot-shot new company run by sharp moneymen with the same status as prime investors.

  Deep in the recession, they persuaded the market that better returns could be made by a niche   operator which specialised in low-risk, non-institutional property. This would focus not just on asset growth but total returns (including  dividends) - a revolutionary idea at that time.  Others might have had trouble selling the concept, but   Wyatt and Walls had the heavyweight reputation to pull in backing for the new company from institutions like Scottish Equitable and Standard Life.

  Today,  everyone wants a slice of the action. The shares have moved as high as 145p compared with last year  flotation price of 113p and money has come in to fund another £37.5m worth of property. More importantly, a   a new phase of growth has begun with the agreed takeover of Fiscal Properties. This will double net assets to more than £100m and take the investment portfolio to almost £230m.

  At first sight it seems the most unlikely of marriages. Fiscal built a reputation  by creating a safe and sturdy portfolio of institutional-type, long-lease buildings, almost entirely let to government departments. Quintain is the ultimate active manager, concentrating on short leasehold and reversionary property.

  While the bid was justified partly from the cashflow from secure assets, the real attraction lay in the heart of an anodyne suburb south of London. Fiscal controls the heart of Croydon through a majority stake in CLE, which took over the local council's freeholds in 1994. This estate will be  meat and drink to Quintain, which will buy out the remaining CLE shareholdings.

  The portfolio comprises around 90 properties worth more than £55m. This includes BT's 23,000 sq m (250,000 sq ft) Delta Point, three blocks let to Norwich Union and a portfolio of industrial and retail property. Significant marriage values are expected to be generated by merging lease and freehold interests, renewal of leases and exploiting planning and breakup potential.

  While Gordon Bloor of Fiscal had anticipated this kind of value enhancement when setting up CLE with backing from HKSB, it was incidental to the main thrust of the company's accumulation of a long-lease portfolio. For Quintain, the potential of adding value is the prime motivation and £50m worth of property which does not meet this criteria will be sold.

  From the outset, the company has  preached against the market axiom that secondary property was also second-rate property - risky, management-intensive and not for the likes of top-flight  investors. But institutional property carries the greater risk, says Quintain. If market expectations for rental growth are not met, it faces the double whammy of disappointment on income and an adverse yield movement. In fact the company is so averse to institutional-style property that it promises to sell buildings once they reach this category.

  At the end of the day, ignorance is this company's strength. Not its own but of the market, which tends to misprice secondary property, underrating the deferred income.

 It needs special skills to handle this kind of material, however. Day-to-day management is outsourced, leaving time for the managers to concentrate on  picking the right stock, which is  crucial. So is detailed knowledge of property law for juggling leases and planning potential for development. Different financial appraisal systems are required to calculate cash flow through internal rates of return rather than traditional yield-based appraisals.