August 2010 Archives

Savills chief executive Jeremy Helsby can mostly afford to grin at this morning's half year results. In the six months to June revenues are up £57m (23%) to £304m over the same period in 2009. Profits have recovered from a slim 100 000 to £14.4m. The business has £20m in the bank rather than a £400 000 overdraft. But the man who took the helm in May 2008 as property nosedived is worried that a milder version of The Crash may recur.

"Looking to the second half," says Helsby, "factors such as the Chinese Government's desire to contain overheating in the residential market, continued concerns over economic growth in many countries and prolonged low levels of debt availability indicate that the recovery is likely to flatten off during the coming months." So, staff wondering about next spring's bonus may be wise limit their expectations to a second hand set of new wheels or a cheaper new house

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Meanwhile rivals will be more interested in those trading numbers which are broken down in refreshing detail. That £57m revenue rise was accompanied by a £43m cost increase - £37m of which was salaries and bonus. So every £1 increase in revenues cost about 75p. Not a bad conversion factor. But hidden in that are losses. Continental Europe continues to drag. Losses of £8.6m have been more than halved to £4m. But income is static at just £26m.

Asia Pacific revenues rose strongly from £95m to £128m, mostly on the back of transaction income which leapt from £20m to £45m. Profits rose from £4m to £13m. But perhaps of more interest is the UK. First half revenues rose 20% from £125m to £150m: but underlying profits rose only £1m, from £9m to £10m. A revenue/profit conversion factor that indicates the margin pressures that still exist in the UK market; pressures that may increase.

Geeks can delve further into the UK numbers, as Savills provides revenue and profits breakdown of residential and commercial activity by sector. Commercial revenues of £87m returned profits of £3.5m - 4%. By contrast ressi revenue of £63m earned £7m profit (11%). The majority of that (£5.4m) from came from transactions - more than double the profits (£2.5M) from commercial transactions. The message: fingers crossed for UK ressi and Asia.

It is to be hoped that Jones Lang LaSalle have been paid a fair rate for the five months they wasted trying to sell Tower 42 on behalf of Blackrock and Hermes. In April the owner's excuse for selling the 600-ft multi-let tower was some piffle about "rebalancing their portfolios." To repeat a post on April 13th: "There can only be one reason for selling, there are trophy hunters in the market willing to pay trophy prices. Let's bag one."

The official (and garbled) reason for not selling the multi-let tower built in late 1960's for the NatWest Bank? "This new direction in strategy, also a result of an inflow of funds, enables the partnership to progress a number of asset management and value-add initiatives across the estate." To translate this piffle: "we're not as cash strapped as we were in April. Nobody wanted to pay well above the £300m price we leaked to the market."

This is the second unsuccessful attempt in three years by Hermes and the giant US investment fund to sell the old NatWest Tower, which they purchased in 1998. In 2007 a sale price of £400m was floated, suggesting a yield of 5% on rental income of £20m a year. Fine. The price floated in April of £300m reflects a 6.6% yield. Fine: but a price the sellers presumably thought would be bettered by at least one of the 40 buyers who were given a tour.

But no. Who knows why? Was it the cost of repairing the 40 year old tower too much for the likes of those like the Tony Malkin, owner of the even older Empire State building, who came over to take a look. Or was it that between the decision to sell in an optimistic spring climate and today's slightly gloomier atmosphere, the trophy hunters simply shied away. Whatever the reason can there be slightly less piffle please when the owners go for third time lucky.

Boris Johnson has chosen mid-August to slip out a couple of interesting housing policy documents. A Framework for Devolved Delivery is the Mayor of London's 17-page milk-and-water attempt at localism, which can be safely ignored. But the 108-page London Housing Design Guide is real meat-and-potatoes set of rules which will prevent developers building shoe boxes - and may influence councils well outside the M25.

You don't have to read very far into the localism document to discover it is little more than a nod to the Conservative Big Idea. London's 33 boroughs don't even have to sign up to the idea of deciding what to do with money allocated to them by the Homes & Communities Agency. The HCA remains firmly in control of the budget and can reallocate cash if the council is tardy in building. Boris remains in charge of the deciding large site applications

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You don't have to read very far into the housing design guide to see that (apart from one key exception) house builders have lost their fight to prevent Boris going back to the 1960's and introducing a 2010 version of the Parker Morris set of minimum space standards, which means 2-person units now need to be a minimum of 50M2. But the standards go much further than setting minimum floor areas. House builders will need to revise their standard designs.

But the positive coverage of the new standards has failed to spot the loophole - the one person flat. This does not appear in the table of minimum sizes. But the appendix gives the detailed guidance on their layout - and shows they need be no bigger than 37M2: the size of the "Hobbit Homes" disparaged by Boris. There was a good deal of lobbying to keep the one-person flat in the mix. But it may, in the end, prove to be only a small comfort to developers.

The US Federal Attorney's investigation into overcharging by Bovis Lend Lease on three New York construction projects might have been scripted by the writers of the Sopranos. But the unfinished year-long probe has caused real-world damage. Australian parent Lend Lease posted figures for the 12 months to June today. A profit of $AU35m in 2009 by the US project management division has turned into a loss of $AU45m. This $AU80m reverse is blamed on losses due to poor trading conditions, restructuring costs and that "NY Investigation."

In June 2009 Lend Lease explained the problem: "The allegation relates to billing practices in respect of foremen taken out of the union pool where excess costs incurred by Bovis Lend Lease for payments made to union foremen were billed to clients. The union pool is a source of labour available to contractors in New York which is used by Bovis Lend Lease." As Tony Soprano might say "why the hell are we having our balls chewed for doing what every other builder does to keep the, er...unions, happy?"

This local difficulty should not detract too much from the news that Lend Lease had a pretty good year, even though revenues plunged by 28.5% from $AU14.8b to $AU10.6b. Post tax operating profits were up 5% at $AU323m. OK, not much. But, last year, the $AU307m operating profit was dwarfed by a $AU961m write down which plunged the business into a $AU654m loss. The turnaround seems to have been achieved by good numbers from Australia and the rest of Asia Pacific.

 
But the business also did pretty well in Europe - which is mostly the UK. Operating profits nearly doubled from $AU62m to $AU119m. The signing of a £1.3b development agreement with London & Continental Railways at Stratford and the £1.5b agreement to redevelop Elephant & Castle is highlighted as good news. But despite (or perhaps because of) these agreements, Lend Lease seems wary of the UK market - which it says is "likely to underperform in the medium term." Wise caution.

A visit to the pleasant Wigmore Street offices of Minerva yesterday morning found chief executive Salmaan Hasan in fine form, his finance director, Ivan Ezekiel a little guarded and development director Tim Garnham calm and collected. The interview was conducted a couple of hours after the publication of a statement rebutting demands for Hasan's head by 29% shareholder, Nathan Kirsh, who wants to install Philip Lewis of Lambert Smith Hampton as temporary CEO to sort out the business.

The arguments in what is now a battle for control of Minerva are well rehearsed. The article resulting from the meeting was in yesterday's Evening Standard, the FT carries an article today, the reasons why this is now a fight to the death, were discussed in my EG column on July 24th. But, in essence, Kirsh says he wants new management, but not control of the business. The Minerva board says he really wants control - and should now make a second formal bid at a far higher price than the failed 50p attempt last November.

What will happen at the EGM called for 8th September to vote on who takes over? City analysts voted for the existing management yesterday, although the share price dipped 7p to 95p. But fund managers hold the real votes. The Kirsh camp concedes it unlikely that institutions will vote against the current management, rather they hope for enough abstentions for their 30% to become more than 50%: but Hasan, Ezekiel and Garnham are touring the City, trying to prevent this happening.

The current management have the inside edge in the sense that former banker Hasan is an insider, and Kirsh is an outsider. But the South African billionaire will run a far sparser ship, as a visit to his extremely modest offices behind an Irish bank in North London showed. However the numbers show that Minerva's bacon has been saved by the fact that estimated profits on 74 flats at Lancaster Gate are more than double the £37m given in guarantees on the 1m sq ft Wallbrook and St Botolph's developments.

The letting of the 450 000 Wallbrook development and the final 277 000 sq ft at St Botolph's are key. Minerva revealed yesterday it has until an unspecified date, no later than June 2012, to let 66% of the space, or the banks will step in. Hasan says no problem. Kirsh says the lettings should have already happened. The results for the year to June are due in late September. They are likely to show a decent uplift in values that will lift the gross asset value of £910 million in December well above the liabilities of £908m.

The odds on who will be presenting the figures? Phew, well, let's go for 60/40 Hasan/Lewis. But, even if it is Hasan, Lewis's boss may still be banging on the door.

A RICS survey of residential agents elicits just 242 replies. Just over 150 say house prices have not changed in the past quarter. Nearly 30 say prices have risen. But the remaining 62 reckon prices are falling. That is quite enough in the current febrile market to have a "prices falling" story splashed on the front page of both the Times and the FT today. A story that overshadowed housing minster Grant Shapps announcement on councils getting six years council tax for every new homes granted permission.

The minister gave sparse details of the New Homes Bonus plan yesterday. But to give councils a taster, the Telegraph on Sunday demonstrated that if 100 Band D dwellings on the average council tax rate of £1439 were approved, a borough will receive and extra £863,400 to spend. The key question is, of course, when they will get the money: a lump sum up front, on approval, is unlikely; more likely is a simple matching of the council tax when buyers start paying. It could be two to five years before the benefits start to trickle in.

Meanwhile is becoming perfectly clear that for every 100 new homes the Shapps plan will encourage, ten times as many are being lost as NIMBY councils quietly drop plans for large-scale settlements, thanks to the first-term fervour of Shapp's boss, Communities Secretary, Eric Pickles. The emerging John Prescott of the Conservative Party simply wrote to councils telling them not to bother with those tiresome Labour targets. That has created a planning vacuum, say seething developers and planners.

This precipitate action is just beginning to rebound on Pickles, in much the same way as botched cutting of the school building programme has soured the reputation of Michael Gove, once a fine journalist, now regarded, rather harshly, as a priggish incompetent. House builders are angered at what they see is Pickles high-handed action. One of their number, Cala Homes, has lodged papers in the High Court calling for a judicial review of Pickles action says the Times today. The honeymoon is officially over.

This morning Patrick Vaughan and Raymond Mould made good on their promise to shift London & Stamford from the Aim market to a full stock exchange listing on October 1st - and convert to REIT status. The conversion comes 6 months later than promised in an interview with me in EG last July. The twosome is also some £380m short of the £1b of gross assets they hoped to have acquired by April 2010. Nevertheless, the achievement of 69-year-old Mould and 63-year-old Vaughan in setting up what will become a fully-fledge REIT with £620m of assets in just three years is remarkable.

The newly-listed business will internalise its management by paying Mould and Vaughan's external management company £55m in return for not paying them £10m a year in fees. However, Mould and Vaughan are not able to walk off into the sunset with the cash. The consideration is being paid in the new company's shares that will give them and one or two other directors a 9.1% stake in the REIT. Those shares cannot be sold for three years - and if the new business does not reach certain targets a penalty charge will cost Mould and Vaughan £10m.

Shareholders should do well - the REIT has to pay out 90% of its profits as dividend and London & Stamford Limited seems to have bought in a wise and timely fashion. Those selling stock to what will be now be called London & Stamford PLC should be pleased: the REIT will need to up the percentage of cash spent from the current 60% to 75% by April 2013. Mould & Vaughan will also have done well by then - and should be able to walk off into the sunset with £55m - the third - and possibly last time -  the duo have correctly called the market in 30 years.

There is the ticklish longer term question of succession. Last July Vaughan countered that question giving strong support to his internal team: that presumably means that ex-Pears and Citigroup man Jeremy Bishop, or, possibly, ex-Duetsche Bank man Stuart Little are favoured for the job(s). But shareholders in a business that could become a multi-billion REIT in five years time may want to start asking questions now of who is going to run things after Mould and Vaughan retire: for it will be hard for anyone to outperform this matchless pair.

Hammerson posted a good set of half year results this morning, producing pre-tax profits of £70.2 million in the six months to 30th June. Add in revaluation gains of £258.7m, plus £6.7m of bits and bobs, and the £5.6b business run by David Atkins was in the black by £335.6m, compared to £818m in the red for the first six months of 2009. Those black and red numbers tells you all you need to know about the sharp recovery of the UK property sector in 12 months.

For the £70.2m trading profit is not that much more than the £65.6m made in the first six months of 2009. What happened last year was that Hammerson suffered a horrific £776m revaluation loss and a £77.9m loss on what were forced sales. The same thing happened to bigger rivals Land Securities and British Land. So, no shame attached. But last year's forced sales have shortened rent rolls.

British Land may have gained £1.2b selling half of Broadgate to Blackstone; but they relinquished millions a year in rent - and will now relinquish half the profits on the £600m redevelopment of the UBS complex, finally announced this morning in the FT. The details are not given. But the 20 year lease with breaks at 10 and 15 years has been signed at £54.50 for a 700 000 sq ft building costing £350m on the site of 4 and 6 Broadgate. The first 18 months is rent free with annual RPI increases of up to 4% says Alan Carter of Evolution Securities.

Hammerson needs to start rebuilding its rent roll. Gross rental income in the six months to June 2009 was £181m against £162m this year. Occupancy rates are a creditable 96% and retail income seems to be holding up.The detailed numbers show the £18m gross rent reduction appears to have come from sales in the office portfolio; about 50% in France and 50% in the UK. Now, how long it will it now take for Hammerson to best the rents made in the worst of times?