The year was marked by four big deals that saw the US enter the agency market. But then the climate chilled off as economic clouds gathered. Jane Roberts and Peter Bill select a few of the more memorable moments of 1998
Who cares about losing a 225-year-old surveying brand to a 36-year-old American when the likes of Kleinworts and Morgan Grenfell had fallen to the Germans? Andrew Huntley, Richard Ellis’s UK chairman, made the comparison in an interview with EG published on February 7 after RE’s UK shareholders voted to sell their business for £50m to US group Insignia, headed by whiz kid Andrew Farquas.
The whole affair exposed the frigid nature of relations between Richard Ellis’s UK and international shareholders. Richard Ellis International – with the rights to use the RE name worldwide – ignored Huntley’s public statements that he hoped REI would follow the UK shareholders into Insignia’s embrace and on February 12 voted instead for a £57.5m marriage to Insignia’s US rival, CB Commercial. CB then went on to buy up another grand old name, Hillier Parker (see July).
January
Transatlantic alliances
Agency takeovers and US REITS were to be enduring themes in 1998. In the first of four takeover deals between US and UK agents, 20 directors of Richard Ellis’s UK business became millionaires when they voted to accept a £50m bid by Insignia (see left). As hotel REIT Patriot America bid for Arcadian, and Security Capital (which runs six of the biggest US REITS) bought Frigoscandia in Sweden, everyone in the UK property market switched from asking,”What’s a REIT?” to “Which REIT might buy me? Can it be REIT?” and so on.
Developer Trevor Osborne had a huge bust-up with former business associate Wilem Frischmann, of consulting engineer Pell Frischmann. In 1996, the two made £25m from buying out part of the government’s Property Services Agency but at the start of 1998, they ended up in court, with Frischmann accusing Osborne of pinching schemes from their joint company, Hawk Developments.
Housing investment trusts, supposed saviour of the struggling residential investment market, quietly expired before they ever got off the ground (probably a good thing, then).
February
Agencies on the move
More movement on the agency front, with Chesterton agreeing to a reverse takeover by support services company Summit. Alas, the deal came unstuck three months later.
No such setbacks at Conrad Ritblat, now known as Milner Estates, which continued to reinvent itself as part agency, part property company. It snapped up Five Oaks for £40m. The deal tidied up the interests in both companies of one John Ritblat, and left a tidy sum in the pocket of Five Oaks’ MD John Watkins.
The deals market was gung-ho: Nabarro Nathanson announced that it was leaving Mayfair to set up shop in midtown London at LandSec’s Theobalds Court on an innovative lease, effectively capping its occupation costs for 15 years, while Greycoat let 1 Great St Helen’s to Hiscox. Such was the sunny outlook at this stage in the year that Greycoat director Chris Strickland boasted of having 14% of speculative City space on the market in this and two other schemes.
Golden sunshine too in the retail market, albeit based on last year’s valuations. Capital Shopping Centres kicked off the results season with an impressive 27% jump in NAV: just over half the £316m rise in the value of the £1.9bn portfolio came from rent increases.
BZW apart, each analyst’s paean to the prospects for property shares seemed sweeter than the last with little sign that companies couldn’t continue to trade at premiums to NAV. Having clawed its way back into favour after Hammerson’s unwelcome 1997 approach, MEPC’s shares hit an 18% premium to NAV, jumping to 600p.
The only sour note was a backlash against IPD’s proposal to revise its historical data to take account of adding new data.
March
Early shivers but warm results
EG’s story that London’s International Financial Futures and Options Exchange (Liffe) might pull out of a £200m exchange building at Spitalfields, EC2 sent an early shiver through the City market. Similarly, problems at the exclusive end of the retail market started to emerge as Christina Ong began to scale back her London franchises, cancelling property deals and quietly putting existing stores on the market.
Stamp duty was the sting in an otherwise neutral Budget. It rose from 2% to 3% on deals over £500,000 and provoked howls of fury from the industry, which then took eight months to get its lobbying act together and hit back.
Company after company continued to post strong results and impressive rises in NAV, including Slough Estates, Chelsfield and Asda Property. Security Capital had a busy month: the US giant bought City & West End Developments, Patrick Despard’s London property company, and launched a $1.5bn fund to buy stakes in European property companies.
Two middle-sized agencies, Gooch & Wagstaff and J Trevor Webster, decided to be middle-sized together, creating – Gooch Webster. Hillier Parker was in more glamorous (and lucrative) merger talks, with CB Commercial, the US broker that bought Richard Ellis International.
Plenty of topical tips from Nick Leslau, who sold out of Burford with Nigel Wray in 1997 and set up Prestbury. In an interview with EG he advised readers: “Never reheat old hamburgers.” So now you know.
April
Personnel changes
April Fool’s Day marked a new chapter in the troubled history of the Valuation Office Agency where Michael Johns had taken over from Veronica Lowe, who had left after only 18 months in the job. The number of Valuation offices was cut from 99 to just 24.
In another sign of these transitory times, John Whalley moved out of the top property job with AMP in the wake of its merger with rival insurance group Henderson Investors. He was followed by Lorraine Baldry, who left the mighty Pru. Baldry was deemed surplus after a management consultant’s review of the personal finance giant.
Small property companies continued to make the news, as usual, mainly for the wrong reasons. Bourne End was hit by a £719,000 bill, partly for paying chief executive Leo Noe to go, while London & Associated’s chairman Michael Heller said that he might cut his family’s 54% stake in an attempt to boost the company’s dismal share price. Trafford Park Estates revealed that it was in takeover talks with sector tiddler Barlows.
Capital Shopping Centres had an unwelcome setback when its proposed extension to the MetroCentre was called in. As the year unfolded, it became clear that the call-in was the first of many as the government tightened planning policy.
Security Capital pounced again, this time on Mark Glatman’s Akeler.
EG’s Company File this month opened by asking, “How much longer will this company survive in its present form?” The company was Bilton.
Trevor Osborne went to court against his old partner at Hawk Developments, Wilem Frischmann
Lorraine Baldry’s job fell victim to a management consultant’s review of the Pru
Hillier Parker’s 27 equity partners impressed their rivals by selling the firm in a mainly cash deal to US broker CB Commercial in July. Hillier Parker’s new boss, 58-year-old American Jim Didion, is not the type to waste time sweet-talking anyone, and had switched his attentions to HP after a five-year alliance with DTZ had fallen apart and he was spurned by Richard Ellis UK. The Hillier Parker equity partners shared £38.25m cash and £4.25m in shares; the balance went to retired partners, salaried and associate staff. Hillier Parker is now the “UK presence” Didion vowed to get and it now finds itself working alongside Richard Ellis International, bought by CB in February. CB has now been renamed CB Richard Ellis. The managing director of Hillier Parker – now called CB Hillier Parker – vowed to improve on the £7m pretax profit made in 1997-98.
May
Takeovers take hold
Merger fever finally took hold. After Trafford Park’s talks with Barlows, Chesterfield’s share price soared on speculation that MEPC was a predator, after GE Capital looked and walked away. That deal didn’t happen, but others did. Hemmingway bought tiny Olives for £29m. Trafford Park itself became a bid target when Stephen Vernon of Green Property jammed his foot in the door just before it closed on the Barlows merger. And retail warehouse specialist Grantchester (which had already snapped up London & Metropolitan in March) bought rival Edge.
Pillar pulled off the biggest-ever retail park deal, setting up a limited partnership with Schroders and Canadian fund SITQ to buy Leicester’s Fosse Park. It also bought Broughton Park in Cheshire.
Talking of things large and record-breaking, Hemmingway Properties’ directors Michael Goldhill and Andrew Browne elicited gasps of disbelief (and envy) when their 1997 salaries were revealed: £1.84m each, and this at a company with a market cap of only £47m.
Competition between serviced office operators was hectic: Mark Dixon’s Regus borrowed from UBS to expand outside Europe, and Peter Kershaw’s HQ secured Mercury Asset Management’s considerable backing.
DTZ lost one of its biggest and most long-standing clients, BP pension fund, to rival Hillier Parker. The rumours that Hillier Parker was about to sell to CB Commercial got stronger (they were right; see left). As CB used to be DTZ’s partner in the US, who would be getting revenge on whom if the deal went through?
July
Changes foreseen
July began with talk of relating fees to performance. This is the sort of top-of-the-market notion put about by those who felt at the time that the downside risk of overestimating the capital or rental values was infinitesimal compared to the upside risk of a whacking great fee if the building was let or sold for a higher-then-estimated price.
But even then, “shares were drifting amid a sea of concerns”, with the FT Property Index sliding further below the All-Share Index.
The month’s good news came from Richard Lay. The incoming president of the RICS promised a slightly sceptical audience at the QEII centre that an organisation that normally welcomes change with firmly folded arms was to undergo a cultural revolution.
Two deals were announced. One later hatched, the other has so far failed to do so. The first was an EG exclusive that architect Sir Norman Foster was drawing up an egg-shaped design for Swiss Re on that recently bombed site, the Baltic Exchange. Since then, not even a small tremor. The other deal signalled was from Arlington’s management, who flashed up their fervent desire to be consumed by US fund manager PRICOA. A deal was consummated later in the year.
August
Doubts creep in
Prescient RICS members tapped the feel-good barometer in the blue skies of early August and saw the needle swing sharply left. The second quarter confidence survey showed a drop to virtually zero in the balance between optimists and pessimists.
Never mind, at least at FPDSavills. Here, £14.6m in bonuses were shared out among 870 staff. Directors took home an average of £250,000 each. Staff on the average salary of £25,000 got a cheque for another £16,000 or so. Next year, who knows?
Another lucky group of agents was the staff of DTZ, who learned that they were to move into very posh (and rather expensive) offices in Curzon Street, Mayfair.
And so the good news went on. Elliott Bernerd managed to persuade Marks & Spencer to anchor his £400m development at the White City in west London by using glamorous new(ish) architect Ian Ritchie. Said the man from M&S: “It’s one of the best-quality schemes I have ever seen.”
The month ended the way it began: gloomily, with talk of the market turning. GVA Grimley felt that “occupier confidence was falling and that rental growth had peaked.” St Quintin talked of “a marked cooling”, DTZ of falling demand and Donaldsons warned that the retail investment boom was over. Only Knight Frank remained stoic, saying the market was “returning to some sort of equilibrium”.
June
The son also rises
Some things were going well: James Ritblat, 33-year-old son of John, continued his unassuming but relentless rise when his private company, Freehold Portfolio Estates, was effectively taken over by quoted minnow Delancey. Installed as the boss with a £100m cash injection from superstar financier George Soros, the younger Ritblat was, it seemed, going places.
Scary amounts of US cash were promised for European property. Morgan Stanley, Credit Suisse First Boston and REIT billionaire Sam Zell all announced £1bn-plus funds for European property. Security Capital was at it again, paying a rumoured £125m for Midlands-based distribution specialist Kingspark – making millionaires many times over of John Cutts and his co-founding directors.
But what would turn out to be a long slide for property shares started this month amid the first mutterings about poor rental growth. Rising interest rates, a strong pound and the Asian economic collapse were depressing spending in the high street. Among retailers, shoppers’ wariness to spend was beginning to erode retailers’ desire to expand and compete.
Property chiefs Richard Peskin and John Ritblat both growled about the rise in stamp duty as they unveiled strong figures. Peskin’s chairman’s statement was notable for the 50 or so pop groups buried within.
JLW confirmed that it was in merger talks with Chicago-based LaSalle Partners.
James Ritblat, 33-year-old son of John, was installed as the boss of Delancey with a £100m cash injection from George Soros
Michael Goldhill, director of Hemmingway Properties (market cap:£47m), earned a £1.84m salary (see May)
H&B goes C&W! After an eight-year courtship, the 178-year-old practice gave up its independence and hitched up with US realtors Cushman & Wakefield for a dowry of £70m hard cash. There was a fair bit of muttering from the lower ranks about the riches being showered on those fortunate enough to be holding the equity. But the criticism was partly mollified by the news that there is still a chance for bright young agents to acquire equity. For the new Healey & Baker will still be a partnership, albeit one in which C&W holds a majority stake. H&B’s name will remain unaltered, but look out for the new image early next year.
September
An epidemic of caution
The month started cautiously. Banks were said to be “getting cautious” about lending to developers. And a leading developer said it was time for his firm to become “more cautious”. A week later that same developer launched an incautious bid for Bilton. Yes, Slough Estates provided the best copy over the next few months as it inexorably pounded away at Bilton’s shaky defences to take over what, in effect, was a family fiefdom.
Another developer grew cautious. MEPC pulled out from a £60m scheme to rebuild Plymouth dockyards – the fifth developer to do so in six years. Never mind, one smallish developer had a triumphant September. Shy but rich John Whittaker opened his 120,770m2 (1.3m sq ft) megaplex shopping mecca near Manchester, Trafford Park.
More gloom. The personal conviction that going to the shops has become a less frequent chore turned into a series of graphics from the British Retail Consortium showing all the lines beginning to arc downwards. By now, even the ever-ebullient retail agents were feeling a mite blue. At the annual conference of OTRAS, the retailers’ feeling was that with a record number of rent reviews due in 1999, next year would not be much fun.
With less-than-perfect timing, the property investment funds decided at once that it was wise to sell. By late September, there were at least 26 For Sale boards on City property worth over £300m. A less-than-perfect month was rounded off with the news that the much-hyped REIT dollars were in fact not flowing that fast across the Atlantic after all.
November
The investment stand-off
As market sentiment settled, an investment stand-off began. Those panicky sellers of September stopped panicking and stopped putting more stock on the market. Buyers also deserted the floor, reasoning that the market had further to fall. Both sides are still waiting.
The euro issue surfaced. Suddenly it dawned on the property sector that euroland would become real on January 1 1999 and that deals in 11 countries, including Ireland could be transacted in the strange new currency.
There was much talk of investing in countries where the currency risk was bad and would now be eliminated – Italy for one. THI was looking to invest £500m in European leisure projects. Gerald Ronson’s Heron group said it was planning something remarkably similar.
Associated Newspapers was said to be thinking about relocating to Paddington Basin. Hammerson, flush with cash from a Canadian sale, was looking to invest £74m in Docklands, that previously forbidden territory for the top UK property companies.
Good news for agents on fee recovery came from the legal battle won by FPDSavills, which convinced the Master of the Rolls that even if the vendor changed his or her mind and decided not to sell after a buyer had been found, the agent was still entitled to half the fee.
October
Horizontal scale
Nerves steadied slightly, but only slightly, in October, as did the stock market. The political season opened and it became open season on drivers, planners and the more deserving Jeffrey Archer. EG exclusively revealed that the government planned to produce a White Paper on transport planning. Er, they did. It’s just that by the time the Queen’s speech came along in November, John Prescott had been told by his boss to park the idea back in the lay-by. Humps in the road will now be built one at a time using the planning system.
Finding gold under recycled land became an issue, with much confusing talk of how to regenerate brownfield sites. The essence of the debate was that the government thinks that it is in principle A Good Thing, while the planners and environmentalists were cavilling endlessly over the details.
Agents with calendar-year ends began to think hard about their 1999 budgets. Phillip Nelson of Nelson Bakewell predicted a 15-20% cut in income. That is probably less of a cut than that of the investment banks, which began to lay off staff. The direct result of this was that at least two big bank moves were pulled and a further four were put on hold. Reporting this met with much criticism of talking the market down.
October sunshine came with the news that Sainsbury’s was thinking of coming down from its ivory tower to meet with agents and developers in order to target dozens of 20,000 sq ft sites in town centres. Like M&S and Tesco, the family-run foodstore giant sees its future growth in the centre of town. That vision – and being fed-up to the teeth with planners rejecting its greenfield plans – has produced a major switch in policy.
December
Pausing for breath
A huddle of forecasters predicted that life would get worse or better in 1999. The average of the forecasts supplied by 27 firms to the Investment Property Forum said that rents will grow by 3.3%, capital values by 2.25% and total returns by 9.4%. But the gloomiest felt that rents will fall and capital values will stagnate. The bulls said no, total returns will be 15%, with rents and capital values rising by 7%. (Caution: some of these predictions are up to six months old. The trouble is that IPD is not saying which ones.)
Patrick Despard, perhaps looking for a sure-fire thing for the next upturn, made a bold bid for planning on a £750m development opposite Harrods. John Ritblat, perhaps looking for a safe port in case of a downturn, almost completed his takeover this year of the Broadgate development with the £230m purchase of 100 Liverpool Street.
