Tim Freeborn asks how, and why, Taylor Woodrow is still playing the property game.
Only a few years ago, most leading contractors sported their own property divisions. Why go through the sweat and headaches of putting up the buildings, they asked, only to leave the juicy investment gains to pinstriped gents in Mayfair?
But, after absorbing the property slump and the worst contracting famine in memory, Tarmac, Wimpey, Costain and many others have limped from the field. Behind them at the crease stands the lonely figure of Taylor Woodrow, still playing the straightest of straight bats.
Perhaps the image of the lone player is wrong for TayWood. It still plasters its famous four-men-and-a-rope logo on everything within reach. The teamwork principle was dear to Frank Taylor. With it went a lifetime employment policy and an institutional ethic.
The recession blew away much of this, but vestiges remain. In TayWood terms, property chairman Keith Egerton, 53, is a raw recruit. He joined from Costain only four years ago. But he, too, wears a company tie-clip – at least for the interview. “I told my wife this morning you’d ask, so we eventually found it.”
He found a good deal more than surplus tie-clips when he took charge. For one thing, there were two completely separate property companies in the UK, each with its own head office and corporate paraphernalia. The quaintly named St Katharine by the Tower Ltd maintained an independent life under the aegis of group chairman Peter Drew. It was the owner of St Katharine Docks: the trailblazing London Docklands redevelopment begun by Drew in 1969.
In the booming 1980s the level of office overheads might have seemed a trifling matter. TayWood’s portfolio grew from £263m in 1984 to £802m in 1989, with St Katharine’s peaking at a £210m valuation. Disposal gains were a motor for group profits, contributing £47m in 1987, 40% of pretax profits, and £28m in 1990 (36%).
Drew left in March 1992. Three weeks later, TayWood reported a £45m plunge into the red. When Egerton took over, he moved to slash costs and tighten performance. The two property companies were integrated, shaving £2m from running costs.
Habits seem to have been relaxed under the old regime. “They weren’t making sure they collected the rents on time,” Egerton says. “There was a view that they owned the portfolio and that it looked after itself.” St Katharine, the flagship, was in a rather sorry state. “There was a dichotomy of views over whether we should be trying to make it attractive to the public or concentrate on it as an office domain,” he says.
Perhaps as a result, neither objective was pursued effectively. The office lettings were suffering from having too many small tenants, breaking up floor areas and deterring more substantial businesses. At the low point, rents were down to £15 per sq ft (£161.46 per m2) with three-year rent-free periods. Now Egerton is conceding 18 months and achieving £20 per sq ft (£215.29 per m2). This is still half the level achieved in the late 1980s.
International House, the largest building in the 500,000 sq ft (46,500m2) complex, is seeing some cosmetic improvements to its common areas. Removing the rabbit warren of small suites will add 10% to 20% to lettable space. Refurbishment is costing about £6 per sq ft (£64.59 per m2) and will give a “£5 to £7 per sq ft (£53.82 to £75.35 per m2)” lift in rent.
Full redevelopment is still some time off. TayWood has permission to replace the 100,000 sq ft (9,300m2) Europe House, which stands at one corner of the Dock, with a 175,000 sq ft (16,300m2) office scheme. But Egerton will not send in the diggers until rents top £30 per sq ft (£322.93 per m2). This could be some while away, since even a year out he still expects only “£22 to £23 per sq ft (£236.81 to £247.58 per m2) and a nine-month rent-free” on his best space.
TayWood is a major housebuilder, but the property division also has its own upmarket housebuilding operation. Its principal project has been Kensington Green, W8, the 5 acre (2.02ha) redevelopment of the former St Mary Abbot’s hospital site. TayWood has achieved £450 per sq ft (£4,843.92 per m2) in Kensington, selling mainly to overseas buyers. In March it will start building a 205-unit scheme at St Katharine using Kensington as a model. “Here the sales value will start with a £300,” Egerton says. As at Kensington, he expects Far Eastern customers to cheerfully buy from the plans.
To improve the attraction of St Katharine, TayWood has joined with the Tower of London and other neighbours in a £1m research project. Half the cash has been provided by the National Lottery’s Millennium Fund. TayWood’s part of the study is to investigate ways to improve direct access to the the riverside from Tower Bridge. The Tower itself is looking at ways to refill its moat, which currently boasts a tennis court and children’s playground but no water.
Despite its problems, St Katharine is sure to remain a key part of the portfolio. It currently makes up around two-thirds of the £180m UK office element. The rest of the portfolio is divided 60:40 between retail and industrial.
TayWood owns six modern shopping centres, the biggest being the 275,000 sq ft (25,600m2) Cascades in Portsmouth, Hants, which opened in 1989. Only one centre, the Chineham in Basingstoke, Hants, is owned freehold. The others are still held by the local councils, but Egerton is keen to get his hands on them. Two years ago he paid £1.7m for the Chineham freehold and achieved a £3m rise in valuation.
That deal was achieved just before the deadline for councils wishing to keep 90% of the disposal proceeds instead of the usual 50%. A new 90% window opened in September, so Egerton hopes to persuade the other councils to sell out. Apart from possible freehold purchases, the only other new spending is a 45,000 sq ft (4,200m2) third phase at Chineham. Department store Allders has taken up 75% of the new space.
On the industrial side, TayWood is distinctly more active, and is engaging in some speculative development. In 1987 it bought a large office and industrial estate in Warrington, Cheshire, from the New Towns Commission. “It’s been very good for us over the past five years when the South East was suffering,” Egerton says. In July he raised £6.5m from disposals in Warrington. They were modern sheds and fully let, so there was little left to be squeezed from them.
A 60,000 sq ft (5,600m2) scheme in Reading, Berks, was launched speculatively. “As soon as you start, it’s staggering how tenant demand builds up,” Egerton says. Despite this success, he wants to keep deals “small and frequent” to reduce risk.
Egerton sets a 10% to 12.5% target internal rate of return. This might seem a little leisurely. After all, Pillar Properties, an independent quoted company, aims to make at least 15% per year over a five-year investment horizon. Assets which do not look promising or which seem mature are put up for sale. The principles seem to be the same at TayWood, but the pace and the proclaimed target are different.
In the US and Australia, there is still around £28m of property, but all of it is earmarked for disposal. This leaves the £69m mixed portfolio of Monarch, TayWood’s 59%-owned Canadian offshoot. Its office properties have suffered in Toronto’s oversupplied market.
Looking to the future, Egerton sees UK conditions remaining much as they are at the moment. Active property companies will compete to serve pockets of undersupply, he says, pointing to the 209,000 sq ft (19,400m2) office development scheme in Reigate, Surrey, which will be completed next summer. Yet it seems the flights of imagination which got St Katharine’s started, will be kept firmly in check.
Egerton would like to venture into the strongly-performing out-of-town leisure property sector. But he must fund all acquisitions from the division’s existing resources. Other companies might be looking to sell their town-centre shopping centres before more trade drains out-of-town.
Egerton clearly needs to tidy up their ownership before he can sell for the best prices. He is confident that planning restrictions will stop much further erosion from the High Street.
TayWood’s UK contracting arm is still in trouble, but he scoffs at the idea of bringing forward some schemes to help in easing the order famine. This might well break all the rules of business sense, but why else does a contractor stay in property investment at all?
Longer term, contracting is moving from being a net provider of capital to a net user. The £450m buried in bricks and mortar, and the £39m rent roll, will look a steadily more tempting target for other divisions to raid. Perhaps the pavilion beckons for the plucky batsman.
