Tristram Gethin, co-founder of development manager Quadrant Estates is a busy man.
Tasked with overseeing the development of nearly half a million square feet of prime City office schemes in just 18 months on behalf of some serious money, the former Chesterton City agent has quite a challenge on his hands.
Quadrant, the small property company led by Gethin and former Wereldhave and Capital & Counties development expert Chris Daniel, is overseeing the development of three major City schemes on behalf of wealthy fund backers.
If you exclude the Square Mile’s newly minted crop of towers (many of which face an uncertain future), that’s almost a third of the entire 2014 development pipeline for the UK’s most prominent property market (see chart). And it is getting on with all of this without committed prelets.
Already the company has appointed Skanska to start construction on the £140m Moorgate Exchange, EC2. At 100 Cheapside, EC2, it is set to start building a 94,000 sq ft office and retail block in March 2013. And after completing a deal last week with Orion Capital Managers to buy the 120,000 sq ft Carmelite building, EC4, from Aberdeen Asset management, where it is due to start work in November 2012.
Standing on the balcony of CBRE’s City office overlooking the London skyline, Gethin says it’s the perfect time to start developing for those lucky enough to be able to do so.
“Now is the first time in the life of the company that we have been able to buy in opportunities at entry values which we feel comfortable with,” he says. “When we started out some of our schemes were in central London, but we haven’t really seen an appropriate window to come back into the market until more recently.”
With a near total freeze on funding for speculative development and a lack of existing stock Quadrant, like other developers, is hoping to take advantage of an estimated 12m sq ft of demand likely to become acute in the City market over the next three or four years.
To do so, it is turning to cash-rich fund manager investors such as CarVal Investors, MGPA and Orion Capital Managers to fund the development of what it thinks will become a rare and much sought-after commodity – prime City offices.
As development manager, Quadrant only acquires a small stake in the schemes it is working on. Instead it takes a management fee for its work putting together and developing out projects; a process that starts with finding development opportunities, leading the acquisitions, appointing and co-ordinating professional teams including agents and contractors, securing debt finance where necessary and overseeing lettings and sales.
On each of Quadrant Estates’ three present major City schemes it has a funding partner with deep pockets. In some cases more than one.
At Moorgate Exchange, EC2, a £140m redevelopment of the former telephone exchange, Quadrant is working with MGPA and CarVal Investors.
At 100 Cheapside, a 94,000 sq ft office and retail scheme, it is again working with CarVal, together with Orion European Real Estate Fund III and the City of London Corporation.
For the latest development Carmelite Court, Orion has returned for yet more repeat business.
So why are those funds choosing to invest via Quadrant? MGPA’s UK country manager George Graham praises the firm’s market knowledge. CarVal’s senior managing director for real estate Robert Balick points to the company’s ability to get that information quickly.
Quadrant’s pitch to investors is convincing in its simplicity: Take advantage of the looming supply squeeze to build speculative office schemes at a time when there is little competition. Do this and you will not only find tenants aplenty when the project is built, you’ll also find risk averse sovereign wealth funds and UK institutions biting your arm off to buy it, should you wish to sell.
Of course Quadrant isn’t the only company to have hit on this idea. Stanhope and Moorevale are also working on schemes such as 8-10 Moorgate and 63 Mary St Axe respectively.
“The debt factor is major,” says Quadrant co-founder Chris Daniel. “It is suppressing prices, because although end-capital values for commercial and residential schemes are high, there is now a sufficient margin in any development appraisal because there is no debt. That is keeping a lid on prices and therefore providing a risk-adjusted return that allows equity backers and investors sufficient attraction to invest.”
Yet fee-paying development management work is not to the taste of all. Quadrant’s 15-year history has mostly been spent developing projects in London and the Home Counties financed primarily by the banks (see below).
When bank funding dried up after the economic downturn, the company faced a crossroads: stick with smaller development projects for which it could get debt funding, or change strategy and seek bigger schemes where it could take on a development management role.
The former was the choice of fellow founding director, Duncan Mason. The difference of opinions led to Mason departing the company 12 months ago.
“Over 2010-11 it was apparent that we wished to pursue an alternative strategy and there was a divergence of views [with Mason],” says Daniel. “We decided to pursue an asset enhancement and development management platform for a small number of equity investors with whom we maintain very close relationships, because we believe we have the skills to apply to large-scale development or aggressive asset management situations on their behalf.
“That’s a skill set that’s in demand from a number of third-party equity investors who have extremely good platforms for raising money and deploying it but require our coal-face skills to actually implement their strategy.”
Following the split, Gethin and Daniel re-angled the firm to chase big City schemes with the help of new arrivals, including Graham Tyler who joined the company as a director last month following four years at fund manager MGPA. Alexander Newport completes the quartet, having recently been promoted to director aged 32.
So with a new team fully in place, and potentially more recruits on the way, will the aggressive City expansion continue, or is the company at capacity?
“We are selectively looking for more opportunities,” says Gethin. “Particularly central London mixed-use schemes.”
Quadrant’s history
Quadrant made its debut in 1997 managing the development of UK & European Investments’ 156,000 sq ft makeover of the former British Rail offices next to Euston station, NW1, followed by office developments in Leadenhall Street and Cornhill in the City.
This was followed over the next decade by a handful of smaller projects developed off its own back.
In May 2000, Quadrant acquired a 12,000 sq ft car showroom in Bury St Edmunds, Suffolk. The premises were extended to 20,000 sq ft and the freehold sold to LA Fitness. Next, Quadrant, with forward-funding from Scottish Widows, developed the Hedge End Trade Park in Southampton.
Larger projects soon followed and in 2006 it started on the 96-acre, 100,000 sq ft Eureka Park in Ashford, Kent, with joint venture partner Trinity College Cambridge.
More recently it has taken on sizeable schemes such as Turner Rise Retail Park in Colchester, a 125,000 sq ft retail park in joint venture with Schroders Exempt Property Unit Trust and Trafalgar Wharf, a 23-acre site mixed use 450,000 sq ft project in Portsmouth.
Quadrant Estates has invested in around £800m of commercial assets since 1997 and currently has a development pipeline of around 2m sq ft with a gross development value of current projects of over £1bn.
It holds its assets in at least 12 separate special purpose company vehicles. According to the most recently filed accounts at Companies House, subsidiary Quadrant Estates Limited has assets of just under £1m.
