CapCo has racked up a £2m bill for its “constructive early steps” on its path to a potential demerger and other one-off costs, its chief financial officer, Situl Jobanputra, has revealed.
The FTSE 250 firm confirmed in May that it was considering splitting the company into two parts – one holding the Covent Garden portfolio and the other its Earls Court development scheme – as looks to turn around its ailing fortunes.
It is also now considering new usages at its troublesome Earls Court project in order to combat the struggling luxury residential market in the capital.
Should the demerger happen it is expected to be formalised by the end of the year, meaning everything would be in place for completion in early 2019.
READ MORE: What would a CapCo demerger mean?
Ian Hawksworth, chief executive at CapCo, said: “Overall I think the shareholders understand the potential of these assets and there’s a logic towards creating two wonderful businesses, and it does enhance the strategic flexibility to deliver value over time.”
He added that it was “now an appropriate time for the board to consider the structure of the group and prepare for a possible demerger” after the readying of Earls Court for physical development and the acceleration of the income profile of Covent Garden.
“The benefit of separation of the two estates would provide increased strategic flexibility and allow each business to attract the most appropriate shareholder base,” he said.
Less dependency on residential
Hemant Kotak, managing director at Green Street Advisors, considers the move away from residential for sale to other sectors of the market at Earls Court a good idea by CapCo.
“In the current stock market environment the weak rating on the residential is really weighing on the stock price.
“So I think they are trying to make it less dependent on residential for sale, it will still be a resi-led scheme, but trying to do PRS and also incorporating student accommodation and senior living makes a lot of sense as investors still want exposure to these segments. It could be attractive if executed in the right way and done quickly enough, as the yield on cost could be in between the 5.5% to 6% range.
READ MORE: Demand falls for London luxury flats
“The primary reason for switching that focus from residential for sale is that you can develop at a quicker pace and that’s really important in generating the requisite returns.
“The point about bringing in extra partners and capital is really to do with how quickly they can offload the sites and start generating an income as quickly as possible to help their return profile.
“They are looking to sell off parcels of the site, but CapCo will have to consider the plans those developers have so that it doesn’t compete with their own plans. Bringing in partners can help de-risk the site for CapCo.
“Greater clarity is needed as to what each of the separate companies will do; with Earls Court in particular detailed strategic plans need to be laid out so that investors can judge the merits of the new company.”
Current market sentiment
Since the second half of 2015, the value of the 77-acre Earls Court site – prior to the sale of the Empress State Building in February, for £250m, to its long term tenant the Mayors’ Office for Policing and Crime – has fallen by half, going from a peak of £1.4bn to £707m as of the end of June 2018.
The most recent drop in value was down to the valuer taking a “more conservative view on gross development value and the cost of delivery together with a higher developer’s margin,” CapCo said.
Gary Yardley, managing director and chief investment officer at CapCo, said: “As we’ve previously highlighted, valuations represent a point in time and do not reflect the long-term potential of this unique piece of London and the underlying inherent investment opportunity that we have available.”
“We’re very comfortable with JLL and their views on the market. It reflects current market sentiment.”
Hawksworth added: “It’s a valuer’s assumption. Whether that’s appropriate for somebody who might wish to invest in part of the scheme, I don’t know.
“The next iteration of value comes from someone actually doing something on the site.”
Dealing with interest
CapCo has confirmed that it is looking to bring in third-party capital to progress development at the scheme, following months of reports of interest in the site from the likes of Berkeley Homes.
“We’ve always had a lot of interest in Earls Court, we’re now ready to deal with that interest. It’s now incumbent upon the business in whatever guise that is, demerger or otherwise, to look at how we start to maximise and realise that value with our partner TfL,” Yardley said.
“Someone’s got to take forward the development itself.”
Yardley added that interest from PRS providers and senior living providers, as well as educational establishments, had been received and that the site was also attractive for offices, leisure and retail as well as cultural uses.
“We’re working with a number of potential parties that will be interested and we’ll try and bring that forward to fruition as soon as we can. Some of that may require revisions to planning, some may not,” he said.
“There’ll always be opportunities to improve planning around the site and to make it reflect more appropriately what London needs going forwards. That’s an ongoing process going forwards, for anyone to carry out.”
On the ground at Earls Court
Demolition works at Earls Court completed in February. A further 12 months of minor enabling works across the site is expected.
Basement works have already been carried out on a block at Lillie Square, near the main Earls Court scheme, which would be the first phase of replacement housing for residents of the West Kensington and Gibbs Green Estates, on which CapCo has exercised its option under a conditional land sale agreement. To date it has paid Hammersmith & Fulham Council £75m of the £105m cash consideration.
CapCo is developing Lillie Square in joint venture with the Kwok family, and reported that 217 residential units have been handed over to residents, with sales of the nine remaining units continuing in progress.
In phase two, 153 of the 186 units have been reserved or exchanged, of which 60 transacted this year. This included the exchange of contracts with an unnamed international investor for 49 apartments and 31 parking spaces, which make up one of the four blocks in phase two.
Covent Garden – Capco’s golden child
The Covent Garden portfolio, which has seen better than expected rental growth in the first six months of 2018, also saw its value increase by £36.1m to £2.6bn, while the Earls Court development scheme has lost a further £53.2m, which includes £1.2m of capital expenditure, or 7% like-for-like in value, dropping to £707m on the back of ongoing weak sentiment in the market for prime residential.
It continues to drag on CapCo’s results and meant its overall portfolio valuation was down £17.1m to £3.3bn.
CapCo holds 1.2m sq ft of Covent Garden, equating to 514 units within 78 buildings.
Recent success for the portfolio has included securing one of the world’s most famous jewellery stores, Tiffany & Co, which opened up this month on James Street, WC2, and Petersham Nurseries, which will open two restaurants in May.
The development of Floral Court also completed this month, providing 85,000 sq ft of space with eight retail spaces, two restaurants and 45 apartments, of which the 16 heritage apartments on King Street have all been leased and the 29 new-build residential units are being prepared for sale.
Plans, which include proposals for office and retail space, are being reviewed for an island site at the southern side of the estate known as the Wellington block, where CapCo has completed assembly after picking up 23 Wellington Street, WC2, for £10m.
In addition, 26 new leases and renewals were completed during the first half of 2018, with occupancy across the portfolio sitting at 97%.
Covent Garden, which brought in net rental income of £25.1m for the first six months of 2018 – up 11.6% on the same period last year – accounts for 79% of the company.
This has been previously published in the EG magazine with the title “Earls Court slump drives CapCo demerger”.
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