Two years after Development Securities approached its shareholders for the first of two capital raisings, the quoted developer is nearing the end of a spending spree.
Chief executive Michael Marx announced this week that the company has now spent more than £150m of the net £188m raised, completing 43 deals – including 14 in the year to-date.
But over that latest period, with values stagnating outside central London, the company has also slipped back into the red, reporting a pretax loss of £1.3m for the six months to 30 June compared with a £0.8m profit for the same period last year and a £2.6m profit in the full year results for 2010. Net asset value per share dipped to 269p from 272p at the end of last year.
Nevertheless, Marx is upbeat about the company’s prospects in the tough and uncertain climate and insists that DevSec’s acquisitions strategy will pave the way for a very different set of results for the year to December 2012.
“We gave shareholders an estimated 18-month investment time and that finishes in February,” says Marx, who began his career as a chartered accountant and joined the business in 1994.
“The capital enabled us to double the size of the company,” he says. “It was a reward for surviving the big crashes and for our having identified a strategy.”
Why we buy
That strategy is focused on buying up secondary assets – typically in joint ventures – and transforming them into prime sites, or near-prime. “We don’t buy real estate for market momentum,” Marx says. “We won’t buy because we think rents are going up and yields are going down. We buy if we think we can change a site.
“Our average hold period of these assets is three to three-and-a-half years. It takes that long to change and convert a property.”
By the second half of 2012, Marx says he intends his disposal of these assets to be in full swing. They include the Manchester Evening News Arena, which DevSec bought for £62m, a 7.15% yield, in 2010 and now owns jointly with Patron Capital Partners.
Marx envisages a 25% leveraged IRR on most of the projects DevSec has accumulated over the past 24 months.
The firm has already begun its exit of some of them. For example, part of Westminster Palace Gardens, a joint venture office-to-residential conversion bought for £10.1m last year, has now been forward sold. DevSec says it is anticipating a £4m profit with an IRR of 45% on the whole scheme.
Cash-rich position
It has certainly been an intense period for the business as it looked to capitalise on its cash-rich position in the debt-starved market. Most of its activity has been in London, but almost entirely in the outer districts, where values are lower.
“We believe we will make more this way rather than just investing everything in the central London market,” Marx says.
One exception is its recent joint venture with Brockton Capital to buy a 14-storey office and retail block, Newcombe House, in Notting Hill for £47.5m. Brockton took a 75% stake through its Brockton Capital Fund II, while DevSec took 25%.
Outside the capital, smaller deals have included the Colston Tower, a multi-let office building in Bristol, bought for £7.6m in June 2011, and an office block in Woking, bought for £6.6m in March.
Marx adds: “The people from whom we are buying are often under some form of stress because they lack capital, and banks are not extending credit. A lot of people are in pain and need to sell real estate.”
However, not all of his firm’s acquisition ambitions have been realised. DevSec teamed up with US private equity giant Carlyle to bid for the high-profile Shell Centre redevelopment and made it to the final shortlist in March.
But in July, DevSec announced it was pulling the plug on the joint bid. Marx will not comment on the decision. However, sources say the consortium’s dignified withdrawal was prompted because it became increasingly clear that Canary Wharf Group and partner Qatari Diar were going to win the deal.
Marx will be hoping that DevSec’s work with Carlyle was not in vain, at least. “We’ve known them for a long time,” he says. “When you work with people as intensely as we did for the Shell bid, we found that we were very compatible, in terms of personality, culture and business points of view. We worked with them before and during the Shell bid, and will continue to do so.”
Note of caution
DevSec said this week that it would continue to seek out large-scale projects in central London, but added a note of caution from chairman David Jenkins: “It seems to us that the weight of money seeking to enter this market has driven land values to a level where we are rarely able to justify the rental tone and exit yields that would be required for an economic, risk-adjusted return,” he said.
The downside for DevSec is that its direct portfolio – located entirely outside central London – benefited from only a modest £1.3m revaluation surplus over the past six months, thanks to asset management rather than any improvement in yields.
However, the business remains well-placed: it still has around £40m of cash left to invest between now and February, net gearing stands at 47% against NAV, and the business is currently in talks with Scottish Widows to finance its £250m, 275,000 sq ft Hammersmith Grove mixed-use project in West London.
Marx concludes: “We won’t need to ask shareholders for any more money. A lot of our projects are coming close to financial realisation, which we can recycle back into the business.”
