Mike Prew and his fellow equity analysts at investment bank Jefferies have said the planning refusal for a GPE development on London’s South Bank gave the developer “a lucky near miss”, warning that any such schemes underwritten before 2022 are now “likely unprofitable”.
The analysis came in a new note from the investment bank in which it downgraded earnings for GPE and Derwent but added that the developer-trade business model of both is “resting, not broken”.
GPE has had two planning applications at New City Court, SE1, refused – one submitted in December 2018 for a 372,500 sq ft scheme and another in 2021 for a 389,100 sq ft scheme. The company appealed for non-determination on both, following which there was a planning inquiry and then a refusal from the planning inspector and secretary of state. GPE said last October that it was “carefully reviewing” the refusals.
Prew and the Jefferies team now say the refusals were “a lucky near miss with planning barriers getting higher and costlier”. The analysts compared their own development assumptions from the time of underwriting with current valuing and cost variables.
“For the underwriting scheme we have used the initial [2006] acquisition price of circa £43m,” the Jefferies team said. “Our analysis highlights that based on today’s assumptions, with a rise in interest rates, yield expansion and higher construction costs as well as the planning delay the scheme would not be profitable – -16% profit on cost – whereas the underwrite scheme we think was achieving a circa 15% normal profit on cost.”
To turn a 15% benchmark profit on cost for the delayed scheme, Prew and colleagues said, the land value would need to be roughly £45m – and yet land prices are now down “as much as 40% on 2022”.
“The site is an income-producing development option, and on written-down land values and possibly higher rents/lower yields and costs, a revised scheme, possibly lower rise thus cheaper to build and less contentious for planning, should be viable,” they added.
Jefferies has lowered its price targets for GPE and Derwent to 343p and 1,863p respectively. As of late morning on 25 January, the stocks were trading at 407.2p and 2,082p.
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