Row erupts over High Street Group scheme in ‘false claim’ accusations

Edmond de Rothschild REIM has issued a legal warning against the High Street Group, alleging that the developer circulated false claims to loan note investors and acted with “malicious falsehood”. In a letter to chairman Gary Forrest on 6 September, seen by EG, EDR’s lawyers claim HSG falsely told loan note investors that it has an investment at Birmingham’s Kent Street Baths scheme, which would remain in the build-to-rent project until completion. The letter quotes a proposal that HSG circulated to loan note investors in July, stating that the investment fund “insisted” that its equity deployment “remains within the project until completion”, including a “loan note investment”. The proposal also stated this was a “stipulation of the forward funding agreement”. EDR alleges the statements were “false and dishonest”, adding that they are likely to cause “pecuniary loss” for the company. The fund’s lawyers also accused HSG of using EDR’s logo without consent on the proposal, giving “the entirely false impression” that EDR authorised the publication, while also breaching intellectual property rights. The letter alleges: “You have sought to blame our clients for your unwillingness and/or inability to repay your investors.” HSG has hit back at these claims. Forrest told EG that HSG has a £10m contract with EDR for the scheme, including the final “bullet” payment and the commercial space. He said the money included a substantial amount of equity from the loan note investment. Growing tension EDR, then known as Cording Real Estate Group, purchased the site in 2019 from an HSG subsidiary and simultaneously entered into a funding and development agreement for HSG to act as developer and deliver the finished scheme. On 27 August, the fund’s special purpose vehicle for the site, EdRRI Kent Street Birmingham Sarl, served HSG’s SPV a notice of termination, with intent to end HSG’s involvement in the development. EDR has demanded that HSG remove the scheme from its website, provide a list of loan note holders that were contacted with the information and agree a statement to be shared with those individuals. As well as Kent Street Baths, EDR previously bought two other BTR schemes from HSG – Cheshire Junction in Warrington, and Brett Wharf in Gateshead, where HSG also owns the commercial space. Wider challenges The legal dispute comes as many HSG loan note investors are looking for answers after HSG locked down the loan notes, preventing early redemptions. HSG has passed a number of schemes and indemnity for repayment to new brand Hadrian Real Estate under chairman Andrew Marsh and former HSG managing director Gavin Fraser. HSG has claimed to be the largest BTR company in the UK, with a pipeline in excess of £1.5bn. Established in 2006, the group launched its largest loan note raise in 2018, seeking £100m from high-net-worth individuals while promising annual returns of 12%, rising to 22% at the end of the term. The group has a three-year loan note and project-specific 12-month bonds for Kent Street Baths as well as two other schemes: Manchester’s Arundel Street, which is owned by Andrew Flintoff’s Logik Developments, and Strawberry Place in Newcastle, previously owned by Mike Ashley. For at least the past two years, HSG has been in protracted talks to take forward 164 flats at Logik’s site as PRS to be sold to a fund. At Strawberry Place, HSG claims it has been unable to progress development due to difficulties securing prelets for the large proportion of commercial and hotel space. Last month, lender Reditum Investments took control of the SPV owning Strawberry Place and a separate vehicle that owns the completed Hadrian’s Tower in Newcastle. The latter also includes a charge of money outstanding and owed to contractor Tolent Construction. HSG said it still has interest in both and will seek to take these back and complete and sell the schemes. Other schemes include Invesco’s Holloway Head in Birmingham, after a forward funding agreement in 2019. Invesco declined to confirm if HSG retains any investment in the Birmingham scheme and Forrest said there will be an announcement shortly on this scheme. HSG previously listed Tony Gallagher’s Stone Yard scheme as its largest scheme after seeking to buy the site last year, telling investors it forecast £27.6m in profit from the 1,000-home scheme. However, this has since been removed from the website. Creditors take action HSG has a large number of SPVs. High Street Grp Limited, its main company vehicle, is late to file accounts for 2019, which were due at the end of 2020. Forrest said they will be filed when the company restructure has completed. This April, PwC auditors resigned, claiming HSG management had failed to provide accurate and timely information for a reliable audit of 2018 accounts, which was instead completed by Haines Watts. Small investors backing HSG’s bonds have joined forces as part of a creditor action group. The group said it has pursued legal action to recoup funds and lawyers recommended the site could “galvanise as a collective”. Creditors say they have struggled to reach the new company Hadrian, with calls and e-mails unanswered. Last week, Forrest wrote to investors assuring they would be contacted by Hadrian Real Estate. In his letter he also blamed “adverse social media” campaigns for the loss of a 2,000-home platform deal that would have generated £175m for the company. Forrest said comments about the company on a blog called the Bond Review had led to the loss of deals with “a major investment fund” and “the world’s largest asset management company”. Two further deals with investors were subsequently lost this year for the same reason, according to Forrest. A new framework has since been agreed with Hadrian Real Estate, allowing for the sale of all the PRS assets previously listed in HSG’s portfolio, with a development value in excess of £600m. However, with the process in play and debate over ownership, investors are still trying to understand how their money will ever be returned. To send feedback, e-mail emma.rosser@eg.co.uk or tweet @EmmaARosser or @EGPropertyNews