by Carl Mortished
“Clearly what we will see in the 1990s is finance-driven projects. It does not matter how good they are — unless you have got the right finance you won’t succeed.”
For Stuart Lipton, chief executive of Stanhope Properties (below), getting the funding right for over £1.8bn of property is his major concern today.
The emphasis on money management has provoked an internal shake-up at Stanhope, with finance director Nigel Wilson promoted to group managing director. Project directors now have to report to Wilson and are assigned specific cost, cash and profit targets.
The company owns 50% of Rosehaugh Stanhope Developments whose total debt stood at £1.2bn last June. Add to that other joint ventures — Stanhope Kajima and Stanhope Trafalgar — and Lipton is looking at some £800m of off-balance sheet borrowings, most of it at short-term rates.
“We want to be out of short-term debt and that can come in various ways. It can certainly be done in a sale — we are offering No 6 Broadgate — and it will certainly be done in a refinancing,” says Lipton.
Banking is not his favourite topic of conversation. He will gladly talk your leg off about architecture, modern art, even the history of the City of London. He is a member of the Royal Fine Art Society; staff in Stanhope’s opulent premises in Lansdowne House, Berkeley Square, are treated to an exhibition of Lipton’s taste in painting. Canvases are changed once a month to allow everyone a chance to view the complete portfolio.
Lipton started his working life as an estate agent with Yates & Yates, doing office agency work for eight years before launching his own small projects in the late 1960s. “My first major project was 38-70 Fitzroy Street — 6,000 sq ft of offices … in those days apart from shell and core we used to provide carpets and telephones, as much as we could, the complete opposite to today.”
In 1971 Lipton moved into Sterling Land with Geoffrey Wilson and Peter Olsberg where he had an 11% stake; that was sold with the company in June 1973, shortly before the property market collapsed. In 1976 Lipton and Wilson formed Greycoat and developed Cutlers Garden and Nos 1 and 2 Finsbury Avenue. Seven years later Lipton left Greycoat, founded Stanhope and, in the same year, established RSD, the joint venture with Rosehaugh.
Today there are three other partnerships: Stanhope Kajima, majority owners of Stockley Park, is a development in which Stuart Lipton has been involved since 1984; Chiswick Business Park, a joint venture with Trafalgar House, is a 32-acre former London Transport garage with planning for 1.5m sq ft of offices — development finance of up to £200m is currently being negotiated. Then, there is a 32% stake in the mammoth London Regeneration Consortium, established in 1988 to develop 134 acres at King’s Cross Station.
Finally, there is Stanhope County. The partnership with County Natwest was set up to buy investment sleepers with redevelopment potential. A property on New Oxford Street, let to the MOD, was purchased last year for £7.5m.
Lipton is no dreamy aesthete; he just wants everyone to work in a beautiful building, preferably built by Stanhope. The 1987 flotation prospectus said that the company would produce “developments which combine aesthetic appeal and architectural merit … and which command premium rents in locations with outstanding growth prospects”. Broadgate, the RSD flagship office complex at Liverpool Street Station in London, epitomises the Stanhope philosophy. The 3.3 m sq ft of offices — designed by top British and American architects — have attracted top banks; 3m sq ft are completed and let. Stanhope’s net asset value, including Broadgate surpluses, grew from 118p at flotation to 275p in June 1990.
But last month the company shocked the City with a £25m write-down on the value of its development properties. That resulted in a £34m loss for the six months to December, and Stanhope warned that the income shortfall would continue for the next six months.
More than half of Stanhope’s properties are in the joint venture with Rosehaugh, and that means that the value of Broadgate is under-pinning Stanhope’s net assets. Stockbrokers Kleinwort Benson believe that the complex is over-valued.
Kleinwort’s argument runs: assuming current rental values of £45 per sq ft, RSD has been clocking up Broadgate revaluation surpluses on yields of 7% to 8%. But with rents in the City falling and overseas investors thin on the ground, a yield of 9% is more appropriate, says Kleinwort. That would mean, using broad brush figures, a £240m write-down on RSD, shared between the two companies.
The brokers also query the potential of Ludgate, another RSD giant. The 525,000-sq ft project has been prelet to Coopers & Lybrand Deloittes at a rumoured £27m pa. With costs estimated at £360m, Kleinwort reckons that RSD needs to achieve a yield of 7% to break even. Kleinwort’s prognosis ends by hammering Stanhope’s net asset value from 276p last June to an estimated 175p.
Lipton agrees that, in general terms, values are falling, but he defends Broadgate from its detractors. “At Broadgate we have let space in the mid-£40s for a long time; we were never greedy about it,” he says. “People who have got the idea that top City rents were in the mid-£60s have got a different situation. They are going to have to come off 25%. Our rents are not going to be doing that.
“There is a lot of talk about bargains. I personally have not seen many bargains. People are buying income streams: properties let at astonishing rents in slightly strange locations. Most of the yields you are seeing at 9% or 10% are, in reality, 7% or 8% yields. Joe Public would have no difficulty in saying that the rental in that building was excessive.
“Clearly, we all have built too much space. But what you are not seeing now is the evidence that quality counts. I think that during the next 12 months, after a quiet patch, we are going to see active negotiations over buildings and I think that you will see that quality pays. To say that quality does not pay would be arguing with history.”
Or to put it another way: quality sells. But at what price? Goldman Sachs has been marketing No 6 Broadgate for over six months. Mischievous gossips suggest that London agents, aggrieved at losing a plum sale mandate to Yankee bankers, have been giving prospective purchasers downbeat advice.
Lipton concedes that RSD has a significant income shortfall. The last joint-venture accounts showed a £41m loss before tax, and recently the venture partners suggested that more Broadgate buildings are to be sold.
For Stanhope itself the picture is less clear. At operating level Stanhope lost £6m, but showed a pre-tax profit of £8.2m, thanks largely to interest receivable of £22m to June 1990. However, most of that £22m of interest receivable is being rolled up or owed to Stanhope from RSD and other joint ventures.
Lipton admits two regrets: building 250 Euston Road — he no longer likes mirror glass-buildings — and not giving sufficient emphasis to long-term financing in the 1980s. But, in one respect, Stanhope has the edge over its joint-venture partner in RSD. In 1988, Olympia & York, the Canary Wharf developers, took a 33% stake in Stanhope at 250p per share. The £137m investment by the Canadians has enabled Stanhope to hold on to its portfolio without going back to its shareholders for more money.
Failure to focus on long-term finance during the boom years can be put down to the prevailing optimism — soaring rents and capital values would solve all short-term problems. But a reluctance to sell may also have stretched Stanhope’s balance sheet. “My own track record has never been as a trader. So one’s goal is to keep as much as possible. But, that said, there are economics that go with it — you cannot keep everything, you have got to pay the rent and obviously we have been in a situation where our financing has been slowed down. There is no doubt about that, we would like to be further forward than we are.”
Today, the drive forward seems to have run out of gas. A £119m convertible mortgage launched last year on 200 Gray’s Inn Road has yet to find any takers. Commentators point to a high loan to value ratio of 85% and an aggressive yield on a property that some say is off pitch. Pricing may also be the problem at No 6 Broadgate while the syndication of RSD’s £280m financing of the Ludgate development stalled during the Gulf war.
When Stanhope’s shareholders boarded at 250p per share back in 1987, they agreed to forgo dividend in return for capital growth; Stanhope’s stated policy was to plough revenue back into properties. Now, some three and half years down the road, the shares stand at 75p. What those shareholders will want to know is whether further value will have to be given up in order to get the company back on to a firm financial footing.
Lipton dismisses market rumours that Olympia & York will inject a new layer of equity into RSD. The solution may come in sales, but will certainly include a bank refinancing. “The reality is it depends on interest rates, sentiment in the investment market and it depends on confidence in the country. Those are all risk factors,” he says.
In the meantime, Stanhope’s chief executive is concentrating on cutting costs. “We have been doing homework for the last 12 months trying to build at lower prices. We will benefit from changes in construction costs. But eventually we have to reduce costs through ingenuity. In the US, buildings cost two-thirds of what they do here and they build them in two-thirds the time. There is no reason why those costs should not be achieved here,” he says.
