Great Portland Estates has called the bottom of the commercial property market and is asking shareholders to back it with £350 million to buy and build more offices in London.
The value of the developer’s portfolio of offices has tumbled by 12 per cent over the past year to £2.3 billion, but it is convinced that those valuations are unlikely to slide any further.
“In the last 12 months inflation, interest rates, political uncertainty, all sorts of impediments to growth got in the way and you’ve seen what happened to the market,” Toby Courtauld, its chief executive, said. “However, rents are growing and [property] yields, by and large, have stopped moving. You can see that from our [office] valuations, with a very small movement in the past six months.”
He added that with office values having fallen sharply over the past couple of years, now was “one of those rare moments in time when you can pick up quality assets at a discount”.
Great Portland Estates has identified “mainly knackered, time-expired” buildings worth about £1.4 billion that it could buy to refurbish or demolish and rebuild. It has gone to its shareholders and asked them for £350 million to fund its ambitions by selling them new shares at 230p apiece, almost half what they were worth on Wednesday evening. Despite that discount, GPE shares fell a further 5½p, or 1.3 per cent, to close at 417p.
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Great Portland Estates is one of the biggest developers and owners of office space in central London. For the past 11 years it has sold more office buildings than it has bought or built, given its aim to sell when the market is strong and to buy during downturns. Indeed, in the aftermath of the 2008 financial crisis, it went on a buying spree, armed with an extra £300 million that investors had given it.
However, Courtauld, 56, said now was “very different to 2009”. While values have fallen by a similar amount, he said there was a “less clear picture on the rental story” 15 years ago. By contrast, Great Portland Estates’ rents rose by 3.8 per cent in the 12 months to the end of March. Over the coming year, it expects rents for the best London offices to rise by up to a further 10 per cent.
Courtauld said the “idea that the office is yesterday’s place of work is plainly nonsense”, with businesses increasingly demanding newer, better office space for which they are happy to pay a premium. Leasing agents have called this “the flight to quality” and the shortage of such space is why rents are rising. Great Portland Estates wants to plug this gap by buying older, less eco-friendly buildings and turning them into the modern, green offices that occupiers want.
“Just about every building that we’ll look to buy will likely have very poor sustainability credentials today, but once we’ve invested in it will be best in class,” Nick Sanderson, chief financial officer at Great Portland Estates, said. “We know that’s so vital for customers when they’re looking for new space. It’s not just what they want, but it’s what their employees want as well.”
Despite strong rental growth over the past year, the chunky drop in the value of its buildings pushed the business to a pre-tax loss of £307.8 million in the 12 months to the end of March, almost double the £163.9 million loss it recorded in the previous year. Excluding the valuation movements, operating profits were unmoved at £19.7 million. The final dividend, to be paid in July, was held at 7.9p per share.
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Rivals watch with interest as Great Portland leads
Bar the odd exception, such as Segro raising £900 million in February to buy and build more warehouses, few property companies have gone cap-in-hand to investors in recent years (Tom Howard writes).
The commercial property industry malaise, with values tumbling against the backdrop of soaring interest rates, has led to a reluctance among investors to keep their existing money on the table, let alone put in more. There is a feeling that sentiment is starting to turn, though, with interest rate cuts looming and occupier demand — especially for newer, greener buildings — holding up well. Most of the landlords updating shareholders in recent weeks have sounded a cautiously upbeat tone.
Great Portland Estates is testing this enthusiasm by asking investors for £350 million to develop more central London offices. Others are likely to follow if investors’ interest is as strong as Toby Courtauld, its chief executive, believes.
“No one wants to be first, but once someone has gone and the starting shot has been fired, you don’t want to be last,” Tim Leckie, a property industry analyst at Panmure Gordon, the broker, said. “We’d be surprised if we go through summer 2024 without at least British Land or Land Securities coming to market. Both companies at their [recent] annual results laid out a positive picture with rich opportunities, but did not pull the trigger on raising equity capital.”
One fund manager suggested that rival bosses would wait to see how Great Portland Estates, a high-profile name with a respected management team, fares: “If it is successful, then some of them will think about [raising money], because they could all do with some money to help their development pipelines.”
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Deal-starved bankers are expected be “falling over themselves” to get their clients to follow Great Portland Estates. Five banks — Bank of America, Deutsche Numis, JP Morgan, Santander and Lazard — are all on the developer’s ticket, desperate for a cut of the fees.
“The banks will be pushing for it and it’s obviously helpful that a high-quality company is raising money, so certainly others will be looking at this,” John Cahill, at Stifel, said. “But floodgates opening? I’m not sure about that.”
