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Other development and trading activity

Other development and trading activity

The market is currently characterised by a dearth of new funding from the banks, the traditional providers of liquidity to the development marketplace. Having access to capital, we have considered a range of opportunities arising for this reason, and selected a number of acquisitions offering strong returns.

Residential developments
Bank portfolios

Mixed–use developments

These projects are across a range of sectors and regions, with the common features mostly being their requirement for equity and for significant and often complex added value components. These projects are generally controlled by the Group, sometimes in partnership with others, working with specialists to access sectors or regions which are new to us.

Retail developments

In March 2010, we acquired a shopping precinct and car park in Hale Barns, an affluent suburb of Manchester. We have submitted a planning application for a comprehensive redevelopment comprising a 30,000 sq. ft. food store which has been pre-leased to Booths, 12,000 sq. ft. of further retail accommodation and 24 residential units. We expect to obtain planning permission shortly and, subject to resolving the final vacant possession issues, will be commencing development later this year. It is likely that the scheme will be developed in conjunction with an institutional development partner.

At the Wick Site in Littlehampton, we were sufficiently encouraged by the site’s planning potential to take a surrender of the occupational leases for a reverse premium of £4.9 million. We now have a seven-acre development site held in our books at an industrial land valuation which should offer significant upside if a retail-led planning consent can be secured.

Residential developments

We believe that selected residential markets offer interesting demand/supply dynamics and we have reviewed a number, along with specialist partners.

At Westminster Palace Gardens, London SW1, which we acquired in June 2010, we have secured planning consent for the change of use of 22 office suites to residential use and have obtained vacant possession of the majority of these units. We are now preparing the tender for the conversion works. The continued strength of the Central London residential market is encouraging and we hope to exceed our original forecast returns from this development.

Since the year-end we have completed the £5.0 million acquisition of a single dwelling house on the Sandbanks peninsula, Dorset06, which has planning permission for demolition and redevelopment as four luxury apartments. Development works will commence immediately and we are hopeful of securing early sales. Interestingly, of the 60 deals undertaken on the peninsula in 2010, only eight required mortgage finance. Our ability to transact with cash allowed us to secure the opportunity at an attractive entry price, since local and regional developers lacked access to capital.

Mixed-use developments

We continue to believe that the suburban London market will offer interesting mixed-use development opportunities as the demand for residential accommodation in London continues to be firm. This activity continues to build upon the principles of density of development and mix of uses that we secured earlier at our Colindale, London NW9 development.07

To date, we have secured two new opportunities in this sector. In May, we entered into a joint venture with Orion Land & Leisure Limited to fund the planning and land acquisition costs to facilitate a 300,000 sq. ft. mixed-use residential and retail development in Shepherds Bush, West London. Since entering into the joint funding arrangement we have been selected as preferred developer by the London Borough of Hammersmith and Fulham and entered into option agreements with the key landowners. A planning strategy brief for the area has also been adopted and we are now preparing to submit a planning application in the second quarter of 2011. An assessment of our development options will be made once planning consent has been obtained.

In September we entered into a joint funding arrangement with Cathedral Group to promote a 2.5 acre site in Greenwich, South East London, for a 300,000 sq. ft. mixed-use development. Simultaneously, we entered into a contract, conditional on planning, for the site purchase and have recently submitted a planning application for our proposals which we are hopeful of seeing consented in the second quarter of 2011. We are already in discussions with end users for the hotel, affordable housing and student accommodation with a view to securing early commitments conditional upon planning. The strategy in respect of the private residential accommodation will be determined later.

We are in early stage negotiations on two further, similar projects in East London which are food store led mixed-use schemes incorporating a residential element. Both schemes are situated near major transport interchanges.

Since the year-end we have acquired for £4.3 million an industrial and office complex in a residential area of Watford, Hertfordshire. Currently yielding circa 8.5 per cent, we intend to secure residential planning consent on the majority of the site, retaining part of the site for employment uses. This granular activity has limited downside risk, yielding an attractive income return but with potential development upside. Again, our ability to transact for cash was important in securing the property.

Other sectors

We are also reviewing other specialist sectors in partnership with sector experts and during the course of 2010 signed framework agreements with two specialist care home developers. The UK’s demographics are supportive of increasing demand for care homes and we believe that the sector will in time mature into a mainstream investment class offering long-term indexed leases. We intend only to pursue opportunities which are either pre-let or pre-sold, choosing operators cautiously in a sector not unknown for its significant financing issues. We have recently commenced an 80-bed care home in Dartmouth which is pre-sold to an end user. We hope to secure further opportunities in this sector in 2011.

Bank portfolios

We have continued to work with several banks to resolve third party situations requiring both capital and expertise.

During 2010 we completed transactions with three different banks. In July, we acquired Airport House08 in Croydon for £7.8 million from LPA Receivers acting on behalf of Bank of Ireland, with the bank providing stapled finance. This local landmark building is a well-located serviced office which was underperforming because the previous owner lacked the capital required to maintain the quality of accommodation. We have commenced a programme of refurbishment works and have already seen improving income and occupancy levels.

In September, we acquired a vacant 103-key hotel in the Braehead area of Glasgow09 from LPA Receivers acting on behalf of Allied Irish Bank for £3.9 million. The price represented a capital value per key of £40,000, which was less than its replacement cost. We have granted a 25-year management contract to the Campanile Group, part of the Starwood Hotel Group. The hotel reopened in November and early indications are promising.

In November we acquired 14 assets (the 'Rock portfolio') for £23.2 million from LPA Receivers acting on behalf of Lloyds Banking Group. Several of the properties have asset management potential, requiring the Group’s combination of expertise and capital. We have a two- to three-year business plan for the portfolio, and have already implemented significant initiatives which should result in some early disposals. We believe that the realisation of the portfolio will make a significant contribution to the Group’s profits. The portfolio has an average lot size of circa £1.6 million. An ability to deal with detail and complexity will be an important theme in 2011 as the banks are reluctant to take a significant discount for uncertainty and Development Securities’ willingness and ability to undertake this analysis as part of the bidding process represents an advantage over competitors in the marketplace.

These three transactions confirm that the Group is increasingly accepted by the banks as a reliable partner in the deleveraging of their balance sheets; the Rock transaction illustrates our capability in increasingly larger deal sizes.

We continue to pursue such opportunities. We believe that the terms of the International Monetary Fund (IMF) 'bailout' of the Irish banking sector will require those banks, in conjunction with the National Asset Management Agency (NAMA), to accelerate their debt reduction activity. We have invested time in 2010 in building relationships with key market participants and these efforts should provide the foundation for a subsequent deal flow.