Posted on 14 Dec 2013

London May Be Our Economic Powerhouse, But Out in the Regions There Are Sure Signs of an Upturn.


I have lived in London, the engine room of our economy, for more than 60 years. There is a perception among many Londoners that north of Watford must be a desert. Most Londoners who do not have family or business interests north of the capital tend not to go there. 

When, in 2010, Stanley Davis, Andrew Perloff and I took effective control of Palace Capital – the smallest company quoted on AIM – our focus was on the recovery of the regional property market. London was already seeing considerable growth, and has been since 2009. 

The investment and letting markets in most of the regions were still effectively depressed, but we believed that the government’s economic policies were correct and that this would eventually benefit areas outside London. 

Our view was that until this occurred and we saw signs of a sea change we would look for an acquisition in one of those regional pockets that could stand up to economic problems. Cheshire, which we call the “South East of the North”, is one of those pockets and in the latter part of 2011 we acquired Hockenhull Estates, which owned nine properties in Nantwich and London may be our economic powerhouse, but out in the regions there are sure signs of an upturn “I have been through four downturns, and when sentiment changes, it can accelerate rapidly” regional returns Neil Sinclair Managing director, Palace Capital Crewe, for just under £2m. 

This was smaller than what we wanted, but it was too good an opportunity to miss. All the properties were fully let, and although two fell vacant they were both let within two months. The economy in this part of the world is very resilient, with relatively low unemployment, and this acquisition has performed exceptionally well. 

Shift in focus 

Our view was that the economy would turn, institutions would recognise that the returns in London were becoming unsustainable, and that the focus would be shifted to the regions. Since our purchase of Hockenhull, I had been travelling extensively around the country and increasingly detected that the regional decline had halted and, having discussed it with my board colleagues, that it was only a matter of time before the regional market began to turn upwards. 

We are not surprised that nearly 1m sq ft of office space in Leeds has been let this year and that the West Midlands is seeing a significant upturn. These are vibrant areas and we are delighted to have acquired properties in Leeds, Birmingham, Stokeon-Trent, Coventry, Bristol, Milton Keynes, Exeter and Southampton, to name a few, as part of the Sequel Portfolio, which we bought from Quintain Estates & Development. 

We first looked at the Sequel Portfolio in November 2012. We agreed terms in March at £39.3m and the catalyst was firstly that we were able to acquire the company and secondly we were able to amend an existing facility with Nationwide Building Society. Early this year the main debt providers were a little cool on regional secondary property, but this situation has changed and a number of them are now very positive about this end of the market. 

In addition, when agreeing terms with Quintain we were able, as a listed company, to offer our shares as part of the consideration, which is an effective carry. We think in some cases that this ability will hand us an advantage over private companies. 

Advantages of the regions 

On our roadshow it became clear that a number of institutions saw the advantages of buying into the regions and they believe, as do we, that we are early in the cycle of a regional economic upturn. We welcome Polar Capital, Quantum Fund, Henderson Global Investors and Axa Investment Managers as new shareholders. 

I have been through four downturns, and when sentiment changes it can accelerate rapidly. Toscafund, Goldman Sachs, Kames Capital, Threadneedle & Kennedy Wilson have all been busy buying regional portfolios and I am in no doubt that there is more to come. 

We bought Sequel at a net yield of more than 13%, although I think we will be hard pushed to repeat this. But even if we buy at 11% with opportunities for active management, I would rather do that than buy at sub-4% – even if it is prime.

London may be our economic powerhouse, but out in the regions there are sure signs of an upturn.