Posted on 05 Oct 2014

Property Veterans’ Young Venture Has a Spring in its Step


In an era where youth is often prized above all else, property group Palace Capital offers a salutary lesson.

The company is run by two real estate veterans, Stanley Davis, 75, and Neil Sinclair, 70. The pair have a century of experience between them and are determined to build a substantial commercial property firm, focused on the regions, rather than London. 

The strategy has started well but there is plenty more to come and the shares, at 3121?2p, should deliver strong growth over the next three to five years. Dividends are rising fast, too, as Davis and Sinclair are committed to producing a good income. 

 

 

Regional focus: The company is taking over properties in cities such as York

Palace  was formed in 2010 when the pair invested in AIM-quoted Leo Insurance, which was underperforming. 

They took over the management, changed the name, sold the insurance arm and started to build a property business. From the start, the plan was to buy companies or property portfolios, rather than individual buildings. 

 

Davis and Sinclair were keen to expand fast to attract institutional investors. In 2011, they bought a small Cheshire firm for £1.8million and a year ago, they spent £39.2million acquiring a portfolio of properties from Quintain Estates. 

The portfolio, called Sequel, consists primarily of properties in city centres and Palace has already seen a dramatic improvement in both the value of these sites and their rental income. 

 

This is no accident. Before the deal, Sinclair’s team visited every property in the portfolio, spoke to tenants and put plans in place. 

Some sites were sold – above their book value – and a number of leases were extended from short to long term. Several new tenants were brought in as there were far too many vacancies in the portfolio. 

There is still work to do, in particular the renovation of 100,000 sq ft Hudson House in central York. Last year, this was 75 per cent vacant, it was generating £250,000 of income and costing £750,000 in rates and service charges. The building is from the 1960s and is in need of modernisation. 

Palace has applied for permission to change it to a 21st century mixed-use property, including shops and offices. This will take a couple of years, but while it waits, the group has brought in new tenants on short lets and persuaded others to stay. 

As a result, the building is generating income rather than losing money. Five weeks ago, Palace made another acquisition, paying £32million for Property Investment Holdings, a private company that had fallen on hard times. 

 PIH has properties dotted around the Home Counties. They have received little investment in recent years, but Palace intends to give them some attention, thereby increasing their value and income, as it has done with the Sequel assets. 

Palace has a market value of just under £65 million but Davis and Sinclair are determined to increase this to £100million in the next couple of years. They are already on the lookout for further acquisitions and there are hopes that another deal will emerge in the coming months. 

Sinclair has been in the property market for too long to overpay, so he is willing to be patient, but the group’s focus on portfolios or companies sets it apart from many peers. 

Analysts expect profits to rise from £1.4million to £4.6million in the year to April 2015, with the dividend soaring from 4.5p to 12p. The group has issued shares to help fund its recent deals, but these have been set around the prevailing share price and have been eagerly bought by institutions. 

Midas verdict: Davis and Sinclair are old-fashioned property men with a keen eye for bargains and a determination to deliver value.