Posted on 17 Jun 2015

One hundred thousand to one hundred million in 5 years?


There is no denying it, the property sector is hot. However with yields coming down over the past year, particularly in London, managers are considering greater asset deployment outside of London and AIM listed Palace Capital is well ahead of the game. 

Neil Sinclair, Chief Executive of Palace Capital, the property investment company that focuses on commercial property outside London, has the air of a man who is content but a brief read of his extensive and impressive biography soon shows he is happiest when driving and growing businesses. 

Neil formed Sinclair Goldsmith in the West End of London in 1970, specialising in the acquisition, leasing and sale of commercial property and the business was successful even in the face of the economic climate at the time. As a member of the Royal Institution of Chartered Surveyors he was precluded from seeking outside shareholders but in 1986 this restriction was lifted and Sinclair Goldsmith was one of the first commercial firms to list their shares on the Official List of the London Stock Exchange. He has been involved in AIM and FTSE Main Board listed groups ever since. 

BUILDING A REGIONAL PORTFOLIO 

Neil was involved in several companies following Sinclair Goldsmith before acquiring control of a listed shell company with Stanley Davis and Andrew Perloff in the summer of 2010. Their intention was to use the vehicle to buy secondary properties outside of London, believing that valuations there were on the verge of recovering after the financial crisis. They felt that they could improve rental yields and maximise asset value through careful management and building strong relationships with their tenants. 

He looked at AIM companies with a market cap under £10m and found Leo Insurance. He called them up, met for a coffee the next day and the deal was done by lunchtime. 

This firm was to become Palace Capital. Over the past 5 years Palace Capital has completed a few large deals with many more having fallen through, Neil often finding companies not having the assets they claimed to own. He is a stickler for due diligence and as part of the process of purchasing Quintain Estates & Developments’ Sequel portfolio in 2013, Neil and his board made 5 separate trips to different parts of England. 

They visited each of the 24 properties in the portfolio and listened to the tenants and letting agents who all said that things were picking up before concluding that there was potential in the portfolio. The board was convinced of its value and the deal was agreed with Quintain. However following the grant of a facility subject to credit committee approval by the existing lender Nationwide Building Society, they then needed to raise the equity. 

Neil approached eight brokers with six saying no immediately, feeling that they could not raise enough support for a regional property portfolio, and eventually only one said yes. After a week of due diligence, Palace Capital had a broker. They raised £23.5m of equity following 66 presentations to potential investors over a 3 week period, acquiring Sequel with a market capitalisation of £25m. 

Neil believed that Sequel was lacking the intensive management needed with over £1m per annum in empty rates and with two properties in particular that were completely empty. By agreeing to pay the agents double their normal commission, both these properties were sold within three months. While Palace Capital made a profit on the sale, they also saved over £250,000 in annual rates. 

They implement a different strategy for each property in their portfolio. For example, they decided to rent a 100,000 sq ft property on short term tenancies as it was 80% vacant. While the rentals were not initially strong, the saving in empty rates and void costs were significant. 

Palace Capital made its second large portfolio deal in 2014 by raising another £20m to acquire the share capital of Property Investment Holdings Ltd. This company owned 17 properties which were valued at £32m. Here there were two vacant properties, one in Staines which was let within 3 months to produce a cash flow benefit of £250,000 per annum and the other in Burgess Hill where contracts have been exchanged to sell at £1.25m having been valued on acquisition at £690,000. 

Whilst Palace Capital does fast track the sale of certain properties, they have kept over 90% of the properties acquired and Neil has a strong belief that you need to keep your tenants but also, need to ‘know your tenants’. 

From a relatively shallow investor base in 2011, Palace Capital has attracted new shareholders such as Polar Capital European Forager Fund, Schroders Plc, Henderson Global Investors, Quantum Partners and Axa. 

RELATIONSHIPS ARE CRITICAL 

There are many instances of opportunities presenting themselves to Neil and Palace Capital as a result of long standing relationships and this is something that Neil feels is important. He invests much time in developing these, including speaking to local councils and is surprised that more groups do not take the time to understand what councillors are focussing on so that they can help them achieve their goals. 

Although he continues to look for the next opportunity, Neil also lives by the old adage that “sometimes the best deals are those that I have walked away from”. 

There are still lots of potential for the firm with new developments and further portfolio deals including the recent acquisition of a 90,000 sq ft property in Leeds. 

With a market capitalisation of around £80 million and with the group’s history of transformative deals, Neil’s goal of transforming Palace Capital from a £100,000 to a £100m company can’t be far away. 

BDO have been lucky to be part of Neil’s career. Indeed, as we go to print, Palace Capital announced an agreement to acquire the entire issued share capital of O&H Northampton Limited, the owner of Sol Central, a mixed use leisure scheme in Northampton, for approximately £20.7m. We are acting as reporting accountants for this deal, helping Neil and his colleagues to achieve his initial objective for the group and break through the £100m market capitalisation mark. It will be helped considerably by another successful £20m fundraise.