by Alex Catalano
Having successfully led the team that won the tender for County Hall — the Thamesside headquarters of the former Greater London Council — London & Metropolitan has come of age.
Never again need it struggle to shine in the shadow of its former parent, John and Peter Beckwith’s London & Edinburgh Trust. LET, which originally owned L&M jointly with Balfour Beatty, sold its remaining 16% stake in April.
To underline the point, David Lewis, Chris Harris and the rest of the hard-working L&M team are battling to bring a mini-Broadgate to the centre of Edinburgh. They are also expanding into Europe and planning leisure-based developments in France and Spain.
But the jewel of L&M’s development programme is the £1bn County Hall project, which L&M won in partnership with TR Property Trust, Lazards and David Jackson’s quoted tiddler, New England Properties.
They pulled off the purchase from the London Residuary Body after a fierce tussle with several groups, including one led by Imry International, and an LET/Trafalgar House consortium. The tender cost the L&M partnership £400,000 in expenses alone.
Even now, David Lewis seems scarcely able to believe that he has actually won the tender. The son of a Welsh coal miner, he began his career as a quantity surveyor with contractors Laing, joining Bovis in 1971 and Balfour Beatty in 1979.
In 1980, Balfour Beatty asked him to set up a building company in the South East of England and before very long David Lewis had teamed up with the Beckwith brothers to form London & Metropolitan. L&M became a joint venture between the Beckwiths’ London & Edinburgh Trust and Balfour Beatty, which was keen to boost its construction turnover by participating in development projects. Peter Beckwith took L&M under his wing, while John Beckwith concentrated on LET.
L&M’s first scheme was an 11-acre business park in Woking. Then, in 1982, it won a site tender for the Princess Square shopping centre, Bracknell. The price paid by L&M — £8.5m for a 125-year lease — raised a few eyebrows, thanks to a bit of stirring by one or two disappointed bidders. L&M did not take long to convince Abbey Life to fund the scheme, which has turned out to be a success.
L&M undoubtedly paid a full price for Princess Square, a project which really put it on the map. But observes probably underestimated its ability to keep building costs tight, in partnership with Balfour Beatty.
To this day, L&M retains a project management team which keeps a very, very close eye on development cost-control, both in-house and for third parties.
After starting work on Bracknell, L&M moved into the City to tackle an office scheme for Societe Generale. In 1984, it hit the headlines by buying a site in Ropemaker Street, EC2, from Granada’s Barranquilla property arm, for £20.5m.
That site became a modernistic 250,000-sq ft office building, prelet to Merrill Lynch at around £26 per sq ft. L&M pursued its typical policy of forward-funding, and persuaded Norwich Union to back the scheme for £75m at an attractive yield.
In 1996, L&M started work on the 285,000-sq ft Watchmoor business park in Camberley. The site cost £10.3m, initially financed by borrowing but later funded by British Telecom’s pension fund. L&M started off expecting a rent of £9 per sq ft and has now achieved £11-plus per sq ft. Tenants include Toshiba, and Sainsbury has bought a 7-acre chunk for a superstore.
Soon after Watchmoor, L&M, in partnership with Arlington Securities and a group of Far Eastern investors, bought the old Whiteleys’ store in Queensway, W2, from Hanson Trust for £15m. The building was listed down to its steelwork and difficult to redevelop. L&M and its pals have had trouble in marrying the old structure with the new.
However, the 273,000-sq ft shopping complex should open next Easter. It will trade on six levels and 40% has been prelet to the likes of Marks & Spencer (34,000 sq ft) and CIC Theatres, which will operate an eight-screen cinema.
Rental income for Whiteleys could total £7m pa, indicating that the scheme might eventually be worth £100m. Given that Standard Life agreed to fund the development for around £80m, there will be a sizeable surplus for the partners to share. The expenditure on construction and site is put at £50m, with interest and marketing costs to be added on.
The Whiteleys project added spice to L&M’s flotation in late 1986. At 145p a share, the public offer for sale valued the company at £58m.
David Lewis says it was inevitable that L&M would want to break away from LET one day. He admits to a degree of rivalry with the “fabulous flying” Beckwith brothers, but the two sides remain on friendly terms. L&M will project-manage the Spitalfields project for LET and they have also joined forces to buy the 57,000-sq ft Almack House in King Street, SW1 which should be redeveloped to show a handsome surplus once the tenant, the Inland Revenue, moves out.
At the time of its flotation, L&M could boast a smooth progression of profits, before taking into account often sizeable capitalised interest charges. In 1981, pre-tax profits were £110,000; by 1985 they had risen to £3.8m.
Net assets, however, were just £2.42m, against on-balance sheet borrowings of £25m. L&M’s investment portfolio was slim — principally a new indoor market and snooker hall in Irvine, valued at £1.22m.
The company also planned to keep an 8,200-sq ft shop and office development in Windsor, which valuers Healey & Baker estimated would be worth £3m when completed and let.
There was also sizeable debt attached to the odd joint-venture project like Whiteleys, which had an overdraft of £14m. Only a third of this was on the balance sheet, but both LET and Balfour Beatty supplied certain guarantees and assurances for L&M’s borrowings.
The £16.5m cash raised from its market float took L&M’s net assets to £18.9m. To further comfort investors, Healey & Baker put an open market value of £44m on its development properties, twice their book value.
Weight was also added by the presence of Norman Ireland, former finance director at industrial giant BTR, on the board as non-executive director. Plus, David Lewis, deputy chairman Chris Harris (ex-Jones Lang Wootton) and finance director John Theophilus (ex-Rush & Tompkins) all proved good salesmen for their shares; the issue ended up 30 times oversubscribed and started trading at a 24p premium.
Only a month after its stock market debut, in December 1986, L&M joined forces with Japanese contractor Kumagai Gumi to scoop Distillers House, St James’s Square, SW1, from Guinness with a winning £30.5m bid. The project may well fetch a record West End rent of appreciably over £70 per sq ft next year, and L&M should end up getting 10% to 15% of the surplus on redevelopment. L&M and KG then went on to come second in last summer’s tender for the Financial Times’ City headquarters, Bracken House. Their bid of around £90m was topped by an astonishing offer of £143m from rival Japanese contractor Ohbayashi.
As property share prices rocketed in 1987, L&M’s hit a high of 313p. Its delighted shareholders were quite keen to take up another £26.6m issue, placed at 275p in September. It was just too bad that a month later the stock market crash slashed L&M’s share price by half.
With developer-traders remaining out of favour, its shares are currently still only 186p, just 28% above their 1986 offer for sale price. This must be galling for David Lewis, given the progress the company has made. However, he does well to hide his irritation; there is nothing the City hates more than a whingeing company chairman.
Anyway, he now has bigger things to worry about, like County Hall. Rumour says the consortium may pay as much as £200m for the site; it goes without saying that L&M’s competitors are muttering it paid too much, just as they did over the Bracknell tender of 1981. David Lewis will not reveal what he is paying beyond saying that the price depends on whether L&M has to abide by an existing planning permission for redevelopment into offices, or whether its own grand scheme will be approved. Lambeth, the planning authority for the area, has gained notoriety as “difficult” and the site across the river from the Houses of Parliament is obviously sensitive. It is likely that planning considerations, as well as price, influenced the LRB’s choice of developer.
L&M hopes to include around 1.5m sq ft of offices, retaining the existing listed facade of County Hall along the Thames. Part of the main building would be converted into a courtyard of 350 flats, which could fetch as much as £500,000 each if put on the market today.
David Lewis would like to put a 450-bedroom hotel — finding an operator is a priority, he says — and a shopping centre on the site. He also wants to move the roundabout next to County Hall, and knock down the dreadful office block which adorns the island. For trimmings, L&M hopes to rebuild the Skylon tower which formed part of the 1951 Festival of Britain.
The financing package for County Hall has yet to be put in place. L&M will presumably get good advice from its new non-executive director, Peter Henwood (ex-Standard Life), its partners on the scheme, Lazards and property unitisation whizz David Jackson.
Meanwhile, L&M is cooking up a mega-scheme to build 600,000 sq ft of offices on the Edinburgh conference centre site. It was originally picked to build 200,000 sq ft, which were to help fund the conference facilities.
When the public sector finance failed to bridge the gap, L&M promptly suggested building a bigger office block, which the council thought was a very good idea. It then asked L&M to tender for the project all over again, and David Lewis can be forgiven for feeling bitter over the affair.
In the South, L&M is also pitching to be part of the 950-acre Emerson Green project near Bristol, in partnership with Royal London Mutual, the Electricity supply pension scheme and others. The consortium is proposing a 320-acre science park and 3,000 homes, against the Emerson Green Development Co’s alternative of a 500-acre science park. To make sure it is not out of pocket — whatever the outcome — L&M has snapped up part-ownership of 30 acres of the site.
Another major L&M development is a 175,000-sq ft shopping scheme in Reigate, which will partly occupy land formerly owned by Oldham Estate. When Harry Hyams controlled Oldham he was ready to help L&M if it was willing to build him a spanking new office block in return. Oldham’s new owner MEPC is now selling the site into the scheme on more conventional lines.
David Lewis is currently undecided about whether or not to go for institutional finance at Reigate. “Institutions are often not flexible enough on schemes,” he says. “If they are offered a completed retail development they are happy to take whatever tenants the developer has found. But often they will not accept those very same tenants if they have agreed to forward-funding.”
L&M also hopes to redevelop the Arding & Hobbs department store in Clapham Junction, SW11. In partnership with Arlington Securities, it is on the shortlist for the 260,000-sq sq ft Lavender Walk shopping centre.
Other L&M retail ventures include four stores, part of a package of 20 recently bought from Woolworth through a £16.7m sale-and-leaseback deal which showed a yield of 6.75%. A dozen of the stores have already been resold at a useful profit, and now other people are offering L&M more such properties. As a result, it has just bought three Tesco stores from an institution in Yeovil, Lowestoft and St Albans.
Land bought from Pearson, in Uxbridge, has potential for 100,000 sq ft of offices, which should benefit from the recent rise in local rents to over £25 per sq ft. This project is currently being financed internally, along with medium-sized schemes in Richmond, Windsor and Edinburgh. A 22,000-sq ft block in Camberley, let to Unigate, has been sold to a Kleinwort Benson fund on a 6% yield.
Excluding County Hall, L&M now has £600m of construction work under management in Britain. Group projects account for 38% of this, with work for third parties making up the remainder.
L&M’s project managers, who formed their own department in 1984, are highly regarded by both former parent London & Edinburgh Trust and outsiders. John Gunn of British & Commonwealth Holdings recently chose L&M to oversee the refurbishment of Cayzer House at St Mary Axe, EC3.
The biggest project management job L&M has landed is the 1.7m-sq ft redevelopment of Spitalfields market. A consortium of London & Edinburgh Trust, Balfour Beatty and Costain’s County & District Properties won Spitalfields last year after a tough fight with Rosehaugh Stanhope. The £350m syndicated funding for the project was arranged by Kleinwort Benson and Goldman Sachs just after October’s stock market crash.
In Europe, L&M is creating two large leisure-based projects, Brent Walker fashion. One of them, backed by a hotel, is in Marbella. L&M has also signed up a huge 300-acre project near Marseilles which is centred on two golf courses. Japanese involvement in such leisure-based schemes looks likely. The company has also teamed up with former Jones Lang Wootton man Miles d’Arcy Irving to start Continental & Metropolitan.
Thanks to last September’s share placing, L&M’s gearing is reasonably healthy. At the end of December, gross borrowings of around £29m were offset by £10.3m cash and commercial paper (or nearcash) of £27m. However, there were also around £13m of off-balance sheet bank borrowings, L&M’s share of related company obligations, which total £27.6m. By comparison the related companies had net assets of £641,000, while L&M’s own net assets are £52m.
Nearly all L&M’s pre-tax profits of £9.06m in 1987 came from development sales. These are processed on a stage-by-stage basis for big projects — “when the final outcome can be determined with reasonable certainty”, the company says. However, the company capitalises a hefty part of its interest payments: in 1987 £5.26m was added to the cost of developments, while only £156,000 was charged to profits.
Although L&M should be coasting towards £13.5m of pre-tax profits this year, its main challenge in the months ahead will be to bolster its balance sheet so that shareholders can get the maximum benefit from dream schemes like County Hall. It would be a great shame if too many of the prospective profits went to funding partners.
But shareholders will not necessarily appreciate a stream of rights issues. At the same time, L&M’s spirit of independence may prevent it from accepting takeover approaches from companies, like British Aerospace, who are looking for development expertise. However, someone willing to make L&M an associate, as Olympia & York did with Stanhope Properties, will not be shown the door.
Still, David Lewis is able enough to cook up a solution that will keep everyone happy.
