|Chief Executive’s Statement|
This has been a particularly exciting and fulfilling year.
Not only have we produced record profits and an excellent growth in the value
of our asset base but we have made substantial progress in achieving the goals
we set at the beginning of the year.
These included the full and successful incorporation of our Bromley joint venture;
the rationalisation and refocusing of our development and trading division,
with the disposal of the bulk of our commercial property investment portfolio
and the £900m refinancing of our loan portfolio, which gives us both greater
flexibility and overall lower interest rates.
Group management board
Headed by Rupert Dickinson and Andrew Cunningham. The group’s expert and unrivalled team allows the business to develop and grow with assurance and confidence.
Pictured left to right:
- 1. Debra Yudolph
Director of Residential Management (South)
- 2. Mark Robson
Director of Residential Management (North)
- 3. Rupert Dickinson
- 4. Andrew Cunningham
Deputy Chief Executive and Finance Director
- 5. Brian Crumbley
Director of Sales and Acquisitions (North)
- 6. Peter Schwerdt
Director of Sales and Acquisitions (South)
- 7. James Fielder
Director of Urban Development
- 8. Marie Glanville
Group Company Secretary Director of Group Financial Operations
- 9. Andy James
Director of Land and Regeneration
- 10. Tony Dodds
Director of Grainger Homes
We have also achieved substantial progress in developing two key areas, which we believe will become significant growth areas for the group – life tenancies and investment in mainland Europe. In both these areas we hope to announce further developments, either through direct acquisition or the creation of important joint venture partnership agreements during the course of the current year.
Turning to the group’s operations in more detail, I can report that the strong housing market we witnessed for most of the year under review was reflected in our tenanted residential division, where sales totalled almost £135m. In addition, we saw a valuation increase on the residential properties in our trading portfolio of 12.4% to September. This figure does mask regional variations of less than 5% in central London and greater than 30% in the North West of England. In our view these increases underline the benefit of our geographically widespread portfolio as well as the underlying strength of the housing market over the period. Some 42% by value of Grainger residential assets are outside London and the South East – the two regions that saw relatively sluggish growth through the year to 30 September 2004. The year end average vacant possession value of our residential properties rose to £164,000 from £144,000 last year. The reversionary surplus in our portfolio (the difference between vacant possession value and investment value) now stands at £536m, or £21.61 per share.
It is also worth noting that many of the sales that we achieved were of unmodernised or below UK average value properties. There is strong and consistent demand for such properties from both first time buyers as well as the owner/developer market.
On the other side of the equation, we are extremely pleased with the level and quality of residential purchases we have made during the year. In fact we acquired, in total, slightly more residential units than we sold. After a slow start we invested approximately £118m to purchase 1,042 units, compared with the 1,031 units sold, which included 486 regulated tenancies (at a cost of £68m) and a further 374 life tenancies (for £23m).
At the start of the year one of the principal goals we set ourselves was to rationalise our development and trading activities through the orderly disposal of our commercial property investments in order to focus effort and resource on the residential sector. As a result we sold £25m of commercial property investments, showing a £3.5m surplus over September 2003 values, leaving the group with only one major development asset – Landmark Place, Slough. The 69,000 sq. ft. office element has been hard hit by current market conditions and we have taken a £1m write-down against its carrying value.
Following the disposal of virtually all our commercial property investments we have now reorganised the development and trading division into three distinct core activities: land and regeneration; residential development; and house building. This, we believe, now presents a coherent and structured approach.
In land and regeneration we sold the final major development plots, comprising 12.4 acres, at Kennel Farm for a total of £14.2m, generating operating profits of £10.7m. Future activity at Kennel Farm will focus on completion of the local centre, the five acres allocated for business use and the sale of minor plots on a piecemeal basis.
The main contribution in residential development has come from the development with Network Housing Association which incorporated 78 flats above a large Sainsbury’s supermarket in Wilton Road, Pimlico. This scheme has generated income to us of almost £8m through the sale of 70 flats during the year; of the remaining eight flats, five have completed since the year end.
House building has made very satisfactory progress during the year as Grainger Homes completed the sale of 132 units for £14.7m, producing a trading profit of more than £2m.
Operationally, therefore, this has been a successful and eventful year. Externally this success has been recognised by our winning the EPRA Best Performance Small/Mid Cap Award for the year ended 2003. EPRA is the European Public Real Estate Association and has been set up to promote, develop and represent the European public real estate sector with a particular focus on establishing best practice standards in accounting, reporting and corporate governance. The award is granted to the company showing the greatest level of total shareholder return provided certain standards of disclosure and corporate governance were met – our return in the year was over 65%.
And what of the future at Grainger Trust? As ever our focus will remain on the regulated tenancy market. This business is high margin and cash generative and we will endeavour to make the most of any opportunities that arise. However, Grainger is a long-term business and we are busy preparing ourselves for the time when the supply of regulated tenancies begins to diminish.
Fundamental to this is the life tenancy market. We are excited by the opportunities presented by this sector. Diminishing pension returns, and the opportunity to crystallise some value from the increase in value of homes has increased the profile of and demand for this product. Regulation of the mortgage market and the future regulation of equity release reversion products will, we believe, introduce more discipline into the sector and reward suppliers with good reputations and a successful history.
We are delighted to announce the appointment of Peter Couch to head up our life tenancy activities. Peter is vastly experienced in the equity release and insurance business sectors having worked as national sales manager of financial planning services for NPI Limited and managing director of AMP Retirement Services before setting up his own equity release consultancy business. We are confident that Peter will help Grainger take full advantage of the opportunities this sector presents to us.
Concern has been expressed that equity release may be tax inefficient for home-owners as a result of the introduction of the pre-owned asset tax in April 2005. We are delighted to report that the Inland Revenue confirmed in an answer to Parliament in November that such assets would not be affected by the new tax.
We have received a number of approaches from financial services companies who want to create a reversionary equity release product and leverage our skills. They are offering us access to their distribution capability and we are exploring options in this regard.
We also feel that we can operate successfully in mainland Europe. We are concentrating our efforts in two areas. The first is investment in long-term reversionary residential portfolios in the more mature economies of Western Europe where we believe there is an opportunity to replicate the return characteristics of our main UK business. We are also looking at more opportunistic investments in residential development land in Central Europe. In both cases we are currently intending to invest alongside local operating partners.
Supporting these activities will be our development and trading division, now rationalised and with a clear strategy. The rationalisation of the commercial property portfolio and the last of the bulk sales at Kennel Farm indicate that this year’s level of profitability will not be repeated in 2005, but we are confident that we will be able to position this division to produce high quality returns across a broad spectrum of residential development activity.
21 December 2004