UK-based investment banking firm Evans Randall has acquired around £2 billion of UK and European property investments on behalf of itself an...

UK-based investment banking firm Evans Randall has acquired around £2 billion of UK and European property investments on behalf of itself and high net worth clients during 2005 and 2006. Evans Randall are targeting IRR returns to investors of 20–25 per cent per annum by acquiring large good quality commercial property in specific areas with exceptional tenants, long leases and with fixed rental increments. It plans to put £1 billion into fresh investments year on year, and if no re-financing takes place this implies new equity at a rate of £150 million annually. The company specialises in acquiring landmark buildings let to high quality covenants, usually rated A or better by Standard & Poors, on leases that have fixed rental uplifts or are index-linked, and have been able to produce exceptional returns to date for clients. Evans Randall’s roots are in high value financing options for mainly FTSE 100 companies in the $250 million to $500 million range that it has been arranging since 1993. It started by developing cross border structured financing solutions for US corporates such as Arjo Wiggins Appleton, Caterpillar, Sara Lee and Campbells Soup, and between 1995 and 2005 completed over $25 billion of financing for its US clients. Relatively modest arrangement fees were charged by Evans Randall and the firm was largely remunerated by sharing in the savings in financing costs it achieved, which were typically between 200 and 300 basis points per annum. This was achieved by using innovative structures based upon clients’ credit ratings which were always S & P “A” rated or above, and clients’ exceptionally good cash flows which enable the company to arrange such large financings. Such transactions involved investors in jurisdictions as varied as Australia, New Zealand, Canada, the UK, the Netherlands and the US. In early 2005 Evans Randall turned its corporate finance skills and philosophy of involvement with large deals and strong companies to the property market. Last March Evans Randall bought the 3m (an AA-rated company) headquarters in Bracknell. 3m are tied into a 22-year lease with fixed, rather than market rate, rental increases. Bank of Scotland provided £66 million of senior debt for the transaction that was financed at £75 million. This property is now valued at £87 million and Evans Randall is in the process of determining whether it is best to sell or re-finance the asset. If the refinancing route is adopted then the lions share of the £9 million that investors subscribed will be returned to the original providers of the cash element of the deal, mainly high net worth individuals, who if this route is chosen would have substantially a free share in the equity of the building. As the financing is on a non-recourse basis investors are not exposed to any potential downside as long as the tenant continues to pay the rent. If there are negative movements in property prices, the strength of the tenant and its ability to continue paying the rent provides security so that investors can ride out any downturns knowing that their equity is secure. The company’s aim is to give back cash to investors, who retain their stakes in the properties, as early as possible, but clearly with the hope that they re-invest in the next deal. Investors range from the minimum level of £100,000 to some who have invested over £20 million, although the average level of investment is £250,000. But if there’s a downturn in capital growth, the fallback is always the fixed growth in rental income. Presently, market rents that are £45 per square foot in the City of London are predicted to rise to around £60 per square foot in 2007 and to around £70 per square foot in 2009. Evans Randall acquired ABN Amro’s City of London building in August 2005 for £186 million. ABN Amro is AA rated and has a 30-year lease with retail price index increases built in. The property has recently been valued at £232 million, giving an increase in value of about £40 million based upon initial equity subscribed of £32 million, and the company is confident of returns of at least 30 per cent per annum for the original investors. Another building, the UK’s Financial Services Authority head office in London’s Canary Wharf was purchased for £205 million in December 2005 and has now been valued at £234 million. Although the FSA doesn’t itself have a credit rating, the rationale for acquiring this building was that the authority’s cost base is, and will continue to be, covered by the UK’s financial services industry. This effectively gives a covenant that is broadly equivalent to a portfolio of quality banks supporting it. The company has recently bought the ING headquarters in The Hague for €205 million and the HBOS building in the City’s Old Broad Street, London EC2 for £197 million. The main target properties in the UK are in the City of London and in Canary Wharf but Evans Randall is also investing in mainland Europe, where the company foresees further yield compression and substantial rental growth. Here, property in Germany (Munich, Stuttgart, Hamburg and Berlin), Paris, Madrid and Barcelona as well as in the Netherlands is of interest. Rather than just location, top quality buildings and tenants are a must. Eastern Europe, though, is not viewed as being an attractive market to the company at this time as the depth of investor demand is not considered to have the depth as in Western Europe. Each UK property is currently held in a special purpose vehicle, but the plan is to aggregate these into a UK “HoldCo” which will then be cross-collateralised, re-financed and potentially floated. “There’s still a huge weight of money chasing quality assets, especially in London, which is particularly favoured by Middle Eastern and Australian money,” Michael Evans chairman and chief executive of Evans Randall told WealthBriefing. According to Mr Evans, yield compression and increasing rentals will drive this process. He points out that for his investors there are huge economies of scale in dealing only in large transactions. “They also have confidence in our ability to get large deals done as we’ve been involved in large transactions for such a long time,” he said. The investors bear none of the legal and underwriting costs that could be lost on an abortive transaction that clearly would be the case if they tried to invest individually. According to Mr Evans, the ability to move quickly on deals as large as these is critical and creates a barrier to many property investors who would like to play at this level. Smaller players tend to go for smaller deals, he said. Evans Randall have recently bought Cisco System’s UK headquarters near Heathrow for £156 million for which it is looking for new investment in the region of £20 million. Alongside this it has bought five UK Government fire control centres for £125 million for which £35 million is required. Only last week Evans Randall bought a new shopping centre in Stuttgart, Germany, home of Mercedes–Benz and Porsche and will require about €50 million for that transaction. The £40 million of equity that it required for the HBOS investment was placed within a month which gives some idea of the weight of money being invested into quality property assets.