In 2007, our profit before tax increased to £524.0m and revenue profit jumped to £73.4m. Stripping out exceptional results, the revenue profit represents a significant increase compared to 2006. These strong results are the consequence of the individual strategies established by our five investment and development businesses around the world and by Grosvenor Fund Management. The results are more particularly due to the combined skills of the 584 Grosvenor people working out of our 17 offices in Europe, North America, Australia and Asia Pacific. Sonae Sierra, jointly controlled by Grosvenor, employs a further 789 people in Continental Europe and Brazil.
The highest total return in 2007 of 24.8% was achieved by Grosvenor Australia as the demand for office space, particularly in Brisbane, continued to exceed supply, causing a further escalation in rents. Strong markets do not endure for ever and throughout our business we are assuming lower industry returns and more challenging conditions in 2008. We expect the number of casualties in the industry to increase as genuine uncertainty creeps into investment markets. The failure of, or severe setbacks for, some companies will reinforce the loss of confidence.
Valuers in the UK have moved swiftly to reduce valuations, repeating previous patterns, whereas US appraisers are so far taking a more measured view in the absence of indicative transactions. As most direct property returns are based on an estimate of value rather than real-time market pricing, there is scope for market place inefficiencies. This might matter for two reasons. First, the fall to market clearing prices should occur much sooner in the UK than the USA, not least because many investors use book values as the benchmark selling price. Second, investors are making capital allocation decisions off inconsistent valuations. Real-time stock market pricing may often mis-price fair medium-term value but at least the system is the same throughout the world. Inconsistent valuations of property are a hindrance to international property investing and we would urge the professional bodies concerned to establish consistent guidelines.
I started in this role at the beginning of 1989, which turned out to be the high point of the 1980s property boom. There followed a severe recession, succeeded after 1993 by an astonishing continuous period of stable high returns for property.Grosvenor has a very long history – of which it is rightly proud – and an interest in a unique asset (our London Estate comprising 300 acres of the city centre). My job has been to continue to build the business off this foundation. We have been able to extend the international diversification, adding Continental Europe and Asia Pacific to the existing activity in the USA, Canada and Australia, and also to create a more international fund management business. We have sought to do this with a style and timing that reflects our independent ownership.
Mark Preston will take over as Chief Executive at a most ‘interesting’ time in the market. However, the conditions will presage a period when the rewards for real property skills should be greater than for some while. The last part of the long bull run in real estate investing was characterised by success appearing to flow to the ‘buy anything and borrow as much as you can’ strategy. This was always bound to fail eventually and, as in all markets, long-term success will accrue to the most professional and experienced, who can distinguish temporary form and fashion from permanent excellence and seminal change.
Strategic and tactical decisions are a constant feature of such a diverse Group. Our devolved structure puts decision-making into the right hands at the local level and we make sure that each Operating Company Board has a good blend of (executive) specialist and (non-executive) broad knowledge.
Many events and achievements are singled out in this report, including the acquisition of three properties in Shanghai to establish our foundation portfolio in that city. In general, 2007 can be characterised as a year of construction. A number of significant projects will complete in 2008, including Liverpool One; Grand Arcade, Cambridge; The RISE, Vancouver; Castle Peak, Hong Kong; and Islazul, Madrid. These projects alone comprise over 430,000m2 and have a combined capital value in excess of £1.5bn. A further 15 smaller projects will also complete in 2008. Although the fall in capital values of shopping centres in the UK has necessitated a further provision against Liverpool One, all of these projects will have a noticeable and positive impact on their localities, the most important test of any project.
Understanding the impact of new buildings (sometimes alone, often collectively) on a city is at the heart of our business. Towns and cities are complicated; knowledge of how a town works as a home town, a work place, a market place, a place to study or be entertained is, in our view, vital for lasting success in property development and indeed property ownership. While we have always worked from this belief, we are placing more emphasis upon it following a review of the Grosvenor brand initiated in 2007. We want to reinforce our approach, ensuring that, throughout the business, we pursue greater depth of knowledge and understanding of particular places – from the vision of the local leaders to the local impact of international politics.
I would like to end by noting the remarkable people I have worked with since 1989, both inside and outside Grosvenor. The relationships and partnerships we have established throughout the world have been crucial to our success. The dedication and loyalty of Grosvenor staff are real and tangible to all those who work here; the genuine interest of the Board; the social awareness of the shareholders and their focus on the long term; the uniqueness of the Grosvenor story; these are the reasons why this will remain the best property company in the world – in my opinion.
Group Chief Executive
13 March 2008
"Stripping out exceptional results, the revenue profit represents a significant increase compared to 2006"
© Grosvenor 2008