Our business is two-fold: to manage, redevelop and invest in our London holdings, continually improving the mix of uses and environment for the community, while outside London we are developing with a focus on retail and residential, including several ambitious mixed-use projects. Grosvenor´s desire is to make a lasting contribution to the future of cities around Britain and Ireland.
The Britain & Ireland business delivered total returns of 12.3% in 2007, once again a year of strong results, particularly from our London residential portfolio. However, we have since seen a weakening of investor confidence and an upward movement of yields. This has reduced the values of parts of our retail and office portfolio, though offset by strong rental growth elsewhere, notably West End London offices. As in the past, the location and quality of our portfolio has proved itself less volatile than much of the market.
Although the increase in yields and resulting value falls will create some difficulties for investors, we see it as a necessary market correction, which should create opportunities for us to make purchases in line with our investment strategy. We see this correction continuing during 2008, given constrained lending conditions and tenant demand.
Looking to the future leadership of the business, we have planned carefully for Mark Preston´s move to Group Chief Executive of Grosvenor. From 1 July Peter Vernon, who is currently Executive Director for London, takes over as Chief Executive of Grosvenor Britain & Ireland. Following Richard Handley´s decision to leave after 17 years at Grosvenor, Roger Blundell has been recruited as Finance Director. Prior to Richard´s appointment to this role in 2000, he was instrumental in the establishment of our continental European business and the UK fund management activities. He leaves in April with our thanks and good wishes for the future. Other new appointments to the Board are Michael Gradon as Non-Executive Director and Giles Clarke, who joins the board on 1 July, as Executive Director (Investment).
Our aim is to create lasting environments for people and businesses by investing and developing in cities in Britain and Ireland. Holdings in London´s West End (the London Estate) will continue to dominate the portfolio and here we have continued a programme of reinvestment and redevelopment in retail, residential and offices. We have also put greater emphasis on improving public spaces and the mix of uses for the communities of Mayfair and Belgravia.
On the London Estate the focus is investment and development in office, residential and retail property, together with delivering a first-class service to our occupiers. Elsewhere in central London we are growing our exposure to residential developments in desirable locations. Outside London, we concentrate on developing large city-centre projects with a significant retail component, together with shorter-term, smaller developments, which are mostly urban residential in nature.
Looking to the future, we will progress developments in Edinburgh, Preston, Dublin, Crawley and other cities, working with joint venture partners where we see opportunities to share risk, capital and expertise.
On the London Estate, we continue to focus on a number of key locations, aiming to improve the mix of uses in these communities. By way of example, we are transforming Mount Street and during the year secured lettings with retailers such as Balenciaga, Alfred Dunhill and Anick Goutal. Mount Street´s success was recently recognised in a survey by Colliers CRE, which identified it as one of the top five ‘best performing’ retail streets in the UK. Motcomb Street is similarly attracting new retailers, reflecting our aspirations for that part of Belgravia.
With respect to offices, our latest London office development, 77 Grosvenor Street, is fully let, leaving us with no significant development completions for 2008, a year we believe will be less active for occupational demand. We are at early stages on several exciting office projects for the future.
As planned, we increased the number of Space Solutions properties (our short-let office portfolio) we hold on the London Estate with the addition of 67 Grosvenor Street and 52 Brook Street.
In the residential sector, we began work on 103-104 Eaton Square: six apartments totaling 20,000 sq ft which we plan to complete in May 2008. We also completed a development of large new-build apartments in Montrose Place, Belgravia, and sold all 18 units.
Demand for short-let residential properties remains strong and we expect uncertainty surrounding residential capital growth to underpin this demand in 2008. We added a further 32 high-quality properties to this portfolio, taking the total number managed to 269 and increasing annual income by 25% to £12.7m.
We gained planning permission for London Bankside, a residential scheme next to the Tate Modern, comprising 229 apartments in four towers, which we are undertaking with Native Land. This is a fast-changing part of London, now competing with the more traditionally desirable West End postcodes.
During the year we secured a pioneering funding agreement with Westminster City Council for public realm improvements in London, the first of its kind between the public and private sector. The model will see £10m invested in improvements in targeted public spaces within the London Estate. Investing in this way in the fabric of our streets and squares, together with enhancing the level of service to occupiers by better understanding their needs, are two key long-term objectives for the London business.
Progress on the 42-acre site of Liverpool One has been very encouraging. We plan to open in two phases in 2008, delivering over 1 million sq ft of retail space in May and the remaining retail and leisure facilities, including the multiplex cinema and five-acre park, in September. The value of the project has fallen as a consequence of the general marketwide increase in yields and the provision for a loss in our accounts has been increased accordingly.
We are making steady progress on lettings and reached the 1 million sq ft milestone in January 2008. In addition, we forward sold the Hilton Hotel and successfully launched the sales programme at its residential neighbour, One Park West. We expect 2008 to be a tougher business environment to complete sales and lettings, but remain confident that we are making a lasting contribution to the city centre for the people of Liverpool and thereby creating an excellent investment for Grosvenor and our funding partners.
On the staffing side, we began the process of recruiting 150 staff who will be responsible for delivering behind-the-scenes and customer-facing services once the development opens.
We completed a new John Lewis store with the opening of the first phase of Grand Arcade, Cambridge, in November 2007. The remaining 170,000 sq ft of space opened this March. Early indications are that retail trading has started well, underlining the strength of consumer demand within the catchment area.
We made good progress with Tithebarn, Preston (a 28-acre mixed-use project), where we signed a joint venture agreement with Lend Lease, who now have a 50% stake in the development. We also agreed terms with John Lewis, who will take a 230,000 sq ft store.
We continued to work with Crawley Borough Council on the proposed master plan for Town Centre North (a 32-acre mixed-use development), and in Ireland we gained planning approval for the second phase development of Liffey Valley, Dublin (an edge-of-town, mainly retail, scheme) and are now planning for the next phase of development.
In Scotland the first phase development of the Springside site is underway (an eight-acre residential-led scheme in Edinburgh comprising 900,000 sq ft of residential, office and retail space). This site represents a further opportunity to make a lasting contribution to the fabric and environment of an important city.
The UK property industry faces challenges this year, as turbulence in the financial markets affects other areas of the economy. The re-pricing of risk, which began with the onset of the credit crunch, will lead to further price falls .However, we expect the outcome will be a more realistic assessment of risk and a more prudent approach to financing.
Lower levels of activity in the financial and business service sectors are affecting the outlook for growth in the London economy, which in recent years has provided the backdrop for very strong rises in prime residential prices and London office rents. Although prime central London residential demand is now more diverse and therefore more sustainable than ever before, it will not be immune from this slowdown. However, two major differences from the early 1990s are likely to prevent prolonged distress, in the West End at least: low interest rates and limited supply of space.
Turning to the retail sector, this year will see the opening of several high profile developments in a number of large regional cities. However, they will open in an uncertain climate. Weak growth in disposable incomes and much lower levels of growth in house prices will impact consumer spending.
As always, opportunities will emerge in these uncertain times and, as a long-term investor with prudent financing, we aim to seek these out.
© Grosvenor 2008