Building momentum Urban estate
On schedule for Quadrant 3
With the recession continuing to impact the property sector, many property organisations have ceased activity altogether. We have pushed ahead with major schemes, including Quadrant 3, an office, retail, restaurant and residential development which is on schedule for completion in 2012. The Quadrant project includes the most significant improvement to the quality of London’s public realm seen in the West End over the last 30 years, after Trafalgar Square.
Earning plaudits
Among many major accolades we were honoured to receive during the year, our strategic vision for Regent Street won The Mayor of London’s Award for Planning Excellence at the London Planning Awards. “I congratulate The Crown Estate for the Regent Street Vision, which combines the best of modern architecture whilst making the most of London’s built heritage,” commented the Mayor of London, Boris Johnson.
West End gets the ‘X’ factor
For the first time, shoppers can now cross Oxford Circus diagonally, thanks to an innovative scheme part-funded by The Crown Estate in partnership with Westminster City Council, Transport for London and The New West End Company. Modelled on Tokyo’s famous Shibuya intersection, it is giving the 200 million shoppers and workers who visit annually around 70% more freedom to move around.
Successful shopping trips
We continued to build our retail presence outside London during the year, in line with our diversification strategy. In Exeter, we acquired a 50% stake in Princesshay Shopping Centre and, shortly after the financial year ended, completed the purchase of the Westgate shopping centre in Oxford.
Delivering the strategy
for St James’s 2009/10 saw planning consent obtained for our first major St James’s scheme. St James’s Gateway is a 150,000 sq ft mixed‑use redevelopment project at the eastern end of Jermyn Street. The project will deliver comprehensive public realm improvements together with a striking new frontage along Piccadilly.
Revenue by activity 2010£million
- Retail – 80.9
- Office – 101.3
- Residential – 15.2
- Industrials – 7.8
- Other Urban – 16.2
The urban estate includes shops, offices, retail and business parks, industrial estates and residential properties. We made outstanding progress during the year, as we continued to concentrate on our areas of competitive advantage and also maintained momentum on key projects.
Our urban portfolio is diverse and extensive. We are increasingly recognised by our peers and partners as an innovative and long-term investor operating at the highest levels of the industry. The portfolio accounts for more than 74% of The Crown Estate’s entire property value, including indirectly held property, and over 76% of its gross income surplus.
For the year to 31 March 2010, revenue derived from the urban estate, including indirect investment, increased by 8.1% to £230.6 million, despite tough market conditions. This performance was ahead of target and our total return performance was very positive. Property valuations including indirect investments rose by 9.6% to £4.6 billion, recovering some of the reduction experienced during the previous year.
The year began with a great deal of uncertainty in the capital markets. Transaction activity across all sectors was at very low levels, with pricing well below historic averages, and all occupational markets were experiencing rental decline. However, our long-term perspective and absence of investment legacy issues allowed us to take a more active position in the market than many other investors. Consequently, during the early months of the year, we concentrated our efforts on taking advantage of what we perceived to be a mispricing of prime UK commercial real estate. This resulted in the acquisition of some rarely-traded dominant retail assets. At the same time, we believed that the market was over-paying for longer-dated income, and we accordingly made a number of disposals.
Over the course of the summer of 2009, signs of recovery began to appear, driven by a range of factors. These included the historically low pricing of prime UK real estate, the decline in the value of sterling making the UK more attractive to foreign investors and the Government’s expansionist monetary policy. By late autumn, the investment market recovery was gathering pace. Our response, in the last quarter of the year, was to reduce our activity and concentrate on selective sales, reflecting our concern that prime UK real estate pricing was once more becoming increasingly unsustainable.
We have been developing, with IPD, a bespoke weighted Crown Estate benchmark to more accurately reflect our performance against a similar portfolio of properties. Going forward it is our intention to outperform this benchmark on a rolling three-year basis and we made a good start in 2009/10 returning 17.1% against the benchmark of 16.4%.
Active asset management
In a difficult and sometimes volatile market, our trading activity was high by historic standards and we completed some £674 million worth of capital transactions as we continued to rebalance the portfolio in line with our strategy. We sold a number of non-core properties, including the Coutts building on The Strand in London, and diversified the portfolio through strategic purchases, principally of major retail schemes. These actions have again reduced our exposure to central London urban commercial property, from 75.7% to 71.4%, in addition to significantly increasing the quality of the portfolio
In London, we concentrated on our areas of competitive advantage, with investment and asset management focused on Regent Street and St James’s.
At a time when many competitors ceased or substantially reduced their development activity, our business model has allowed us to maintain confidence and continue to push ahead with our major schemes. The Quadrant 3, the former Regent Palace Hotel which we are transforming into a 270,000 sq ft office, retail, restaurant and residential development, remains both on schedule and on budget. Alongside this, The Alrov Group commenced The Quadrant 1 project, the former Café Royal. This project will deliver a new 150 room five-star hotel with spa, restaurants and retail accommodation. Quadrant 3 is due for completion in the first quarter of 2012 and Quadrant 1 in the second quarter of 2012. The Quadrant projects are part of a £750 million investment programme to redevelop Regent Street.
As we set out in last year’s Annual Report, St James’s has been identified as an area that would benefit from proactive asset management similar to that dedicated to Regent Street. During the year, we made substantial progress in realising this ambition by obtaining planning consent for our initial St James’s scheme. Known as St James’s Gateway, the proposal is for an 85,000 sq ft mixed-use redevelopment scheme at the eastern end of Jermyn Street and Piccadilly. As part of this development the distinctive retail character of Jermyn Street will be preserved, with long-established Jermyn Street retailers such as Trumpers and Herbie Frogg returning to the development once it is completed.
Together, Regent Street and St James’s, with over 8 million sq ft in freehold ownership, are complementary holdings that form the twin, long-term focus of our central London strategy.
As part of the diversification strategy to reduce our London weighting, the year saw us invest in two more major shopping centres. In Exeter, we acquired a 50% stake in Princesshay Shopping Centre from Land Securities Group PLC for close to £100 million. The 530,000 sq ft open city centre retail scheme was completed in September 2007 and incorporates major retail outlets as well as restaurants.
After the financial year ended, we completed the purchase of the 320,000 sq ft Westgate shopping centre in Oxford for around £56 million at a net initial yield of around 6.75%. This acquisition attracted extremely positive media coverage from both the industry press, which recognised the importance and value of the deal, and local media in Oxford which welcomed our involvement in the city.
Building on our relationship at Princesshay, we have also established a 50:50 joint venture partnership with Land Securities Group PLC on this shopping centre.
Industry accolades
Our efforts during 2009/10 led to us receiving a number of important awards:
- the Mayor of London’s Award for Planning Excellence for our Regent Street Vision
- Estates Gazette’s National Property Company of the Year (Retail & Leisure)
- Royal Institution of Chartered Surveyors London Sustainability Award
- Royal Institute of British Architects Sustainability Award
- Westminster Society Biennial Award for Architecture
Consulting with our housing tenants
As part of our ongoing practice of regularly reviewing the portfolio, we brought forward a proposal to sell the approximately 1,300 houses and flats which comprise our Housing Business Group (HBG) and are spread across four estates in Camden, Hackney, Lewisham and Westminster.
These estates form a small part of our overall business and we believe that they could be better and more efficiently run by an organisation dedicated to owning and managing this type of housing. We accordingly entered into a formal consultation with our residents from January to March 2010. As part of this process, we received a very high level of response, not only from residents but also from key stakeholders. At the end of the year this matter was still ongoing. We will report any further developments in next year’s Annual Report.
Supporting communities
Together with the high level of investment activity, the year was also characterised by a number of examples of the urban team working positively alongside stakeholders to bring demonstrable benefits to the communities in which we work.
For example, in July 2009 we appointed a workplace co-ordinator to source permanent West End jobs for out-of-work Westminster residents. By the end of the financial year, 11 people were in work as a result of this Regent Street initiative.
As part of our ongoing commitment to public realm, we supported the Oxford Circus diagonal crossing scheme, which was opened by Mayor Boris Johnson. This transformation of the West End’s busiest area was funded by The Crown Estate and Transport for London and implemented by Westminster City Council. In addition, Heddon Street, the Regent Street Food Quarter, was pedestrianised, as was Regent’s Place. A new initiative was trialled by The Crown Estate to encourage retailers to consolidate their deliveries in order to reduce traffic in Regent Street.
Other community-based initiatives around Regent Street included themed events such as the Christmas Lights, Taste of Spain Festival and Best of British Festival, each of which brought a sense of fun and style to London’s premier shopping street. We continued to encourage pedestrian movement by the publication of Walking Maps and the facilitation of wayfinding initiatives implemented by Transport for London.
Looking to the long term
Following the very strong progress we made in pursuit of our strategic goals during the year, we are hoping that 2010/11 brings a period of stability in the economy and real estate capital markets, combined with a gradual improvement in our principal occupier markets. Consistent with our overall strategic approach during the current year we intend to focus on:
- a continued reduction in our central London weighting
- the exploration of ways to introduce third-party capital to Regent Street and selected individual projects within St James’s
- the effective asset management of all assets, in particular the new acquisitions
- the successful delivery of our major development projects
- ensuring that the urban portfolio plays a significant role in The Crown Estate’s overall sustainability strategy
- further investment in public realm, including a focus on initiating improvements to Piccadilly
Furthermore, we will continue to seize the benefits inherent in our long-term outlook. We will take advantage of any changes in market pricing and, if appropriate, take a counter-cyclical view, looking beyond short-term gains to realise long-term objectives.