Recycling capital

Capital recycling – investment management

This year has seen exceptional levels of investment activity across the Group with the equivalent of 45% of our starting portfolio either bought or sold. We have crystallised attractive returns and improved the Group’s liquidity by selling £336.0 million of properties and bought £354.6 million of new assets with multiple opportunities to generate significant rental value growth.

Great Capital Partnership investments

In April 2007‚ we invested £233.4 million to create GCP‚ a new joint venture with Liberty International subsidiary Capital & Counties which started with a portfolio of 17 holdings across central London.

In August‚ GCP acquired a further five properties in four transactions at a cost of £159.6 million (£79.8 million our share) in Jermyn Street‚ SW1‚ Fetter Lane‚ EC4 and Regent Street‚ W1 all adjacent or near to existing holdings providing enhanced opportunities for asset repositioning. In December‚ GCP purchased a 29‚500 sq ft holding fronting Broadwick Street‚ W1 for £18.2 million (£9.1 million our share) bringing the Group’s total property investment in GCP to £322.3 million for the year.

In February‚ GCP completed a swap transaction with The Crown Estate involving 580‚000 sq ft of property valued at £358 million across the West End. GCP swapped three of its properties worth £61 million in exchange for three new leasehold properties‚ one freehold and more favourable terms on a number of its other leaseholds generating an immediate value uplift of £81 million. In addition to unlocking value instantly‚ GCP now has a number of future repositioning opportunities through the improved head lease terms negotiated. There are three elements to the deal:

• the acquisition of a freehold interest in 26/40 Kensington High Street‚ W8 (previously GCP held a 104 year leasehold interest) and three further 150 year leasehold properties adjoining the Park Crescent Estate‚ W1;
• the extension and improvement of GCP’s existing leasehold interests from The Crown Estate at eight holdings on Argyll Street‚ Regent Street‚ Park Crescent and Portland Place‚ W1. GCP and The Crown Estate have regeared the leasehold interests extending their length‚ reducing the rent paid to The Crown Estate and loosening various operational‚ user and development restrictions which will enable GCP to refurbish and redevelop the properties over time; and
• the transfer by GCP to The Crown Estate of 21 Sackville Street‚ W1‚ 99/101 Regent Street‚ W1 and 203 Regent Street‚ W1. The assets were valued at £61.1 million at 31 December 2007 and produced an annual rent‚ net of ground rents of £2.6 million per annum.

Other acquisitions

In our wholly owned portfolio‚ we made three acquisitions at a cost of £21.8 million during the year‚ all adjacent to existing holdings. 18 Dering Street‚ W1 was purchased to augment our holding on the western side of Hanover Square; Bramah House‚ 65/71 Bermondsey Street together with 1 Black Swan Yard‚ both in Southwark were acquired to extend our holdings in this part of the Southbank; and 9 Holyrood Street‚ SE1 was acquired in March to enhance the expansion potential of our adjacent buildings in Shand Street opposite our successful Tooley Street‚ SE1 development.

Sales

We have continued to recycle capital‚ either selling properties where we have executed our strategy‚ using properties to seed joint ventures or swapping properties for those which offer the Group better opportunity for value creation. At the beginning of the period‚ our initial GCP assets were sold into the new joint venture. In September‚ we sold Met Building‚ 22 Percy Street‚ W1‚ the Group’s successful development completed in 2005‚ for £107.0 million‚ off a net initial yield of 4.1%‚ and crystallised a return on total capital employed of 156% since purchase in June 2003.

In December‚ two buildings located in Whitfield Street‚ W1 were sold for £16.1 million‚ generating a profit of £2.1 million or 15% above their March 2007 valuation‚ net of transaction costs.