Annual Report 2012 - Development Securities PLC

annualreport2012.
developmentsecurities.com/
chairmans-statement
hope for in the near-term is a more or less sideways
movement in GDP performance – effectively, stagnation.
In the investment property markets, 2011 was
characterised by an increasing flow of overseas funds
into Central London’s prime office and residential
markets. The financial and political turmoil in various
parts of the world caused a significant flow of funds into
the Sterling-denominated Central London property
markets, to some extent seeking a safe haven from the
perceived risks elsewhere and only tentatively based on
property fundamentals. The secondary property market
continued to languish and, indeed, in the final few months
of the period under review, values declined slightly.
This was largely a result of prospects for rental
growth continuing to recede and the flight to quality
strengthening amidst increasing uncertainty in the
eurozone and continuing concerns over the weakness of
the UK economy. For the first time in over a decade our
performance was less than that of the IPD UK Monthly
Property Index. The largest contribution to our 4.2 per
cent underperformance was the insolvency at Peacocks
in February 2012. We believe that the prime markets of
Central London will ease back and the secondary
markets will recover lost ground in the near- to
medium-term.
It is our view that the UK needs a vigorous
regeneration of its redundant and derelict real estate
assets into prime or near-prime investments servicing
those areas of the economy which still retain an element
of demand strength; effectively, changing functional
obsolescence into functional strength. Accordingly, at
this stage in the economic cycle, we do not see a strong
demand for large-scale office development in our
country’s major conurbations, including Central London.
That demand must largely await a recovery in GDP growth
both domestic and international. It is our continued belief
that, in an economy with virtually no upward and possibly
some downward momentum, the opportunity to create
growth in our industry will rely on the value-added
component that can be generated through repositioning
real estate into areas of demand. We will continue to
pursue this strategy as and until the wide arbitrage
between secondary and prime yields begins to narrow
significantly. The alternative approach of expanding our
investment portfolio does not hold attractions for us at
this stage of the economic cycle. Whilst that strategy
might offer a more stable income base for us, it offers
little in the way of significant capital growth. Our skills as
a developer have naturally led us into our current area
of activity that relies on a detailed and technical
understanding of real estate fundamentals in which we
are accomplished and confident. We believe that the
successes now emerging from within our development
and trading portfolio are evidence of our strategy coming
to fruition. Of course, our Group policy of maintaining a
moderate level of gearing offsets, to a large extent, the
risks associated with our development and trading
property assets that are either nil or low income yielding.
Outlook
The yield curve is indicating that interest rates will remain
at current minimal levels for some considerable amount
of time and we would not disagree. Current fiscal policy,
together with further rounds of quantitative easing, are
helping to support asset values and we believe will
continue to do so. Of course, at some time, one would
anticipate interest rates returning to long-term trend but
that will probably need to await a perceived recovery in
the UK’s economic performance. When that re-rating of
the cost of money does occur, it may impact negatively on
property values since the perceived offset of increased
rental growth will take several years to work through
the cash flows attaching to individual assets. We expect
the banking groups to continue to gradually reduce
their exposure to real estate in a way that does not
significantly impact on property values. In that regard,
they will be consistent with their policy of recent years
of not unduly disturbing current market equilibrium.
Conclusion
After nearly nine years of sterling service on behalf
of your Company, both Victoria Mitchell and Michael
Soames will be stepping down from the Board at this
year’s Annual General Meeting. On your behalf, I would
like sincerely to thank both of these Non-executive
Directors for their valuable contribution to our
deliberations and for their resolute efforts and
commitment in support of the progress we have made.
I would also like to welcome our new Non-executive
Board member, Nick Thomlinson, senior partner and
Chairman of the Knight Frank Group, who joined the
Board on 3rd January 2012 and brings with him
significant expertise and experience derived from
a lengthy career in the property industry.
The period under review has seen an enormous
effort from the management and staff at Development
Securities PLC in deploying equity and debt into the
market across a multitude of sometimes very complicated
transactions, and implementing our strategy for each
either in joint venture or on our own account. I would like
to place on record my thanks for their commitment,
professionalism and teamwork in a challenging market
where credibility, track record and brand strength have
played such an important role.
David Jenkins
Chairman
1st May 2012
Chairman’s Statement
Development Securities PLC / Annual Report 2012 3