MH Article

A Keen Eye

Prize in sight. Making the most of the current slump in the market, Rob Whitton is targeting distresses assets with a new opportunity fund. Paul Norman reports.

Robert Whitton, the co-founder and chief executive of celebrity-backed property fund AIM, has been reflecting on a frenetic 15 years as a developer and investor in recent weeks.

The 45-year-old Arsenal fanatic, and business associate of Sir Alex Ferguson and Simon Cowell, made his first foray into property investment in December 1992, via Eastbury – a vehicle set up to target distressed residential properties.

Fast-forward to today, and Whitton has launched an opportunity fund targeting distressed commercial property assets.

As Whitton points out, the use class may have changed, but the business philosophy has not. To emphasise this point, Whitton outlines recent IPD figures on returns that have a particular resonance for him.

According to IPD, October saw total returns on commercial property fall for the first time since his fledging entrepreneurial days back in December 1992, dipping by 1.2%.

“There are similarities between 1992 and now,” says the quietly-spoken Whitton. “There will be a period of price correction, there are opportunities to take advantage of forced sellers and there is already a lack of buyers that have liquidity, particularly as the big funds are sitting on the sidelines.”

Unsurprisingly, cash has been easier for Whitton to come by this time around.

The UK Opportunity Fund, which Whitton launched in October via ROM Capital, the joint venture he set up with Burney Group boss Daren Burney four years ago, is starting with £400m of funding.

“In 1992 I had just £2,000 of capital to buy a repossessed flat”.

Whitton and Burney’s fund is the latest example of that phenomena of commercial property market slump, the vulture fund.

It follows hot on the eels of a similar £400m opportunity fund launched by Mountgrange Capital with Credit Suisse First Boston, and Raymond Mould and Patrick Vaughan’s listing of London & Stamford Properties to raise £250m in equity to take advantage of the “market correction”.

Whitton says that a number of large investment banks are set to follow suit. When you get volatility, then you are going to have an entrepreneurial response,” he says.

Whitton’s seven-year fund has been 80% geared and will raise around £80m of equity, of which ROM will provide 50%. The remainder will be provided by Whitton’s long-term backers at AIM, Bank of Scotland Corporate, which is also providing debt financing.

It has been seeded by a £25m first buy of a 13-strong, nationwide industrial portfolio purchased from Peter Murphy’s C&C Properties.

Whitton says the fund is close to securing two further acquisitions.

He adds that it has been set up as a “five-year hold with a two-year disposal period”, but he says a £100m pa spending target is not set in stone. “We may buy more. It really depends how the market evolves as it is certainly not fully corrected and stabilised,” he says.

That said, Whitton is certain the fundamentals are in place for property to bounce back faster than in the early 1990s.

“The fundamentals of supply and demand are very strong, so I would be surprised if there was a dramatic reversal for a long period.”

“A real window of opportunity has opened up for 12 months, perhaps even longer, but the correction this time won’t be as great as during the last downturn because the macro-economics remain strong,” he says.

It is for this reason that Whitton is confident that he has got the timing just right: “Now is the optimum time to lock in capital. That does not mean we will rush in.

Target areas

“We will slowly invest over that period,” he says.

Whitton says he is targeting secondary assets in the South East and North West, areas where ROM can use its expertise in sweating assets to particular effect.
“These are the regions I know, and the regions where if there is a downturn demand will remain strong.”

In particular, Whitton is eyeing secondary retail parades, regional multi-let offices, industrial estates and mixed-use portfolios and has capped the deal size at between £3m and £30m: “That’s below the radar of some of the big funds bit above the radar of the smaller private investor”, he says.

Whitton says the stock is already slowly coming out.

“We expect this to increase fairly rapidly. There is a lot of inventory that people will need to sell.”

And the main targets in Whitton’s range are those who bought during the “phenomenal bull-run” of recent times on short-term funding, with a view to trading on relatively quickly.

“We’ve already seen secondary shipping centres come back where the strategy for improving them was never implemented. Investors will struggle to refinance short-term debt now and have not seen the yield shift needed either.

“There are people who will want to exit from real estate bought five or even 10 years ago, who see no point in holding because the rise in value will be slow or there is negative growth.”

Whitton is targeting IRRs of 25% with the fund.

The point of difference for Whitton and similar opportunity fund entrepreneurs is their skill in spotting opportunities to add value. “We are obviously not buying assets and relying on yield compression. We buy underpriced assets and use a number of strategies to maximise value.”

In the main this means a simple philosophy of bringing hard-earned experience to asset management.

“We will create value through transactional restructuring,” explains Whitton. “We will buy private companies that are often inefficiently structured for tax purposes, and organise them more efficiently. We will also get best debt on the vehicle to create value.”

Whitton also targets reversionary values, eyeing assets where the “underlying rental is low and there is an opportunity to improve the covenant and the tenant mix”.

For this reason, Whitton has a particular fondness for secondary retail parades. “It is often a case of getting poorly-performing tenants out and bringing a national covenant like Ladbrokes or Domino’s Pizza in.”

Finally, Whitton says, development remains key. “It will be fundamental to most real estate we buy. Rearranging layouts is an extremely important angle.”

ROM Capital itself is of course just one part of Whitton’s property empire (see box out). He acts as chairman for the company with Daren Barney, chief executive in charge of the “day-to-day” running of the business. There are two other asset management experts working alongside Barney.

Fundamental to its success, and that of the other new vulture funds, will be the principals’ experience of the last property downturns.

“So many people who have been investing in property have never been through a cycle. It will be a ride awakening for many.”

Marriott Harrison acted for Mr Whitton on his 1st purchase of a 13 stong nationwide industrial portfolio