Jones Lang puts high price on Broadgate's prospects: The pounds 1.5bn valuation could have implications for rents. Tom Stevenson reports

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The Independent Online
THE pounds 1.5bn valuation put on Broadgate Properties by Jones Lang Wootton has raised eyebrows throughout the property industry. The Rosehaugh/Stanhope joint venture which built one of the City of London's highest-profile office developments had previously been valued at less than pounds 1bn.

The assumption the valuation makes of a two-thirds jump in rents for top-quality space in central London from pounds 30 per square foot to about pounds 50 within 18 months has surprised other property agents and seems at odds with Jones Lang's own recent forecasts.

If the assumption is correct the implications will be far-reaching. Such a valuation would make Stanhope's negotiations with its bankers in December a stroll.

British Land, which makes no bones about its desire to acquire Broadgate, could be left high and dry. More generally the London property market could be set for an unexpected take-off.

Other agents are not convinced. Richard Ellis thinks a more likely scenario is rapidly reducing rent- free incentives until the middle of next year followed by growth in rents of about 20 per cent to pounds 36.

'Even that is very rapid growth after the falls of recent years,' said Ian Ellis, a partner at the surveying firm. He thought some deals for absolutely top space would achieve rents in the low pounds 40 range but thought pounds 50 extremely optimistic.

Hillier Parker also struck a cautious note, suggesting that while pounds 50 might be achievable on absolutely top-notch space, Broadgate was getting on for 10 years old. The fact that the offices are also leasehold would probably mean a pounds 40 limit in the foreseeable future.

Even Tim Hayward, a partner at KPMG Peat Marwick, the receiver to Rosehaugh since 1992, expressed surprise at Jones Lang's valuation. He expected rents to rise to somewhere in the pounds 40 range as the development cycle took off, putting a cap on rises.

Jones Lang said only a month ago that there had been no change in City office rents.

If Jones Lang's more recent expectations of rental growth prove to be correct analysts will have to make substantial adjustments to their forecasts of many companies' net asset values.

Higher rents would also give the London development market a massive boost just as some developers are beginning to dust off previously forgotten plans.

Rents are the key missing element in the return of the development cycle where a tentative recovery has been prompted by increasing shortages of good-quality space, exactly the conditions that prompted the development of Broadgate a decade ago.

According to Grimley JR Eve, the surveying firm, only one building of more than 50,000 sq ft is available in the West End, pushing rents back up to the sort of values achieved at the height of the late-1980s boom.

Almack House in St James's, recently let to JP Morgan, the US investment bank, is reported to have been let at pounds 52.50 per square foot. Henrietta House, the remaining large building, is reported to be on offer for pounds 49 per square foot.

Availability in the City is, however, much less tight than in the West End. According to Jones Lang recent deals have been struck in the Square Mile at between pounds 17.50 and pounds 30 a square foot.

The real importance of Jones Lang's estimate of City rents, however, has much more to do with the impending renegotiation of the terms on which banks are currently lending Stanhope pounds 160m.

If Broadgate really is worth the pounds 1.5bn implied by the valuation, Stanhope's debt and the pounds 300m owed by Rosehaugh will pale into relative insignificance.

The healthy cover implied by these figures explains the ease with which Long Term Credit Bank of Japan is reported to have found a buyer for pounds 20m of borrowings at 60p in the pound.

The timing of the release of Jones Lang's estimates is also significant given the delicate state of negotiations between Stanhope and four reported suitors, all of which are keen to buy at least a chunk of Broadgate.

British Land, which owns 29.9 per cent of Stanhope, is the least-favoured partner for Stuart Lipton, Stanhope's chief executive, and is unsurprisingly thought to be sceptical about the assumptions underlying the valuation.

A source inside the company said negotiations were ongoing, but Stanhope is also thought to be in discussions with Goldman Sachs and Morgan Stanley, the US securities houses, and at least one Far Eastern investor. Rumoured names include Singapore Land, the property developer, and Li Ka-shing, the Hong Kong billionaire who first made an approach to buy Broadgate three years ago.

Broadgate is certainly a prize worth fighting for. Between them Mr Lipton and Godfrey Bradman, the former head of Rosehaugh, created the hub of London's financial centre out of a derelict railway yard. Broadgate redefined the Square Mile, pulling the centre of gravity away from the Throgmorton Street/Mansion House area. It now comprises 14 buildings occupied by blue-chip tenants, including SG Warburg and UBS.

The timing of Broadgate was perfect, coinciding with the period after Big Bang when deregulated markets and an explosion in information technology created a huge demand for modern, large purpose-built offices of which the City had precious few.

But the very success of Broadgate was to prove its downfall as, in a climate of booming champagne sales, Mr Lipton and Mr Bradman turned away Japanese investors who were queueing to take a stake in the development.

Other less well-timed developments flooded on to the market just as recession took away the demand that had seemed unstoppable. Broadgate was left with sky-high debts and too much unlet space.

Rosehaugh was the first to hit the buffers and was put into receivership by its banks in 1992. Stanhope survived, just - its shares collapsed from a high of over 311p to 12p. By June 1993 it had negative net worth of pounds 15m.

Stuart Lipton always maintained that the true worth of Broadgate would eventually emerge to make that figure meaningless. His bankers must decide by the end of the year whether they believe him.

(Photograph omitted)