Development Securities PLC Preliminary results Developing value - - PowerPoint PPT Presentation

Development Securities PLC

Preliminary results

Developing value through real estate expertise

May 2012

2

Contents

Slide number Company strategy and market context 3 - 9 Preliminary results 10 – 16 Portfolio review 17 – 30 Property review 31 – 36 Appendix 1 – Company information 37 – 39 Appendix 2 – Impairment provision and Peacocks administration 40 – 42 Appendix 3 – Property returns and IPD 43 – 45 Appendix 4 – Major developments: funding and timing 46 - 48

Company strategy and market context

4

Five core principles

The following „five commandments‟, consistently followed over 15 years, underpin our strategy and our approach to risk-management:

1. We only invest in UK property 2. We focus primarily on commercial property We maintain a predominant focus on securing planning consents and redeveloping commercial property although the emphasis of our activities may shift between major, complex developments and smaller scale development and trading properties at the different stages

• f the property cycle.

Since July 2009, we have broadened the scope of our real estate activities to include mixed-use projects that include residential, hotel and student accommodation.

3.

We do not undertake major developments on our balance sheet and minimise exposure through forward-funding/pre-lets We consider large-scale development projects to be generally a late economic cycle activity driven by an expanding economy and strengthening demand. We have never believed it appropriate for a company of our size to accept sole development risk in relation to our substantial development projects and consequently, we share the majority of development project risk with financial institutions and partners who are the more appropriate long-term investors. 4. We maintain an active investment portfolio whereby rents cover operational expenses Our investment portfolio provides a steady and predictable flow of funds, contributing significantly towards central overheads and mitigating the more uneven profits and cash flow arising from the major development and trading portfolio. The investment portfolio accounts for a significant element of invested equity and represents a diverse portfolio of assets across the UK, comprising carefully selected retail and office properties.

• 5. We target modest levels of gearing (c.50% – 60%)

5

Group strategy

 Use forward-funding and pre-lets/pre-sales to minimise development risk on major projects  Utilise strength of balance sheet for small and medium size projects  Portfolio includes commercial, retail, residential and leisure developments

Applying development expertise in a risk-averse manner across a diversified portfolio to generate attractive returns Major developments

 Investment portfolio provides stable income and prospect of significant capital appreciation  Target assets with core defensive income and enhancement potential in sectors where

• ccupier demand is strong and supply of accommodation restricted

 Drive income growth through proactive asset management  Drive capital gains through upgrading secondary assets into prime/near-prime capitalising

• n yield arbitrage opportunities

 Select the right buying opportunities where terms of trade in our favour and demand for exits is strong  Target a 3 – 4 year turnaround of assets and IRRs of 20 per cent and above

Investment portfolio Development and trading portfolio

Including joint ventures and strategic partnerships

6

Market update

“Cash is still king”

• Availability of bank debt for real estate opportunities is highly constrained – net new lending to real estate sector has

been negative since early 2009. Some previously high profile lenders have withdrawn from the sector completely

• Lack of liquidity, in particular in regional and secondary markets, has amplified the value of equity

Stagnant economy holding back real estate growth

• GDP growth negligible and likely to remain weak for medium-term
• Economic weakness and pressure on the consumer will continue to hold back rental growth
• Outside of prime investment markets e.g. Central London commercial/West End residential, few opportunities to

capture meaningful rental and capital value growth Yield gap between prime and secondary property remains wide

• Well-priced opportunities to buy secondary property and redevelop into institutional, prime or near-prime assets,

capturing yield arbitrage

• Real opportunities to generate value by applying development expertise to reposition functionally obsolete assets

into sectors of demand

Continuing to deploy our cash resources into selected real estate opportunities where capital growth can be achieved in spite of wider economic weakness

7

Market context – key graphs

Lending to Commercial Property Net new lending negative for 8 consecutive quarters Initial Yield (%) Arbitrage opportunities still strong

Source: Capital Economics

All-property initial yield minus 10 year gilt yield Real estate market fairly priced All-property initial yield minus FTSE All Share dividend yield Real estate market fairly priced

Source: Capital Economics Source: Capital Economics Source: Capital Economics

• 8
• 6
• 4
• 2

2 4 6

• 8
• 6
• 4
• 2

2 4 6 90 92 94 96 98 00 02 04 06 08 10 12 14

IPD all property initial yields less yields on 10-year gilts, %

Property looks expensive CE forecast 1 2 3 4 5 6 1 2 3 4 5 6 90 92 94 96 98 00 02 04 06 08 10 12 14

IPD all property initial yields less FTSE All- Share dividend yield, %

Property looks expensive CE forecast 1 2 3 4 5 6 7 2 4 6 8 10 12 14 01 02 03 04 05 06 07 08 09 10 11

Spread, %-points (RH S) IPD low yield/prime, % (LHS) IPD high yield/non-prime, % (LHS)

• 4
• 2

2 4 6 8 10 12 14 4 5 6 7 8 9 10 11 12 13 87 89 91 93 95 97 99 01 03 05 07 09 11

Lending to property as a % of total loan book (LHS) Net new lending to property, £bn (RHS)

8

What is our focus?

• Applying equity - real estate opportunities where our equity resource commands a powerful position in the market

and terms of trade move towards us

• Arbitrage opportunities - acquisition of selected secondary assets which through repositioning (in which planning

uplift, change of use etc is a very important component) can be sold into sectors of the prime/near-prime or institutional market capitalising on yield differential

• Risk diversification – acquisition of multiple assets across sectors and locations where demand is in evidence

achieving a risk diversification as opposed to concentration of value in one or two individual assets

• Reinvestment - potential for equity released from disposals of assets to be recycled into further yield arbitrage
• pportunities, market conditions permitting

Investment Portfolio Development & Trading Portfolio Total Acquisition Cost (including development expenditure) 174.9 222.5 397.4 DS Equity 46.0 117.4 163.4

Investment of equity since July 2009:

9

Where can we expect to make gains in the near term?

Manchester Arena Complex not included

2013 2014 Development and trading portfolio Disposals following planning uplift Airport House Croydon X The MVMT, Greenwich X X Wick Site, Littlehampton X Rock portfolio X X 328 Sandbanks Road, Sandbanks X Westminster Palace Gardens X Braehead, Glasgow X Hale Barns X Dartmouth care home X Marsh Mills, Wessex X The Old Vinyl Factory, Hayes X Shepherds Bush Market X Investment portfolio Proactive asset management to drive rental growth Major development portfolio Development profits – 10 Hammersmith Grove X Legacy assets Release of cash from disposals 399 Edgware Road X Broughton X

Preliminary results 2012

11

2011-12 highlights

Activity Details

Disposals of assets acquired since July 2009 (profits arising p/e 2012 and y/e 2013)

• Rock portfolio (sales of £17.2 million generating profits of £3.8 million to date)
• Wick site, Littlehampton (conditional pre-sale of 47,500 sq. ft. foodstore site to Morrisons)
• Westminster Palace Gardens (£22.9 million of sales contracts exchanged for residential and office

component)

• The MVMT, Greenwich (contracts exchanged with Willmott Dixon for £16.15 million for development
• f residential plot)
• The Old Vinyl Factory, Hayes (80% stake in a shell office building sold to a specialist developer for

an initial receipt of £3.8m. Further value expected from overage linked to this sale)

Planning secured on secondary assets to reposition into prime or near-prime

• Wick site, Littlehampton (planning consent secured for 47,500 sq. ft. foodstore)
• Shepherds Bush (outline planning secured for redevelopment of market and surrounding area)
• Rock portfolio (planning consents secured on ten assets since January 2011)
• The Old Vinyl Factory (planning consent secured for first phase – 132 residential apartments)
• Rembrandt House, Watford (planning consent secured for residential-led, mixed-use redevelopment)
• Westminster Palace Gardens (planning consent for change of use from commercial to residential)
• The MVMT (planning consent secured for mixed-use development comprising residential, hotel and

student accommodation and community facilities)

Further acquisitions of real estate with strong

• ptions for repositioning
• 16 projects acquired since January 2011

Forward-funding secured

• n speculative London

development

• 10 Hammersmith Grove (forward-funding of first phase 110,000 sq. ft. prime office building by

Scottish Widows Investment Partnership Property Trust for £50.0 million)

12

Key financial messages

• NAV reduction of £19.9 million including £5.9 million of dividends paid and £12.0 million of fair value adjustments in

respect of: negative revaluation of investment property assets and certain JV schemes (£4.4 million); exceptional impairment (£2.8 million); fixed-interest swaps (£4.8 million)

• Final dividend for the period of 3.2 pence per share given the emerging and likely success of strategy making a total

dividend of 5.6 pence per share for the 14 month period.

• Further gains to flow from development and trading portfolio from asset disposals in the foreseeable future

(development and trading assets carried at lower of cost and net realisable value - not revalued)

• Continued access to finance through strong relationships with banks

– Refinancing of £38.0 million facility with Lloyds Banking Group in December 2011 – New facilities of £118.8 million including £39.7 million of JV facilities – Continued banking support for new acquisitions

13

Results for the 14 months ended 29th February 2012

29 Feb 2012

£ million

31 Dec 2010

£ million Profit before revaluations, exceptional impairment, interest & taxation 7.5 3.8 Net finance costs (10.1) (10.0) Loss before revaluations and taxation (2.6) (6.2) Exceptional impairment (2.8)

• Swap mark-to-market valuations

(0.5)

• Property revaluation (loss)/gains

(4.3) 8.8 (Loss)/profit before tax (10.2) 2.6 (Loss)/earnings per share (10.3)p 1.7p Dividend per share 5.6p 4.8p

14

Contribution to NAV reduction

£‟m Cash-related in the period Non cash-related in the period NAV at 1 January 2011 333.1 Loss before revaluations and taxation (2.6) (2.6) Interest rate swap revaluations (4.8) (4.8) Property revaluations (4.4) (4.4) Impairment provision against ECC* (2.8) (2.8) Taxation (0.8) (0.8) Dividend (5.9) (5.9) Non-controlling interest 1.4 1.4 Sub-total (19.9) (7.9) (12.0) NAV at 29 February 2012 313.2

* Refer to slide 41 “ECC impairment provision”

15

Change in NAV per share through the period

Fair-value adjustments

Amounts in pence per share* *Attributable to shareholders of the parent Company

16

Net Debt

29 Feb 2012 (£m) 31 Dec 2010 (£m) Gross debt 203.1 175.5 Cash (50.2) (104.1) Net debt 152.9 71.4 Gearing 48.8% 21.4% Share of net debt in joint ventures 31.5 20.8 Net debt including joint ventures 184.4 92.2 Gearing including joint ventures 58.9% 27.7% Analysis of gross debt Fixed rate 49.4% 43.8% Capped / SWAP 44.7% 35.1% Floating rate 5.9% 21.1% Weighted average interest rate 6.0% 5.8% Maturing within (including JV‟s) £‟m £‟m One year 8.7 0.5 Two years 13.6 6.3 Three years 19.6 60.3 Four or more years 195.8 130.4 Weighted average maturity 8.4 years 8.5 years

Portfolio review

1) Legacy assets 2) Major development portfolio 3) Investment portfolio 4) Development and trading portfolio

18

1) Legacy assets: progress made towards release of cash

399 Edgware Road, London

• 7-acre site comprising the now defunct Oriental City shopping mall. Held at £25.0 million book value
• Site purchased in 2005 and planning consent secured for over one million sq. ft. of development in 2007
• Currently preparing a revised planning application for a smaller and more deliverable scheme in the current market

with submission scheduled for July 2012

• Pre-let secured of an 80,000 sq. ft. food store with Morrisons subject to planning

Broughton

• Development site near Chester adjacent to retail scheme previously developed by the Group
• Residential element of site held at £10.5 million book value and awaiting the outcome of appeal against non-

determination for residential uses – broadly supported by Local Authority. Inspector‟s report with Welsh Assembly for review. Marketing for sale now commenced.

• Remaining component of land held at £5.5 million and plans in hand to bring forward leisure-led development forward

Curzon Street

• Redevelopment plans for 1.4 million sq. ft. mixed use development in JV with Grainger PLC currently on hold due to

proposed HS2 route

• Held at book value of £5.0 million. Additional equity exposure of £7.8 million (against residual bank loan)

19

2) Major development portfolio

Typically a late economic cycle activity driven by a growing economy and strengthening occupier demand, hence low levels

• f current activity.

Strategy:

• Target major development schemes in:
• Key Central London and provincial office markets
• Urban, mixed-use regeneration in non-prime sites with strong uplift potential
• Complex sites requiring specialist expertise
• Do not develop major projects on own balance sheet – de-risk developments through institutional forward-funding*:
• Limits exposure to downside risk in the property market and the development process
• Reduces exposure to bank debt
• Earn project management fee through the development process and a participation in the profit to the investors once

project is complete

• Secure pre-lets or pre-sales where possible to minimise risk

Highlights:

• Hammersmith Grove – Forward-funding secured on phase 1 of scheme - 10 Hammersmith Grove (110,000 sq ft) - and

construction now under way

• Two Kingdom Street, PaddingtonCentral – New lettings to Rio Tinto and Nokia during the period. Strong interest

received on remaining un-let space.

• Cambridge Science Park – Appointed development manager in April 2012 by Trinity Hall college for three new

buildings totalling 110, 000 sq. ft.

* See appendix 4: Forward-funding equity erosion

20

Hammersmith Grove, London

• 275,000 sq. ft. prime office development in Hammersmith town centre, West London
• First building (110,000 sq. ft.) forward-funded on a speculative basis by Scottish Widows Investment

Partnership Property Trust for £50.0 million

• Practical completion expected in May 2013

21

• 235,000 sq. ft. prime office building within PaddingtonCentral
• Scheme end value circa £200.0 million
• Forward funded by Aviva and Avestus
• 159,000 sq ft let to Rio Tinto, Nokia and AstraZeneca
• £5.0 million of Development Securities‟ equity invested
• Strong letting interest on remaining space

Two Kingdom Street, PaddingtonCentral

22

Future phases:

• Four and Five Kingdom Street to

provide 150,000 sq. ft. and 210,000 sq. ft. of prime office space respectively

• Will conclude the

PaddingtonCentral development

Four and five Kingdom Street, PaddingtonCentral

23

3) Investment portfolio

Strategy:

• Careful stock selection of assets with core defensive income and enhancement/redevelopment potential
• Focus on:

–

Foodstore anchored retail schemes with 5 – 25 additional retail units that can be proactively asset managed and available surface car parking to accommodate scheme extension where appropriate

–

Other selected sectors with strong occupier demand and restricted supply e.g. care homes, student, residential

• Proactive asset management to grow income and capital value rather than relying on market momentum to drive

growth – lease re-gears, extensions, restructurings, new planning consents etc Highlights:

• Tenant mix further improved through new lettings
• Progress made on planning applications for extensions or

refurbishments to schemes to add capital value

• Vacancy rates 11.4 per cent in spite of downturn in

consumer demand (current industry void rate 12.5 per cent)

• Negative revaluation of £4.7 million* with Peacocks

administration** accounting for 50 per cent Top ten occupiers

29th February 2012 Annual rent £'m % of contracted rent Waitrose 1.82 13.22% Primark Stores Limited 0.49 3.53% Martin McColl Limited 0.47 3.42% Sports World 0.46 3.31% Brausch & Co 0.42 3.04% Trillium (Secretary of State) 0.34 2.30% HMV UK Ltd 0.32 2.10% Wickes Building Suppliers 0.27 1.80% Spacemaker 0.25 1.60% Carphone Warehouse 0.25 1.60%

• *Refer to slide 26 “Investment portfolio revaluation”
• **Refer to Appendix 2

24

Investment property portfolio statistics

29th February 2012 31st December 2010

Portfolio value 237.9 199.2 Number of assets 24 21 Rent roll £13.7 m £12.5 m Initial yield 7.3 6.1 Equivalent yield 7.5 7.3 Voids 11.4 8.0

25

Investment property portfolio contribution

29th February 2012

(14 month period) £ million

31st December 2010

£ million

Revenue 17.1 12.9 Direct costs (3.7) (3.7) 13.4 9.2 Gains on disposals 0.2 0.3 Asset management fees 0.3

• Contribution prior to revaluation

13.9 9.5 Revaluation loss/gains

• Direct
• Share of MEN Arena JV

(4.7) 0.5 8.8 3.3 Contribution 9.7 21.6

26

Investment portfolio revaluations

Breakdown of revaluation

£‟m

Attributing factor Asset management initiatives

Atlantic Village, Bideford (0.7) (0.32) (0.54) (0.14)

• Yield shift for secondary retail (NEY from 8.06% to 8.50%)
• Tenant administrations
• Tenants not renewing on lease expiry
• Agreed deals on concessionary terms to maintain occupancy where the alternative

was that the tenant would vacate Values will recover when new 100,000 sq. ft. extension is implemented, taking Atlantic Village to regional shopping centre status (1.7) Crown Glass Shopping Centre, Nailsea (0.5) (0.2)

• Yield shift for secondary retail (NEY from 9.64% to 10.23%)
• Peacocks administration (£56.5k rent)+ drop in rent due to vacant units

Re-let of vacant units and sale of part of site under way (1.3) Bank Hey Street, Blackpool (0.3) (1.7) (0.1)

• Yield shift for secondary retail (NIY from 6.1% to 6.87%)
• Peacocks administration (40% of rent).
• Loss of office tenant

Re-let in hand at £225,000 p.a. (reduced by £60,000 from Peacocks) (2.1) Wheeler Gate, Nottingham (1.0) (0.2)

• Yield shift due to tenant lease expiry
• Office vacant yield also moved out

Offices now refurbished. Retail awaits resolution of town‟s proposed new shopping centre (1.2) Winchester 1.0 Broughton 1.0 Net other (0.4) Overall valuation movement (4.7)

Above excludes £0.5 million revaluation gain on Manchester Arena Complex

27

The Furlong Shopping Centre, Ringwood

• 85,000 sq. ft. open courtyard shopping centre anchored by Waitrose in affluent catchment area.
• Targeted lettings strategy has enhanced tenant profile – Hobbs, Jaeger, AGA, Crew Clothing, Phase Eight, Joules
• Currently preparing a revised planning application for a 12,000 sq. ft. extension to the centre

28

4) Development and trading portfolio

Strategy:

• Converting secondary assets to prime or near-prime to exploit current arbitrage opportunities
• Driving capital growth through planning gains and proactive asset management rather than relying on market

momentum

• Selecting the right buying opportunities in sectors where demand for exits is strong e.g. Food store anchored mixed-

use schemes, selected residential, student housing and hotels

• Diversification of financial risk – limited equity deployed in each project
• Often distressed sellers with no access to finance so terms of trade move in our favour

Highlights (refer to slide 11: 2011-12 highlights):

• Further disposals of assets to institutions, housebuilders and others
• Planning „uplift‟ through e.g. change of use underpinning c.50% of added value
• Further acquisitions of selected real estate to be repositioned into sectors of demand

The majority of the proceeds of the equity raised since July 2009 has been targeted mainly towards secondary assets that can be redeveloped or repositioned into the prime or near-prime market. These assets are carried at lower of cost and net realisable value.

29

£110 million town centre mixed-use regeneration scheme on the site of the former Greenwich Industrial Estate, immediately adjacent to Greenwich DLR station. The scheme will include 181 residential apartments, 358 student apartments, hotel accommodation as well as community facilities. Contracts were exchanged with Willmott Dixon Construction for £16.15 million to deliver the residential component and the 106-bed hotel has been pre-let to Travelodge. The student accommodation village and associated café and commercial spaces are under offer as is the boutique hotel plot. Total revenue of £25.0 million contracted into the partnership. Demolition works have commenced on site.

The MVMT, Greenwich

30

Development and trading portfolio contribution

29th February 2012 31st December 2010

£ million £ million Southampton 0.8 0.7 Wallington

• 1.1

Westminster Palace Gardens 2.4

• Rock portfolio

3.8

• Littlehampton
• 1.0

Stanground 0.1 0.5 Net Rental Income 1.9 2.4 Project Management Fees 0.4 0.2 Other (0.9) (0.4) Gross contribution 8.5 5.5

Property review

1) Manchester Arena Complex 2) Rock portfolio 3) Wick Site, Littlehampton 4) Westminster Palace Gardens 5) Sandbanks, Dorset

32

Manchester Arena Complex

• Acquired in June 2010 for £62.0 million in joint venture with Patron Capital Partners. Europe‟s largest indoor venue and

the second busiest venue in the world by ticket sales

• Largest asset acquired since equity raise in 2009
• Existing naming rights deal expired 2012. Working with operator SMG to re-tender contract taking advantage of

Arena‟s increased exposure

• Other asset management initiatives under way

33

Rock Portfolio

• Portfolio of assets acquired from receivers acting on behalf of Lloyds Banking Group in October 2010 for £23.2 million.
• £17.2 million of revenue generated to February 2012, generating profits of £3.8 million
• Assets repositioned and enhanced through redevelopment, refurbishment and change of use – 10 planning consents

since January 2011

34

Wick Site, Littlehampton

• Site of former headquarters of Body Shop International Limited acquired for £7.6 million in July 2010
• Reverse premium of £4.85 million from tenant for surrender of lease
• Site pre-sold to Morrisons for development of a 47,500 sq ft food store, petrol station and parking.
• Planning secured in April 2012 for development of a foodstore anchored mixed-use scheme (subject to JR period)

35

Westminster Palace Gardens, Central London

• 46,000 sq. ft. Grade II listed mansion block including residential, retail and commercial space in prime Westminster location.

Acquired for £10.6 million in June 2010

• Planning consent secured for change of use from offices to residential and conversion of 24,000 sq. ft. now under way.

Practical completion due in Q2 2012

• Residential units sold for £20.6 million and office units sold for £2.3 million. Retail element of the scheme is now being

marketed for sale and is under offer at £1.3 million. The freehold is under offer at £1.1 million

36

Sandbanks, Dorset

• 12,000 sq ft luxury residential property acquired in February 2011 for £5.0 million in prime Sandbanks location
• Planning consent secured for development of five luxury flats with practical completion due at the beginning of

Q3 2012

• Marketing drive for pre-sales currently under way with strong anticipated interest for these prime waterside

apartments at values in excess of £1,000 psf

Appendix 1 – Company information

38

Corporate timeline

 Established November 1980 as Clayform Properties Limited  Full Listing on the London Stock Exchange July 1986  Net assets of £150 million at December 1989. Suffered substantially during 1990 to 1993 due to the downturn in the commercial property sector. By December 1992 net assets had reduced to £10.6m  Name changed to Development Securities PLC in July 1993, upon introduction of new management  Michael Marx joined the Board in September 1994 and Julian Barwick in May 1998  £1 billion PaddingtonCentral scheme commences in 1999  Matthew Weiner appointed as Executive Director in March 2004  Graham Prothero appointed as Finance Director in November 2008  July 2009 and July 2010 company completes two £100 million rights issues to capitalise on market opportunities  June 2009 – December 2011 – c.£160 million of net proceeds of two equity raises invested in over 40 properties

39

Executive team

Michael Marx Chief Executive Julian Barwick Executive Director (Development) Graham Prothero Finance Director Matthew Weiner Executive Director (Investment)

Appendix 2 – Impairment provision and impact of Peacocks administration

41

ECC – impairment provision

• One of the consequences of the current economic slowdown has been seen in the serviced office sector in the UK,

where we are represented by ECC, our wholly owned subsidiary that operates out of 7 locations across the UK: – Birmingham Airport (x2) – Edgbaston – Reading – Nottingham – Milton Keynes – Cardiff

• Its operating margins have been squeezed considerably by the impact of declining short term income on one hand

and the fixed, longer term nature of its own rental obligations to its various landlords on the other with a trading loss

• f £1.5 million (including £0.6 million depreciation) for the period.
• In present market conditions, recovery of its margins is likely to be a slow and uncertain process and accordingly

we have made a £2.8 million provision this year for impairment of its fixed assets and the resultant onerous leases of certain of the properties from which ECC trades.

• The provisions made are as follows:

–

Asset Impairment £1.6m

–

Lease provisions £1.2m

42

Peacocks administration

Value lost £ million Value recovery £ million

Comment

Bank Hey Street, Blackpool (1.7) 0.7

Terms agreed to re-let unit to good covenant albeit at lower rent

Swanley Shopping Centre (0.3) 0.5

Assigned to improved covenant (Iceland)

Crown Glass Shopping Centre, Nailsea (0.2) 0.2

Unit to be re-let in the open market

Eltham, S E London (0.1) 0.1

Acquired by successor Peacocks company owned by Edinburgh Woolen Mill

The Furlong Centre, Ringwood (0.02) 0.02

Acquired by successor Peacocks company owned by Edinburgh Woolen Mill

Total (2.32) 1.52

• The major negative impact on the revaluation of our investment portfolio was the sale of Peacocks by the

Administrator on 22 February 2012 resulting in multiple store closures

• To date, over half of this value has been potentially recovered via asset management initiatives

Appendix 3 – Property returns and IPD

44

UK property returns 1981 - 2011

45

Historical outperformance of IPD

Source: IPD

Over the last 10 years, Development Securities‟ investment portfolio has generally outperformed the IPD index

Appendix 4 – Major developments – funding & timing

47

Major developments: Forward-funding equity erosion

• Typically Development Securities identifies a

project, finds a buyer (investor) and arranges financing – The investor funds and owns the land and the project – Development Securities responsible for managing development process, including timely construction and letting

• Benefits to Development Securities:

– Limited exposure to downside risk in the property market – Limited exposure to bank debt

• Development Securities must secure third party

rental income for investor if profit potential is to be realised

• Development Securities participates in any profit

increase from improving market rents and yields

• If income is lower than expected (through

delayed lettings, lower rents or weaker market yields), Development Securities‟ loss is restricted to its equity invested

 Downside exposure = construction time and cost overrun  Funding risk = nil  Property risk: – Downside = nil – Upside = exposure to letting market

Final valuation Pro forma appraisal

• f investment value

Total development cost PC+ 1 year 2 years 3 years 4 years 5 years £

48

Major development: a late economic cycle activity

Tenant Funding partner Market focus on Investment property Investment values peak Funding partners return to speculative development Developer strength OVER SUPPLY 7 – 10 year cycle

High vacancy rate No speculative development Falling interest rates and hardening yields As occupational market Strengthens, vacancy rates reduce Speculative returns become attractive relative to investment Delivery of projects to funders Weakening yields and negative rental growth UK The City

49

Disclaimer

This presentation has been prepared by Development Securities PLC (the “Company”). No representation or warranty (express or implied) of any nature is given nor is any responsibility or liability of any kind accepted by the Company or any of its directors, officers, employees, advisers, representatives or other agents, with respect to the truthfulness, completeness or accuracy of any information, projection, representation or warranty (expressed or implied), omissions, errors or misstatements in this presentation, or any other written or oral statement provided. In particular, no responsibility or liability is or will be accepted and no representation or warranty is or is authorised to be given as to the accuracy, reliability or reasonableness of any forward-looking statement, including any future projections, management targets, estimates or assessments of future prospects contained in this presentation, or of any assumption or estimate on the basis of which they have been given (which may be subject to significant business, economic or competitive uncertainties and contingencies beyond the control of the management of the Company). Any such forward-looking statements have not been independently audited, examined or otherwise reviewed or verified. All views expressed in this presentation are based on financial, economic, market and other conditions prevailing as of the date of this

• presentation. The Company does not undertake to provide access to any additional information or to update any future projections,

management targets, estimates or assessment of future prospects or any other forward-looking statements to reflect events that occur

• r circumstances that arise after the date of this presentation, or to correct any inaccuracies in this presentation which may become
• apparent. Past performance is not indicative of future results and forward-looking statements are not guarantees of future performance.

This presentation is for information purposes only and does not constitute an offering document or an offer of transferable securities to the public in the UK. This presentation is not intended to provide the basis for any credit or other evaluation of any securities of the Company and should not be considered as a recommendation that any investor should subscribe for, dispose of or purchase any such securities or enter into any other transaction with the Company or any other person. The merits and suitability of any investment action in relation to securities should be considered carefully and involve, among other things, an assessment of the legal, tax, accounting, regulatory, financial, credit and other related aspects of such securities. This presentation is being communicated or distributed within the UK only to persons to whom it may lawfully be communicated, and has not been approved for the purposes of section 21 of the Financial Services and Markets Act 2000. It may not be reproduced (in whole or in part), distributed or transmitted to any other person without the prior written consent of the Company. In particular this presentation is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Any recipients of this presentation outside the UK should inform themselves of and

• bserve any applicable legal or regulatory requirements in their jurisdiction, and are treated as having represented that they are able to

receive this presentation without contravention of any law or regulation in the jurisdiction in which they reside or conduct business.