In 2012, the Government announced that property companies would no longer need planning permission to convert office blocks into flats. The move was designed to alleviate the housing crisis, but it has had a dramatic impact on the office world, particularly outside London.
In Birmingham, for example, office availability has shrunk nearly 60 per cent in the past six years, while Milton Keynes has seen a fall of more than 35 per cent.
The trend plays neatly into the hands of Circle Property, a small but ambitious firm run by some of the most experienced developers in the property sector. The shares are 202p and should rise considerably, as the company expands.
Circle Property bought the offices above Moorgate tube station
Circle is chaired by Ian Henderson, former head of the UK’s largest commercial property group, Land Securities. His chief executive is John Arnold, who started in property in the late 1970s and has been in the industry ever since.
The board also boasts the Duke of Roxburghe and Jamie Hambro, patrician chairman of top wealth management firm James Hambro & Partners. Between them, directors own close to 30 per cent of Circle shares so they are well motivated to make the business work.
Performance to date is encouraging. Circle was founded in 2002, when Hambro got together with a few friends and family, raised some cash and asked Arnold to seek out interesting situations in the property sector and make the money work. The strategy worked well, the business grew and listed on Aim in February 2016, with a focus on under-valued office space in the regions.
Arnold looks for office buildings that are too small for major property companies, too big for private investors and too tricky for either. Some of the blocks have several vacancies, so they do not appeal to firms looking for easy income. Some are let out at below market rates because the buildings have been neglected. Some have only short leases, which need to be renegotiated.
And some are well priced because Arnold and his colleagues are frequently shown buildings before they officially go on the market.
Circle chief executive John Arnold, who started in property in the late 1970s and has been in the industry ever since
In almost every case however, the properties need work, including refurbishment, new tenants and discussions over rents and leases.
The work can be time-consuming but yields results. Circle bought one office block in Birmingham in 2016 for £7.75 million. It upgraded the building, introduced new tenants and the property was recently valued at £14.5 million. At the same time, its annual rental income rose from £765,000 to more than £1.2 million.
This approach has been repeated across Circle’s business. The group has 17 properties in cities such as Northampton, Bristol, Milton Keynes and Birmingham. Results for the year to March revealed that the total portfolio rose in value by almost 23 per cent year-on-year, to £114 million, while rental income rose 21 per cent to £6.8 million. The dividend rose 8 per cent to 5.2p and net asset value per share – a key measure in the property sector – rose 25 per cent to 230p.
Looking ahead, further strong growth is expected. Some buildings have just been upgraded, so rents are likely to increase this year. Some properties still need refurbishment, so increases in value and income should follow.
The company is actively looking for new sites too, with a pipeline of opportunities in store for the coming months.
Financing future deals may involve issuing new shares, but Arnold and his team will only pursue this route if they are confident that new transactions will deliver robust returns for shareholders.
Existing investors are likely to give Arnold the benefit of the doubt. The regional office market is suffering a lack of space and demand for new sites remains strong. Many of Circle’s tenants are small firms, such as lawyers and accountants, who seem less concerned by the vagaries of Brexit than some larger, export-focused groups.
Midas verdict: Circle Property is a specialist company run by a know- ledgeable team, who are determined to expand the business and make money for shareholders. At 202p, the stock is a buy.