Palace Capital’s Sinclair: ‘Companies will leave London – and we’ll benefit’

Neil Sinclair has been banging the regional office market drum throughout investment company Palace Capital’s first decade in business. Now, the coronavirus pandemic means the beat is getting even louder. The change in working practices necessitated by the UK’s lockdown, not to mention workers’ worries over returning to the office on crowded public transport, could encourage occupiers to rethink their real estate strategies – and look away from the capital. “They may decide they don’t need expensive, central London offices,” says the Palace Capital chief executive. “They can very easily be in the regions. You can go to Leeds at £30 a foot, York at £27 a foot. It’s much cheaper – and it’s not just rents, it’s rates.” Sinclair echoes the sentiments of other regional office investors that expect growing demand for offices outside of the capital. And the current crisis is not the only driver. “We think with the government’s ‘levelling up’ agenda, they’re going to encourage companies to move out of London,” Sinclair says. “We know several government departments are being encouraged to move out of London, and we see that continuing. We’ll be a beneficiary from that.” Sinclair speaks to EG as the company posts a mixed set of results for the year to 31 March. At 1.1%, the REIT’s total property return outperformed the MSCI UK Quarterly Benchmark of -0.5%, the third consecutive year in which it has done so. EPRA earnings of £10.8m were 42% higher than a year earlier. A quarter of the apartments have now been sold at the company’s Hudson Quarter, York’s first mixed-use project in a decade, although the timescale for the project has slipped slightly, with completion now due next March. “We were going like a steam train, selling four or five flats a week,” Sinclair says. “It’s picked up significantly in the last week, and hopefully our chancellor tomorrow may give some sort of stamp duty holiday, which can only help.” But a near-6% hit to valuations sent the company into the red, with a pre-tax loss of £9.1m. The sharpest valuation declines were in the REIT’s leisure and retail properties, Sinclair says, although he adds that many of its tenants in these sectors are up to date with rent payments, including cinema operator Vue as well as Wickes and Pets at Home, which rent retail warehouses from Palace. Sinclair and colleagues set immediate priorities in March as lockdown began. “I’ve been through a few downturns, and I’ve also been through pandemics – you have to handle it as best you can,” Sinclair says. The first focus was liquidity – stopping all non-essential capital expenditure for a time to preserve cash. But the second was to preserve contact. The Palace team called all its tenants – some 200 companies – to make sure it had a direct dialogue over rents and any problems they might have paying them. “It’s all a question of talking to your tenants, direct,” Sinclair says. “That’s why our rent collection figures for the March quarter were over 90%.” The company has struck deals some of its largest tenants. Palace negotiated with hotel operator Accor, giving the company six months rent free in return for the operator extending its lease from 2027 to 2032. Another, unnamed, tenant agreed to remove a break clause from its lease in return for a rent-free period. Not all of the conversations are easy. Some tenants could pay but simply refused. Others were genuinely in distress and had no prospect of paying the bill – “You’ve got to be realistic,” Sinclair says of those occupiers that have seen their finances decimated by the pandemic. “It’s no good chasing rainbows.” To send feedback, e-mail tim.burke@egi.co.uk or tweet @_tim_burke or @estatesgazette