London Project Turns Unprofitable Developer Into Market Darling

Northacre Plc, an unprofitable London developer, became the second-best performing real-estate stock in Europe this year thanks to just one project that’s still in progress.

Sales at The Lancasters redevelopment, a city block of 1850s townhouses overlooking Hyde Park, have probably been sufficient to entitle the company to a 50 percent share in the profits under an agreement with partner Minerva Plc. The shares have climbed to 122.5 pence from 24 pence this year, more than a fivefold gain, compared with 4.3 percent average decline for the 50 members of the FTSE AIM Real Estate Index.

One shareholder “hugged and kissed me” at the company’s Aug. 3 annual meeting, Chief Executive Officer Klas Nilsson, 69, said in an interview in The Lancasters’ model apartment. The grateful investor bought 10,000 pounds ($16,000) of Northacre stock when it languished at 2 pence, an investment that was worth 612,500 pounds at yesterday’s closing price.

Apartments in the 77-unit Lancasters went on sale amid increased demand from wealthy overseas investors, who are using the pound’s weakness as an opportunity to buy homes in central London. A shortage of properties for sale for more than 1 million pounds pushed prices higher, making luxury homes in London outpace the rest of the U.K. housing market.

“They have hit the sweet spot in the market,” said Charlie Ellingworth, the co-founder of Property Vision, a unit of HSBC Private Bank that advises wealthy investors on buying homes. “If you want to buy something new and of that level of quality in central London, your choices are limited.”

Profit Share

Northacre has raised almost 250 million pounds selling about 60 percent of The Lancasters apartments, Nilsson said. Minerva, the second-largest developer in the City of London financial district, agreed to split profit equally if sales exceed the project’s estimated 170 million-pound costs by 20 percent. Northacre would only get a 5 percent share if profits are 10 percent or less above costs.

PI Portugal Global Immobilien AG, a German real estate company with a market value of 2.9 million euros ($3.9 million), is the only company in the Europe, Middle East and Africa region to have a bigger share-price increase this year.

Sustaining the stock’s value will depend on Northacre finding another profitable development by the time work ends on The Lancasters in August 2011.

“Our share price will go down unless we have something in the pipeline,” said Nilsson, a Swede who trained as an architect in Germany before coming to the U.K. and founding Northacre in 1989. “We have a year.”

Future Plans

The company plans to resubmit a planning application in the first half of next year to redevelop Vicarage Gate House, a former nursing home overlooking Kensington Palace, after a seven-year planning battle. The property, which Northacre would develop with Singapore-based real estate investor Ong Beng Seng, would take three years to complete.

A partnership formed in April with private-equity investor Evans Randall Ltd., part-owner of the London tower known as the Gherkin, may help Northacre get development finance as it scours the British capital for sites, Nilsson said.

“They have brought some interesting financial partners to us,” he said. “We are aiming for projects for which we will be remembered -- landmark projects.”

The time it takes to get planning consent and construction permits is critical for niche developers like Northacre, which has a market value of just 32.7 million pounds. A single project can make the difference between an annual profit and a loss.

Unprofitable

The company reported losses totaling 4 million pounds for the two years through February. Aside from property sales, the company gets income from its Intarya interior design arm and its Nilsson architecture unit.

Northacre is focusing on selling the remaining apartments, priced from 900,000 pounds to 16.5 million pounds for the 5,385 square-foot (500-square-meter) show apartment that opened in June.

Refurbishment of the 192,000-square-foot former hotel began in 2008, with the heritage-protected façade retained as the interior was gutted. The front gardens were excavated and will be covered over again for two underground stories of garages and a third-story swimming pool, gymnasium and leisure facility.

“There’s a lot of foreign money seeking to invest in London residential property,” Nilsson said. While London luxury home sales have slowed in the final quarter as the end of the year approaches, he expects all the units to have sold by the time work at The Lancasters is completed.

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net

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