MEPC plc

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MEPC plc

Brook House
113 Park Lane
London W1Y 4AY
United Kingdom
(071) 491 5300
Fax: (071) 491 5361

Public Company
1946 as The Mercantile Property Corporation Ltd.
Employees: 900
Sales: £238.30 million (US$459.95 million)
Stock Exchange: London

MEPC is the United Kingdoms second-largest property company and one of the largest property companies in the world, operating in more than ten countries. Its principal business activities include the management of its extensive portfolio of investment properties, the acquisition of properties, property development, and trading. U.K. activities account for 84% of its assets while other important areas of activity include Europe, Australia and the United States.

Like many of the U.K.s largest property companies, MEPC was incorporated shortly after World War II, although the property activities of its founder, Claude Moss Leigh, go back much earlier. Claude Leigh was born in 1888, the son of a northeast London surveyor and estate agent. Leigh joined his fathers business, but soon realized more money could be made in the property market by acting on his own account rather than as an agent for others. Leighs early ventures concentrated on the provision of working-class housing. In the interwar period, most of the urban working class rented housing, apart from a small proportion provided by charities and similar bodies, was owned by small-scale or absentee landlords who made few efforts to ensure that the houses were kept in good repair or had an acceptable standard of amenities. Leigh perceived the need for a public company that would provide good quality rented housing and enlightened housing management, including welfare services for the tenants, while paying a commercially acceptable dividend to its investors. His efforts in this area culminated in the establishment of The Metropolitan Housing Corporation Ltd. (M.H.C.).

M.H.C. was floated as a public company in March 1929, with authorized capital of £1 million. The company owned 13 housing estates located in the poorer parts of London. Leighs attempts to find commercial, rather than philanthropic, solutions to working-class housing problems met with only limited success, however, and the necessity of earning an acceptable dividend meant that his welfare plans could never be fully implemented. With the onset of World War II, rent control legislation was tightened and the project became unworkable even as a commercial enterprize. Leigh decided to embark in a new direction and in 1946 established a new company to acquire and manage commercial property.

On October 1, 1946, the company was incorporated under the name of The Mercantile Property Corporation Ltd., the product of the merger of three companies; The Metropolitan Housing Corporation Ltd., The Monument Property Trust Ltd., and the Mercantile Estate and Property Corporation Ltd. These companies, together with their subsidiaries, formed the nucleus of MEPC to which the assets of several more property companies were quickly added by acquisition. On October 25, 1946, its name was changed to Metropolitan Estate and Property Corporation Ltd., shortened to MEPC in 1973.

MEPCs initial property portfolio contained a large proportion of residential properties, which made up 44% of its holdings. A further 25% of the portfolio was offices, 12% was shops, and the remainder consisted of industrial and other properties. This weighting toward housing would have constituted a substantial liability for the company in the years ahead; residential rent controls and higher management costs associated with this type of property led to a flight from residential property by property investing institutions. The need to reduce residential holdings was soon perceived, and by January 1948 the proportion of houses in the portfolio had fallen to 40%.

MEPCs early capital needs were met by the issue of shares, long term finance via mortgages and short term finance via bank loans. More than £400,000 was also received in War Damage Compensation during the first year. Compared to a rent roll which stood at £900,000 at the end of 1949, this was clearly a substantial amount. The sale of houses and other unprofitable properties raised further funds.

Early investments concentrated on land purchases and financing property construction, although development did not contribute significantly to the firms activities until the late 1950s. In order to reduce the burden of Profits Tax, MEPC also turned to investment in equity, which was not subject to this tax. Other activities included property dealing; in the early 1950s the House and Land Syndicate, which had been acquired by MEPC in 1946, was reconstructed for this purpose.

The early years of the company saw steady expansion. Building materials shortages and a variety of government restrictions on capital and building licenses led to an under-supply of new buildings in the early postwar years. A boom in second hand property resulted, as demand for existing buildings outstripped supply. Such conditions were favorable for the property companies, many of which were established during this period, since although the development market was severely restricted the investment market was extremely buoyant. During these early years the company expanded largely by takeover. In 1948 Percy Bilton Investment Trust Ltd. was acquired. Three more property companies were taken over in 1949 and a further three in 1950.

In addition to activity in the domestic market the company looked to overseas opportunities from an early date. Claude Leigh visited South Africa in 1948 and during that year the firms first overseas subsidiary, M.E.P.C. Ltd., was founded there. Another African company, Metropolitan Estate and Property Corporation (Rhodesia) Ltd., followed. By the early 1950s attention had turned to Canada as a possible source of investment opportunities and in 1955 MEPC established a Canadian subsidiary. Difficulties in gaining Bank of England consent for sending out sufficient capital led to delays but permission was finally granted on the understanding that half the subsidiarys profits would be remitted to the United Kingdom. This Canadian venture proved to be a success.

During the first eight years, MEPC operated as an investment company, restructuring its portfolio in the light of postwar property market conditions by selling residential properties and buying the freeholds of some of its leasehold City offices. In doing so, the company concentrated assets in what was to become one of the most successful areas of property investment during the following years. High construction costs and building license restrictions dissuaded MEPC from undertaking developments during these early years, and even after the building restrictions were lifted in 1954 it was initially decided not to develop properties, other than the redevelopment of war-damaged sites, the cost of which was partly covered by government compensation.

This policy was changed a year later, however, and during 1955 a 216,000-square-foot office was developed in Wigmore Street, London. Over half of the building was let before construction to major industrial companies, including IBM. However, MEPC remained primarily an investment, rather than development, company throughout the 1950s. While other companies were forced to enter the development market due to the lack of sufficient investment propositions, MEPC was able to acquire new investment properties by a series of property company takeovers and the purchase of insurance company property portfolios.

MEPC pursued this strategy until the early 1970s, its acquisitions including: Town Investments, Metropolitan Railways Surplus Lands Co., Manchester Commercial Buildings Co., Westgate House Investments Ltd., Avondown Properties Ltd., Jeffery Sons & Co. Ltd., and London County Freehold & Leasehold Properties. The portfolios of secondary quality shops of the Prudential and Phoenix insurance companies were also purchased in the 1960s, many of these properties having great potential for rent increases upon the termination of their leases. Further expansion was also sought overseas; during the 1960s MEPC entered the Australian and European markets and its activities proved successful in both areas. When Claude Leigh died in 1964, MEPC had grown into the fourth largest property company in the United Kingdom, its capital at that time amounting to £50 million.

Although MEPC had experienced rapid growth during the property boom period, from the lifting of building license restrictions in 1954 until 1964 when the highly restrictive Brown Ban was placed on office building in and around London, it was felt by many commentators that the company had not taken full advantage of what was essentially a development boom. Pent-up demand for new office accommodation, which was released by the lifting of the building restrictions, led to high profit margins for developers and a large number of fortunes were made in development, often from virtually nothing, during this period. However MEPC began its development program late and remained primarily an investment company throughout the boom period.

While early expansion was financed by sales of residential property, income from this source soon proved insufficient for expansion plans and the company launched a series of rights and scrip issues to finance takeovers. In 1960 the company required development finance and turned to a source of development funds which was already widely used by property companies, the formation of funding arrangements with financial institutions. A joint company, Percy Street Investments Ltd., was formed together with the Equitable Life Assurance Society, to develop property in Percy Street, Newcastle. A year later a further deal was struck, this time involving the Equitable Life Assurance Society, the London Life Association, and the National Provident Institution for Mutual Life Assurance. A joint company was established, the Cumberland Property Investment Trust Ltd., to redevelop some of the properties in MEPCs portfolio.

By the early 1970s, MEPC was seen by some financial commentators as a somewhat dull property company that rested on its asset portfolio and showed little interest in development activity. While this was not a fair assessment of the company, its development program having a value of £79 million in 1970, such a reputation left it vulnerable to takeover bids. However, a bid launched by Commercial Union and Trafalgar House, and later merger negotiations with the merchant bankers Hill Samuel, both ended in failure. The company sought to expand rapidly activities by making use of borrowed funds that were all too readily available from the government and banks at this time. In July 1972 a new managing director, Peter Anker, was appointed, following the retirement of Dick Sheppard. Anker had risen to prominence in the company when he had been selected by Claude Leigh to set up operations in Canada. His efforts had resulted in the establishment of a highly successful Canadian subsidiary and it was hoped that his flair for large scale developments and rapid expansion would be equally successful when applied to the parent company. I look on it as though Ive taken over a gold mine, he stated with regard to MEPCs £350 million portfolio.

During 1972 and 1973 the company launched a number of ambitious development initiatives. These included large shopping projects in London, Guildford, and Birmingham, as well as overseas shopping malls in Honolulu, Munich, and Frankfurt. A joint scheme with Reed International to develop 300,000 square feet of offices in Covent Garden, London, was also announced and a house-building firm, J. Sanders & Sons, was acquired in return for shares. These, and a large number of smaller development projects and property acquisitions amounted to considerable commitments. By 1973, the value of the total development program was £417 million. Much of this development activity was financed by borrowed funds, placing the company in a vulnerable position in the event of a severe downturn in the property market.

By December 1973, the first signs of alarm which heralded the disastrous property crash of 1974 began to appear. MEPC was one of the first companies to show concern. On December 7 it decided not to proceed with five provisional U.K. office developments. Some of the factors which precipitated the property crash, such as the imposition of commercial rent controls, were domestic in origin and made the crash more severe in the U.K. than elsewhere. However, the most important factors behind the crash, the oil price rises and the economic downturn, had an international impact, leading to a depression in property markets worldwide. MEPC therefore faced considerable difficulties with its overseas commitments in addition to problems in the domestic market. Two important foreign projects, the Sydney Exchange Centre and the Manhattan Centre in Brussels, ran into severe problems as conditions in the Australian and Belgian property markets turned sour.

MEPC reacted to the crash by borrowing more money which was then placed on deposit. This added further to its interest payments but had the effect of securing the liquidity of the company. The debts that MEPC had accumulated from the banks and foreign currency bond markets, together with this extra borrowing, weighed heavily on the company during the following years. In 1974, net borrowings amounted to £331 million, representing 116% of shareholders funds. Falling property prices and rising interest rates on debts which could not be quickly paid made the situation even worse in 1975, by which time net borrowing had risen to 154% of shareholders funds. MEPC shares fell to a low point of 53 pence in 1975, after standing at 231 pence earlier in the year.

Despite these problems, MEPCs underlying position was quite strong. Its investment portfolio, the value of which had been slashed by the property crash, was still substantial and £40 million of cash in the bank helped to ensure that the company was not forced to sell properties during the depths of the crash. Some property assets were sold when the market began to pick up, and the companys finances were stabilized.

Property market conditions in the late 1970s heralded a change in the management style of the company. After a series of heated boardroom disputes over future policy, the expansionist Peter Anker was replaced by Chris Benson, and Sir Gerald Thorley of Allied Breweries became MEPCs new chairman. MEPCs banking advisor, NM Rothschild, was also replaced, by Hill Samuel and Morgan Grenfell. Under this new management the companys fortunes improved. The year 1977 saw a significant turnaround in its performance, with a marked reduction in debts. This was largely due to the sale in that year of MEPC Canada, the groups Canadian subsidiary, which reduced its debts by £82 million and raised £27 million. An important reason for this sale was the Foreign Investment Review Act, which hampered the remission of profits to the United Kingdom. The group also reduced its interests in the U.K. housing market and scaled down its development program.

During the late 1970s and early 1980s, a more cautious approach to the market and the inherent strength of MEPCs portfolio led to a steady improvement in the companys condition. In addition to institutional finance and overseas borrowing, the company also made use of rights issues to finance its activities in the late 1970s, despite the dilution of equity that this involved. Property development was resumed in 1978, notable projects including the Friary Centre in Guildford, the West One building in Oxford Street, London, and the Long Acre office development in Covent Garden, which was developed together with Legal & General. By 1981 the value of this development program stood at £100 million.

By 1980, 55% of the companys property portfolio consisted of offices, 20% shops, 15% industrial, 1% residential and 9% developments. Properties in the United Kingdom accounted for 75% of the portfolio, 9.5% was in Australia, 10% in the European Economic Community and 5.5% in the United States. The company moved its U.S. headquarters to Dallas in order to focus U.S. operations in that area of the country. Some early difficulties were experienced in this market, which MEPC attributed to adverse economic conditions caused by the oil price slump. Its 1984 report noted that overall, however, the contribution from this [U.S.] subsidiary has been disappointing. Despite these setbacks, MEPC held on to its investments in this area and by the late 1980s conditions had improved markedly.

The company did not suffer during the recession of the early 1980s, and while the property sector as a whole was adversely affected by the economic downturn, MEPC achieved steadily rising profits. By 1985 it became clear that an upturn in the property market was likely, and during that year MEPC bought control of the English Property Corporation from Olympia & York. Two years later, the company made a much more important acquisition, the takeover of Harry Hyamss Oldham Estate for £516 million, raising MEPCs property asset value to nearly £2.5 billion. The assets of this company were concentrated in London and the south east. They included Centre Point, the most famous of the buildings to be developed in London during the 1960s property boom. This building had become a focus of popular resentment against the property development industry in the 1960s due to the alleged unwillingness of Hyams to let the property, since it was worth more as a vacant office block than as an occupied one.

In 1988 James Tuckey took over as managing director. During this year the development program was increased to £1.2 billion, the biggest in MEPCs history, as boom conditions in the property market continued.

Considerable flexibility has been built into MEPCs development program and development finance has been arranged largely on a long-term, fixed-interest basis, thereby insulating the company from rises in interest rates. MEPC has learned from its experiences in the 1974 property crash and is well prepared for any rough waters that may lie ahead.

Principal Subsidiaries

MEPC Developments Ltd.; MEPC Investments Ltd.; Ortem Developments Ltd.; MEPC Corporate Services Ltd.; MEPC Australia Ltd.; MEPC Germany GmbH; MEPC American Holdings Inc. (U.S.A.).

Further Reading

Marriott, Oliver, The Property Boom, London, Hamish Hamilton Ltd., 1967; Watson, John, The Incompleat Surveyor, London, Estates Gazette, 1973; Erdman, Edward, People and Property, London, Batsford, 1982; Company File: MEPC, Estates Gazette, February 18, 1978; Foster, Michael, Company File: MEPC, Estates Gazette, January 30, 1982; Smyth, Hedley, The Historical Growth Of Property Companies And The Construction Industry In Britain Between 1939 And 1979, unpublished Ph.D thesis, University of Bristol, 1982; MEPC: Well Spread, Investors Chronicle, December 4, 1987; Foster, Michael, MEPC Gets Motoring, Estates Gazette, December 17, 1988.

Peter Scott