2016 was a record year for Bruntwood, with more than £1bn of property under its ownership for the first time in its 40-year history and a huge development pipeline still to come in 2017.
Activity in the year was focussed on major construction works in all of Bruntwood’s regional cities, with over £86m invested in the development of both new and refurbished space. With a gross development pipeline of £1.4bn and 1.8m sq ft of development planned between now and 2020, the business continues to go from strength to strength.
Sudden shocks, like the ones we have experienced in the last year, cause you to re-evaluate your strategy and stress test it against all possible outcomes. With that done, you emerge with a reinforced and reinvigorated belief that you’re on the right track for the future.
For Bruntwood, the opportunity to take a pause and thoroughly interrogate our future plans has convinced us that the path we have set out is robust. We are confident that both our strategy and plans are nimble and flexible enough to adapt as necessary as we navigate through the potentially choppy waters ahead.
In 2016, we continued to do what Bruntwood does best – deliver real value for our customers, our partners and our communities. We have increased occupancy levels across our portfolio, letting over 860,000 sq ft over the year, and we have continued to invest in the quality of both our product and our services. We have made a capital investment of £65m in our commercial portfolio, either upgrading buildings we already own, or developing new ones. Over the next three years we anticipate operating with around 20% of our portfolio in development at any one time.
In the wake of recent upheavals, it is our strong belief that both UK business and the UK consumer – and particularly those in our regional cities – are more resilient than the bulk of the commentary in the London-based financial press gives them credit for.
It is heartening to see that our belief in regional cities is shared by Government, with a renewed commitment to both the Northern Powerhouse and the Midlands Engine emanating from Westminster recently. As one of the Government’s Northern Powerhouse Partners and a member of the George Osborne-led Northern Powerhouse Partnership board, Bruntwood is committed to playing an active part in driving the transformation in our regional cities that is necessary to help rebalance the national economy. With a presence in the four regional cities that sit at the heart of these two economic regions, we are uniquely placed to do so.
Connecting with our regional cities and communities by deepening our engagement with the people and partnerships that make them tick is fundamental to our future business strategy. Our development of Cornerblock in Birmingham will deliver 110,000 sq ft of Grade A space into an office market that is heating up in anticipation of the benefits of HS2, and we are looking for further development opportunities.
In Leeds, our successful development of Sovereign Square has led to a closer relationship with the local authority as we support them in their goal to make their own physical assets work harder for the local community. In Manchester we are keen to dovetail with the city region’s plans for ensuring the growth of the city centre economy ripples out into the smaller towns and conurbations that it feeds. And in Liverpool, we plan to actively support the city’s burgeoning Knowledge Quarter.
As a business we have always prided ourselves on looking at the bigger picture of what we do, putting resources and effort into doing something of real value to society.
Each of our regional cities is developing a model for growth that is as individual as they are, tailored to their unique set of circumstances. What unites them all is that they are working to develop economic answers to the problems they face whilst also creating a better world for their citizens in the future. For all of them, a substantial part of the solution lies in science and technology, sectors which can generate significant economic benefit and tackle society’s pressing issues at the same time.
As a business we pride ourselves on looking at the bigger picture of what we do, putting resources and effort into doing something of real value to society. Through our own contributions and those of the Oglesby Charitable Trust we continue to donate 10% of our profits to community, cultural and charitable projects, but we are increasingly looking to join our charitable efforts with our core business activities to add value overall.
Through our role in Manchester Science Partnerships we may be providing the support and facilities that a new start-up life sciences business needs to develop a ground-breaking treatment for diabetes; through Bruntwood’s role as strategic property partner for the Central Manchester Hospitals NHS Foundation Trust we may be facilitating the efficient use of buildings and improving the flow of people through their services; and through the work of the Oglesby Charitable Trust we may be helping to give disadvantaged communities the confidence to tackle their own health inequalities.
Being a better business isn’t rocket science, but by being smarter about it we can make a real impact on the problems facing our cities and society as a whole.
As a business we believe that by focussing on collaboration above competition we can create true added value for our partners and for the cities where we operate. Our strongest relationships exist where we have established levels of trust with our partners that allow us to focus on working together for the benefit of the whole – if together we can create better results, then greater benefits will naturally accrue to both sides.
We are fully behind the Northern Powerhouse initiatives as they promote the case for collaboration. Our city regions – each with its own identity and goals – are starting to grasp the fact that they can build an economy that is bigger than their separate parts if they work together collaboratively. Historically, the first instinct has been to create competition between them as a way of driving down costs, but this risks undermining value and creating a zero sum game.
Across the north, cities that have spent so long competing against one another are now beginning to learn to work together in a more constructive way, using their complementary strengths so that we can truly generate value from the Northern Powerhouse economic thesis. If we can bring places with sectoral strengths together, we create powerful propositions that can unlock funding and resources on a much larger scale. If we just look at the possibilities through the lens of each regional city competing against each other, what we actually end up doing is limiting the available rewards.
“If we can bring places with sectoral strengths together, we create powerful propositions that can unlock funding and resources on a much larger scale.”
As the UK deals with the challenges created by re-framing its relationship with the EU trading block, our main concern remains the impact on the continued free movement of people. The flow of people is the vital undercurrent to the flow of ideas that feeds the scientific and technological innovations driving some of the most valuable elements of the UK economy.
The UK Government has a huge responsibility to deliver a good deal for British businesses outside the single market and undoubtedly the negotiations will be tough in the extreme. But with the country’s engines of growth even more reliant on the innovation economy than ever, it must take care to listen to the business community about keeping Britain’s doors open to the skills and resources we need. Otherwise we risk long-term damage to both our reputation in the wider world and our economy.
We start a new financial year with a robust balance sheet, a business model aligned to the needs of our customers and a strong portfolio across regional cities that is increasingly focussed on the growth sectors of tomorrow. However our biggest source of competitive advantage continues to be the Bruntwood team of circa 600 people who are instrumental in making our business not just successful but also exciting to be part of.
To all the teams across the Bruntwood Group I offer my sincere gratitude for everything they have achieved, for the culture they have created and for the belief they have shown in following what we call the Bruntwood way.
There’s been plenty to smile about in 2016, from Bruntwood’s first residential conversion to the greening of our urban environments.
With the drive to rebalance the UK’s economy away from the South East, Bruntwood has an important role to play in the success of the cities and places where it operates.
Use the links below for details of our business performance and notable developments in our key regional markets.
Bruntwood’s business has always been built on the strength of its people and a renewed focus on supporting their growth and development is one of the core strands of the company’s business strategy.
Many members of the team begin their career with the company either fresh from university, or increasingly via a variety of work placement and apprenticeship programmes.
At Bruntwood we have always believed that good business is a force for good. For us our involvement has been incredibly diverse and has ranged from supporting major arts and environmental initiatives through to encouraging our staff to volunteer through our Bruntwood Cares programme.
For over 20 years Bruntwood has pledged to contribute 10% of our annual profits to cultural and charitable causes. But we don’t just donate the money; we also get actively involved in how it’s used to deliver real value, through the work of both Bruntwood and the Oglesby Charitable Trust. By using our commercial expertise and our leadership, we make lasting connections across our communities.
In last year’s Annual Review I professed my belief that the next 3-4 years will be some of the most exciting in the company’s history and, despite the turbulent events of 2016, nothing has happened to change that view. Once again, we can report another successful year of growth, with net worth increasing by 16% to £473m: a great achievement in a year where property yields have remained relatively flat.
This is the first year that we have reported our results under FRS102, the financial reporting standard for companies in the UK which aligns the presentation of our accounts with international accounting standards. This has led to some notable differences in the way that our profit figures are calculated and displayed.
The biggest change this has created is the inclusion of revaluation and fair value movements in our profit and loss account and the recognition of the interest rate-derivative valuations on our balance sheet. Under FRS102, profit before taxation (PBT) is now reported at £68m, down from £71m in 2015.
Stripping out fair-value movements, the PBT reported under the former UK accounting standard would be £22.5m, compared to £15.5m in 2015. The fair-value increases of £56m in 2015 were aided by a reduction in market valuation yield, but the £45m figure shown in 2016 is a fairer reflection of the impact of our own endeavours. Under the new reporting rules, market yield movements will now become the single biggest cause of volatility in our annual performance statement.
Net worth increased by 16% to £473m, and profit before taxation
(under like for like accounting standards) was up to £22.5m.
The Bruntwood group’s turnover increased by 9% in 2016, mainly resulting from an increase in development activity. Our property investment business makes up 85% of the group and has had another strong year, with vacancy down at record lows in the majority of our markets, concessions continuing to reduce and headline rent increasing. This business in isolation would deliver over £22m of PBT, and so allows us to leverage off a very strong foundation in the running of our development business, which is dedicated to laying the foundations for future growth.
The group saw record levels of activity in 2016 with new developments in Manchester, Birmingham and Leeds all achieving strong letting pipelines well ahead of practical completion. We have exited five small, non-core sites and we have spent close to £120m in capital and development. With the completion of the Manchester Business School Hotel, significant further capital investment into Alderley Park and getting started on commercial schemes at Circle Square and Citylabs 2.0 in Manchester, we expect 2017 to be another record year.
The group’s Loan to Value (LTV) ratio at the end of the financial year was 49% and it is likely to remain at this level for the next 12-18 months as we continue to deliver our development pipeline, but our medium-term aim is to reduce this percentage closer to 40%. We continue to be very grateful for the fantastic support of all of our banks, and following the completion of a new £115m, 15 year loan facility with Aviva (see opposite), we are now working with our medium-term facility lenders to extend the term and increase the quantum of the remaining £180m facility and bring into it some of our development pipeline.
Flexibility will be the key to adapting to the ever-changing circumstances of an increasingly volatile and uncertain business environment. Despite the twin shocks of Brexit and Trump, the world has held up pretty well, with the UK consumer, who accounts for almost 65% of the country’s economy, continuing to spend. Each new month seems to bring further record spending, but we cannot however ignore the depreciation of sterling, which will increase inflation and therefore begin to erode disposable income levels over the coming year.
Our expectation is that this will result in a slowing down rather than outright recession at this stage, but we are always mindful of the level of risk that we take within the business. By keeping the percentage of our capital deployed in development below 20% and by restricting the speculative nature of any development, we will ensure that we maintain the ability to turn the taps off if it does start to get cold out there.
With the prevailing headwinds, further shocks will undoubtedly happen, but with an average equivalent valuation yield across our portfolio of close to 8%, property still looks like a good investment, especially when the average FTSE 100 yield is just 3% and 10-year gilts trade at close to 1%. Occupational demand is still buoyant and supply and demand in our markets is in balance. We do not foresee any major risk of a sharp correction in the near future and so enter the new financial year with cautious optimism.
As time passes, however, the original shock of both these events is being somewhat tempered by the positives that are starting to emerge and opportunities that are arising. That is not to say that the belligerence of Russia, the uncertainties surrounding China’s intentions and the insanity of the warring factions in the Middle East are issues that are any nearer resolution.
Whilst focusing on the international events of our time we must, however, not lose sight of the big and very real issues directly affecting our own communities. There can be no more telling fact than those that show that people in the North live significantly shorter lives than those in the South and, although longevity generally is increasing, the divide is not reducing. We can add to this the truly disturbing fact that the less affluent in the North live at least 10 years less and enjoy significantly poorer quality of health than the rest of society.
People are our major asset and we all have a role to play in turning this round and improving their wellbeing. We are addressing this in the Oglesby Charitable Trust by establishing the Shared Health Foundation, a body that is playing a significant role in health in the less affluent communities and it is gratifying to see that the public sector is beginning to join with us in prioritising this.
Whilst focusing on international events... we must, however, not lose sight of the big and very real issues directly affecting our own communities.
What does this really mean in reality? It’s about putting community support workers in 100 GP practices; setting up a network of volunteers in communities to provide basic support and guidance on health; improving the lives of the many carers in our community; improving the health of the homeless; working to improve and grow the network of community centres in deprived communities.
An important part of the well-being and success of any community is the role played by our environment and the arts. A quality environment not only helps the quality of people’s lives but also makes a contribution to its sustainable future. The arts not only enhance our lives but also make a major statement about a city’s priorities. Playing our part in instigating and supporting these activities, through the Bruntwood Prize for Playwriting, B!RTH Festival and Manchester City of Trees are some of the projects of which we can be proud.
I have been contributing to the company’s Annual Report for the best part of 40 years now. On looking both backwards and to the future I am delighted to see our continuing pattern of company growth and investment in the region through both the good and bad times in our economy. This year’s report shows the continuing upward trend and, despite the possibility of some dark clouds on the horizon, our strength and diversity has always played a major factor in ensuring a sustainable future. We can also be proud that, throughout that time, we have never lost sight of the fact that we have been fully engaged in the wider community and there is no question that this engagement and these embedded values will continue long after I have a role to play.