31 May 2023
The Conygar Investment Company PLC
Interim results for the six months ended 31 March 2023
Summary
· Net asset value (“NAV”) decreased in the period by £2.3 million to £122.3 million (205.1p per share; 30 September 2022: 208.9p per share) primarily as a result of increased administrative and operational costs.
· Total cash deposits of £13.3 million (22.2p per share) and no debt drawn as at 31 March 2023.
· Construction progressing well for the 693-bed student accommodation development at The Island Quarter, Nottingham planned for completion in the summer of 2024.
· £47.5 million facility agreement entered into with Barclays Bank PLC in December 2022, for a maximum term of 3 years, to enable the completion and subsequent letting of the student accommodation development at The Island Quarter, to be drawn from May 2023.
· Detailed planning application granted in May 2023, subject to the documenting of the section 106 agreement, for a 249,000 square foot bioscience building at The Island Quarter where occupancy and funding discussions are well advanced.
· Disposal of the development site at Haverfordwest, Pembrokeshire, for gross proceeds of £9.65 million to realise a profit in the period of £0.2 million.
· Anglesey Freeport confirmed as one of the two newly established freeports in Wales with our 203-acre brownfield site at Rhosgoch, Anglesey assigned as a special area within that freeport.
· Conditional contract exchanged, at a cost of £450,000, for the purchase of a 14.7 acre plot at the Bristol Fruitmarket site in the St Philip’s Marsh area of Bristol.
Group net assets summary
| 31 Mar 2023 £’m | 31 Mar 2022 £’m | 30 Sept 2022 £’m | |
| Properties | 115.6 | 99.3 | 110.1 |
| Cash | 13.3 | 30.7 | 17.4 |
| Provisions | (2.5) | (4.0) | (3.1) |
| Other net (liabilities) / assets | (4.1) | 0.6 | 0.2 |
| Net assets | 122.3 | 126.6 | 124.6 |
| NAV per share | 205.1p | 212.3p | 208.9p |
Robert Ware, Chief Executive commented:
“Having gratefully exited 2022, the year of the permacrisis, relatively unscathed and with interest rates looking to have reached their near peak, real estate markets beginning to stabilise and investor sentiment improving, we are cautiously optimistic about the Group’s prospects over the remainder of the year and beyond.
Whilst we recognise the continuing risks for the UK and global economies and the impact that above target inflation and rising interest rates have had, and will continue to have, on consumers facing a cost-of-living crisis, we believe that the significant progress made at our currently owned and targeted development projects leaves us well positioned to take advantage of those opportunities as they start to emerge.”
Chairman’s and Chief Executive’s statement
Progression and results summary
This has been, and continues to be, a transitional period for the Group where, having sold, over a number of years, the vast majority of our rent producing investment properties, to lock in, for the benefit of our shareholders, the significant returns generated from those assets, we are now utilising those funds to progress the planning applications for, and construction of, both our owned and targeted development projects. This, we believe, has the potential to realise considerable upside over the coming years.
We have historically maintained a minimal and efficient management team, supported by third party asset managers to administer our real estate activities. However, to better ensure the successful implementation of our vision, branding and desired outcomes for the development portfolio, such that we can provide at each destination a placemaking-led, often locally-unique, high quality and environmentally and socially enhancing product we have increased our management operations at Nottingham. As such, the annual overheads for our head office and local site management functions are expected to increase this year to circa £4.0 million.
This necessary cost increase, required to fully support both the implementation of our stated development goals and expanding operations team, along with the minimal rents currently being received, during the planning and development phases of our property assets, are the main contributors to the Group realising a loss in the current period of £2.3 million (year ended 30 September 2022: loss of £53,000). However, we believe the upside for these assets remains significant and will look to realise their full potential over the coming years as we benefit from the forecast future growth in the UK economy and restabilisation of the real estate market.
Cash deposits at 31 March 2023 amounted to £13.3 million, a reduction in the period of £4.1 million primarily as a result of construction costs incurred on the student accommodation development at The Island Quarter in Nottingham, partly offset by the proceeds from the sale of our site at Haverfordwest in Pembrokeshire.
To further support our ambitions for the development portfolio, in addition to competitively priced funding, we announced, on 31 March 2023, the publication of a prospectus in connection with a proposed placing of 30 million ZDP shares at a price of £1 per ZDP share. The ZDP shares would have a life of five years and a final capital entitlement of 146.93 pence for each £1 ZDP share, equivalent to a gross redemption yield of 8.0 per cent. per annum on the issue price. The Company has received strong interest and demand from investors for the issue, but not to the level required to be eligible for admission to the Standard Segment of the Official List of the London Stock Exchange, which requires a minimum market capitalisation of £30 million. As a result, the Company announced on 22 May 2023 that it has paused the ZDP issue while it explores possible alternative listing venues, with a revised issue size of up to £20 million. Pending confirmation of the alternative listing venue, the placing has been extended to the long stop date of the ZDP Placing Agreement of 30 June 2023.
The additional funding being sought is intended for use to enable, amongst other projects, the faster progression of the designs and detailed applications for the next phases of The Island Quarter, including applications for between 1,500 and 2,000 build to rent apartments and a further 400-bed student accommodation scheme. We will also look to progress our existing and proposed bioscience applications at The Island Quarter, implement required infrastructure works and refurbish the two existing heritage warehouses to enable their possible future letting, further details of which are set out below.
The Island Quarter, Nottingham
We have made significant progress at The Island Quarter site since its acquisition in 2016 such that the Group is now well positioned, subject to investor appetite, to progress at a pace the further advancement of this substantial and transformative scheme.
Having received outline consent for a mixed-use development of approximately 2.8 million square feet in 2019 we subsequently constructed and, in September 2022, commenced trading at the first phase restaurant and events venue to achieve the desired outcome of regenerating considerable interest in a site that had remained derelict for almost 30 years. We have also completed the works to bring an electricity substation onto the site to provide the power required to support a development of this size, are currently on site constructing a 693-bed student accommodation scheme targeted for completion in May 2024, have received detailed planning permission for two hotels, 247 build to rent apartments and 30,000 square feet of co-working space and, subject to documenting the section 106 agreement, have also received permission for a 249,000 square foot bioscience building in May 2023.
More recently, we have also held constructive discussions with Nottingham City Council to agree in principle the parameters for a sitewide masterplan that will guide and support the future planning applications at The Island Quarter. This has resulted in a scheme which, subject to the granting of detailed consent and local demand, will enable the overall size of the development to increase up to approximately 3.5 million square feet. Following on from this, we will be looking to utilise, in the coming months, the funds we hope to raise from the ZDP issue to progress further detailed applications in particular for assets in those sectors where investor demand at The Island Quarter is becoming increasingly apparent.
Valuation
For this Interim Report, the fair value of The Island Quarter has been considered by the Conygar Board by reference to any changes in the assumptions set out in the reported 30 September 2022 valuation provided by Knight Frank LLP, progression of the project and the recoverability of costs incurred since that date. During the period, no planning permissions were granted or buildings completed, however there have been significant cash outlays, in particular to progress construction of the student accommodation development.
In assessing the fair value of The Island Quarter, for disclosure in the ZDP prospectus, the Conygar Board received confirmation from Knight Frank LLP that, in their opinion the real estate market movements over the six-month period to 31 March 2023 would not have materially changed the overall valuation as provided for this asset at 30 September 2022. Whilst we recognise the negative impact that price inflation and accelerated interest rate increases continue to have on property construction costs and valuation yields, we are seeing these adjustments being cushioned by rental growth, particularly within the residential build to rent (“BTR”), purpose built student accommodation (“PBSA”) and bioscience sectors. By reference to their gross development value, these three sectors comprise over 85 per cent of The Island Quarter site.
Despite the challenges faced by residential buyers, as a result of the ongoing cost of living crisis and mortgage rate increases, the acute supply and demand imbalance continue to support high levels of demand, and rent inflation growth, in the property rental market for which investor appetite remains strong. Furthermore, the continuing expansion in the UK’s student population, record levels of occupancy and the acute shortage of available multi-occupancy accommodation as a result of increased taxation, regulation and local authority social housing policy also continue to drive strong rental growth and investor returns within the PBSA sector.
In addition, an over-reliance on overseas providers, recent supply chain shortages and limited provision of laboratory space in the UK have highlighted a need for and, over recent years, attracted significant investment in, the bioscience sector. This is further supported by the UK government’s announcement, in March 2023, of their plan to cement the UK’s place as a science and technology superpower by 2030, backed by over £370 million in new government funding.
As a result, the overall fair value for The Island Quarter is assumed to have been maintained throughout the period subject to an uplift to reflect the value enhancement from the costs incurred since 30 September 2022, primarily in connection with the student accommodation development and bioscience planning application, resulting in a £14.7 million increase in the carrying value at 31 March 2023 to £107.7 million.
1 The Island Quarter
The restaurant and events venue at 1 The Island Quarter, which has now been operational for just over six months, has been very well received by the local community with the Cleaver and Wake restaurant itself recently promoted by The Times newspaper as being in its top 30 new waterside restaurants.
For a brand-new venue, 1 The Island Quarter, which had a delayed opening in a challenging economic environment, operating to date only during the seasonally quieter winter months, and with pressure on disposable incomes, has achieved solid revenues in line with our projections, of £1.65 million. However, the delayed completion of the development, due to various material and contracting issues, resulted in the events operation being unable to take advantage of the late summer and Christmas trade. This delay, when compounded by the phased opening, intentional overstaffing as operations were fully tested and margins being squeezed as a result of continuing inflationary pressures have resulted in an initial gross loss for the period, before administrative costs, of £0.1 million.
With the warmer months ahead and given the unique facilities and high-quality offering at the venue, as well as the significant opportunities offered by the indoor events space, outdoor plaza and bandstand, for which we have a series of events planned through to the autumn, we are expecting to significantly increase revenues for the remainder of the year. This will be supported by further targeted improvements to gross margins following the recruitment of an exceptional team, effective and efficient cost management, menu engineering and improved disciplines as this new venture becomes more established.
We also look forward to launching our loyalty app early in May called “The Island Club” which will enable significant leverage for bespoke sales opportunities as we build our database where points can be ‘earned and burned’. The app platform is designed to be modular and grow with the rest of The Island Quarter and accommodate more varied functionality, not just food and beverage loyalty points, but to ultimately also include other revenue-generating service provision options for residents and workers as we further progress the development.
Elsewhere on site
Construction of the student accommodation development is now fully funded, following the approval of a £47.5million debt facility from Barclays Bank PLC (Barclays”) in December 2022. The development is progressing on-time and on-budget, with completion planned for May 2024 to enable its letting to the September 2024 Nottingham university intake. The three-year term of the loan will enable, post completion of the development, the letting and stabilisation of the property to ensure we are able to maximise the return from this investment.
The recently granted 249,000 square foot bioscience application includes both laboratory and office space as well as conference facilities and is located to the north of the site directly adjacent to an existing bioscience hub. We are in advanced discussions with both a potential local tenant seeking significant expansion space as well as an investor to forward fund the development and we hope to provide an update in that regard over the coming months. However, should they not proceed, the demand for bioscience space is such that we feel confident that we would be able to find alternative tenants and investors.
To further support the placemaking strategy for The Island Quarter we are also advancing discussions with a national operator for the possible use of the site’s existing heritage warehouses as a potentially destination defining, events and performance venue and hope to be in a position to confirm arrangements later this year.
Other projects
We announced, in March 2023, the confirmation of the Anglesey Freeport as one of the two newly established freeports in Wales. Included within this location, as a special area, is our 203-acre brownfield site at Rhosgoch, in addition to, although not designated with the same special area status, our further site at Parc Cybi, both in Anglesey.
These freeports will form special zones with the benefit of simplified customs procedures, relief on customs duties, tax benefits and development flexibility designed at attracting major domestic and international investment. The Welsh freeports will also prioritise environmental sustainability and the climate emergency.
We are yet to fully assess the impact and potential upside that this initiative will enable for our sites, where we have continuing interest from the renewables sector, in particular for our site at Rhosgoch, but are delighted to finally see their significant potential being supported by the UK and Welsh governments.
In addition, the Company owns a further site in Anglesey at Holyhead Waterfront which is ideally located to benefit from new investment on the island and where we await the determination, currently expected later this year, of our detailed application for 259 townhouses and apartments, a 250-berth marina and associated marine commercial and retail units.
After somewhat protracted negotiations, we finally completed the sale of our site at Haverfordwest, Pembrokeshire to The Welsh Minister and POBL Homes and Communities Limited for net proceeds of £9.5 million to realise a profit in the period of £0.2 million.
We also announced, on 6 April 2023, that Conygar Bristol Limited, a joint venture owned 80 per cent by the Company and 20 per cent by Urban and City Limited, had acquired, for £450,000, an option to purchase 14.7 acres of land, strategically located, to the east of Bristol Temple Meads railway station.
Completion of the purchase, which remains subject to Conygar’s discretion, is dependent upon both a vacant possession condition being satisfied and a suitable planning permission being granted for a number of possible development options. The conditional contract expires on 31 March 2024 in the event that a planning application for the development of the site has not been submitted by that date.
Outlook
Having gratefully exited 2022, the year of the permacrisis, relatively unscathed and with interest rates looking to have reached their near peak, real estate markets beginning to stabilise and investor sentiment improving, we are cautiously optimistic about the Group’s prospects over the remainder of the year and beyond.
Whilst we recognise the continuing risks for the UK and global economies and the impact that above target inflation and rising interest rates have had, and will continue to have, on consumers facing a cost-of-living crisis, we believe that the significant progress made at our currently owned and targeted development projects leaves us well positioned to take advantage of those opportunities as they start to emerge.
N J Hamway R T E Ware
Chairman Chief Executive