November 15, 2017
The Talent Spotter
Ray Palmer and the team at Palmer Capital successfully nurture property companies with strategic investment and have an enviable record of backing winners. As the business celebrates its 25th anniversary, we spoke to Palmer about what it takes to be a property talent spotter.
At these points in the property cycle when the market has softened in places and there is uncertainty, it’s usual to get a flurry of start-up businesses. Some of these launches are precipitated by circumstances – for example, as property consultancies downsize their teams – but others are a response to a slightly less competitive market providing more opportunity for fledgling businesses.
It’s a scenario with which Ray Palmer has become very familiar over the past 25 years. He has developed a knack for spotting winners in a business where propcos are often more characterised by their inherent fragility than potential longevity.
Palmer Capital had its origins in 1992 when Palmer left his role as Chief Executive at property agency, Lambert Smith Hampton, with his share of effectively ‘having sold the business three times’.
Although Palmer had money in the bank, the property market was in recession and he found that his wealth actually inhibited the ambition of his dealmaking: “I was coming second in just about everything I bid for,” he recalls.
His involvement in the redevelopment of Leeds Rugby Ground was a breakthrough deal in terms of putting him on the property investment map. The creation of a Morrisons supermarket and a retail warehouse scheme generated good returns and, as he notes, also enabled the creation of several new rugby pitches for Leeds.
However, it was his investment into start-up propco, Wrenbridge, in 1993 which established the Palmer Capital template that still endures to this day. The company – which was looking initially to develop around Cambridge – had been started by Peter Jarman and Tim Holmes but they needed new backing to take the business forward.
Palmer recalls: “They wanted financial banking, but they also wanted ‘grey haired thinking’ – somebody that would ask the ‘What if?’ questions.
“It worked very well: Wrenbridge made a profit in its first year and has made a profit every year since. So I thought: ‘Hang on – this is quite an interesting model’. I then met another company about 18 months or so later and I did exactly the same thing with them.”
Today, Palmer Capital has stakes in eight operating businesses: Angle Property, Cubex Land, Danescroft Land, Harlex Property, Manse, Opus Land, Opus North and Wrenbridge Land. It also has around £850m of assets under management across joint ventures, active funds and segregated accounts.
Palmer Capital is still looking to back businesses and its founder is proud that in 25 years it has only parted company with two businesses in which it had invested.
One situation dissolved “because the guys had made so much money they wanted to spend more time on the beach”. Regarding the other, he will only say it was a “matter of trust”.
“We’ve always had a lot of companies that have approached us for financial backing, but often when you look into the details of the business plan, the directors have got £100,000 to £150,000 a year pencilled in for their salaries. That’s not starting up by yourself; it’s not being an entrepreneur. You’re just seeking to swap employers and increase your bonus arrangements.
“So a lot of people get ruled out when we say that you have to live off of the profits of the company. We are not subsidising salaries for them. We’re looking for true entrepreneurial spirit. Typically, we’re being approached by thirtysomethings and it’s the best and worst time for them to go it alone. It’s great because they are full of ambition, energy and ideas but at that stage of their life they have often recently got married and started a family. They have to be really rather brave to take that step.
“For us, the investing in people comes first. We have to really like and trust the people involved because if we don’t, it’s just not going to work. If you get tempted by a good deal with people you’re not so sure about, and the situation goes wrong then sorting it out is going to be difficult. If you find really good people and you have a deal that goes wrong, you’ll get through it.”
Not ‘playing favourites’ is also essential when you are invested in several companies. Palmer notes: “We have the same shareholding in all of them and so there’s no financial complex of how we are involved with one in comparison with another”.
Of course, if you’re in the business of backing propcos and delivering investment management performance, the underlying state of the market is of central importance. Palmer is positive about certain sectors but concerned about the macro-economic outlook.
“There is no real oversupply of offices or industrial throughout the regions which is good because I think in the next few years we are in for a very rocky ride in both the economy and the property marketplace. The political and the economic threats are greater at this moment than I can previously recall in my career.”
He voted ‘remain’ in the EU Referendum but does not believe that the country should backtrack on that decision: “I respect democracy and I think we have to stick with the vote result. The UK is actually really quite good at making the best of its situation”.
The companies that Palmer has backed have always represented a blend of commercial and residential development and it is an approach which has gained increasing acceptance as the traditional lines between sectors have become more blurred.
“Our particular focus is twofold. One is residential land for house builders. We buy a lot of land without planning consent, spend money to obtain the necessary consent and then sell it onto the house building community.
“The second focus is on retail and the need for last mile logistics for the likes of Amazon – we are particularly keen on that sector.”
Although Palmer says that retail is the least favoured of the business’s target sectors, it still has pretty substantial involvement: “We’re building space for Lidl, Aldi, Sainsbury’s and B&M with all of the assets to be sold on completion. We’re also involved in some very large shopping centres via our property companies, and these include The Grafton Centre in Cambridge which is presently the subject of a major refurbishment and extension”.
The retail logistics sector is an area of particular focus, and this summer Palmer Capital recorded its largest single acquisition with the £86.4m purchase of a 750,000 sq ft distribution warehouse in Peterborough let to Debenhams.
Palmer observes: “In terms of logistics, warehouse properties for the likes of Amazon around major conurbations have shown exceptionally good rental growth over recent years and that is likely to continue because housing pressure has taken up so much old industrial land and continues to do so. Suburban logistics properties are becoming a rarer animal and consequentially the rental growth on them is forecast to be good”.
Most recently, Palmer Capital has given its backing to a new Manchester-based company called Harlex Property founded by former Kier Property development director James Nicholson. The North West was the only major UK region where there was previously not an active Palmer Capital-backed company.
“This type of situation is incredibly satisfying because you’re adding finance and knowledge to someone’s skill set and hoping that two and two make a lot more than four. It was satisfying 25 years ago with Wrenbridge and it’s still incredibly satisfying today.”
Featured in the Q3 2017 edition of Browse Magazine.