Plaudits for Minerva but short-term view still hazy

Minerva, the London developer, saw off the approach by Nathan Kirsh last week with considerably more ease than England managed against his South African compatriots in the third cricket Test in Cape Town at the time.

It has not proven to be a good campaign for Mr Kirsh, who made little headway in gaining support since moving from largest shareholder to hostile predator in November. The eventual support of 0.08 per cent of shares cannot be seen as anything other than a dismissal for what was seen as an opportunistic 50p a share bid from fellow stockholders.

Plaudits should go to a plucky defence from Minerva’s management, who unleashed a flurry of announcements of sales and lettings, as well as a crucial updated net asset value of 95p that gave shareholders a target for discussions. It helped that the unexpected market recovery meant a moving price target.

Shareholders cannot be so sure that the next few months will prove as positive, however. His bid was far too low in this instance, but Mr Kirsh is a man said to have faith in his knowledge of the value of investments – it is difficult to argue against the £25m ($40m) or more that he has made from buying Minerva shares at the bottom of the market.

He started buying at about 10p a share in the face of negative opinion about the developer, which was seen as overexposed to the City of London office market. Now, the shares are trading at about 73p.

Mr Kirsh predicted that there would be little short-term gain to the stock when trying to persuade others to sell. Fighting talk aside, it appears true that there will be a lot of work needed in letting and developing its portfolio at a profitable level. It would be a surprise to see NAV continue to grow as rapidly and, without bid support, this could easily feed into a return of share price weakness.

Minerva has one potential ace up its sleeve in its Walbrook scheme, now one of the only large new buildings left in the City of London market after BlackRock agreed to lease Drapers Gardens last week.

It can now hope to hold out for a rent nearer £60 a sq ft, a premium to BlackRock’s letting at £50.

This recovery perhaps should not be seen as so surprising, even if the speed has been. Two years ago, near the top of the market, Michael Marx, chief executive of Development Securities, sat down with a piece of paper and drew two lines, labelling one £40 and the other £70. Between the two, he pencilled in a wavy line hitting each level. There, he said, was the City of London rental cycle.

No matter how clever a developer may claim to be, there is no fighting a market cycle that had consistently peaked at these two points for prime office space. This point also relates to another truth: that developers do not make money from development, but from timing.

If a building hits the market at the wrong time then it will lose money, and most new buildings were planned with higher rents in mind. The return of rental growth to the Square Mile should not hide the fact that many are still letting offices at a rate that will not make much profit.

Testing the market

The owners of Drapers Gardens – Morgan Stanley’s real estate funds, Canary Wharf and Exemplar – are already said to be preparing to sell at a price of about £220m before the ink is even dry on the lease.

Indeed, the first week after Christmas has seen the investment market return to life surprisingly fast, but it is worth a look at who is doing the trading. The William Pears group, the astute family investor run by Mark Pears, is testing the market with a £450m portfolio, for example. There are properties coming to the market soon from other well-regarded investors.

Values are still increasing rapidly – by 3.3 per cent in December, according to CBRE – but this could be a worrying signal to take profit soon by those with track records of judging market trends.

Asset alliances

Outside Minerva, there are few obvious bid targets among property companies given share prices trading near NAV and uncertainty over outlook. However, at the end of last year, this column predicted that the property asset management sector would see further consolidation – a forecast already proving accurate.

On Monday, Invista announced discussions with a third party, providing a potential exit for Lloyds, its largest shareholder. More fund managers are bound to follow, as the larger groups bulk up assets under management in the hope of a recovering property market, while investors make sure poorly performing management teams are shown the door.

dan.thomas@ft.com