The Duke of Westminster’s property company, which owns swathes of London’s exclusive Mayfair and Belgravia districts, has paid out a £50m dividend despite falling profits.
The boss of Grosvenor, the duke’s £11.5bn property empire, warned of a period of stagflation and that UK interest rates and inflation could stay high for longer than expected, resulting in “more pain” for the commercial property market.
Mark Preston, the chief executive, predicted a “shakeout” in real estate, as the value of its offices and other commercial assets in the UK dropped by 3.7% year on year amid a downturn in the market, after 2.5% growth in 2021.
Even so, it paid a £49.9m dividend to the duke’s family and its trusts, after a £48.7m dividend in 2021. Grosvenor also owns rural estates and one of the largest farms in the UK, as well as investments in food and agritech firms.
The company is owned by the duke, Hugh Grosvenor, 32, one of Britain’s richest men and godfather to Prince George. The 32-year-old has just become engaged to Olivia Henson, who works as an account manager for a food company in London.
Preston said big challenges included the move to hybrid working which had reduced demand for office space, along with rising interest rates and the withdrawal of debt financing availability, particularly in the US, which will hit overindebted businesses hard.
“Those [buildings] that are awkward space, less well located and in particular less up to scratch in terms of their environmental credentials are really struggling,” he said.
“Fortunately, we don’t have very many of those. You hear stories of 30% to 40% occupancy in these sorts of buildings and that’s not just a UK story, it’s an American story as well. Those are properties where the refinancing problems are going to be quite severe … in the next few months.”
Prices in the UK’s $1.6tn commercial property sector fell by 13% last year, according to industry figures from the property group CBRE, as dealmaking hit the lowest levels in more than a decade. Experts expect further price falls this year.
Preston predicted “some more pain in terms of property values” and said the extent of the downturn depended on the path of interest rates.
The Bank of England governor, Andrew Bailey, has predicted that inflation will slow in the coming months, but it has remained stubbornly high, with official figures last week showing it at 10.1% in March, down from 10.4% in February.
Preston said: “Once inflation gets up to these sorts of levels, it’s mighty difficult to bring it down again. So my suspicion is that interest rates will not come down that quickly. They will stay elevated for longer than perhaps some people are saying. But there may not be any particular reason why they should have to go up much further.”
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Grosvenor’s pretax profits from urban property fell to £110m last year from £437.5m the year before, partly because the 2021 results were boosted by a few large property deals. Profit in the UK property business, excluding valuation movements, increased by 6% to £38.3m, with projects including offices above the Bond Street West Elizabeth line station. Grosvenor’s total return dropped to 3.5% from 5.2% as rising interest rates led to falls in property values.
The value of the group’s property assets, which also include warehouses in the US, student accommodation and laboratories, edged up to £9bn from £8.9bn in 2021 reflecting higher residential and warehouse values, while total assets under management climbed to £11.5bn from £11bn.
The company paid £85.6m in total taxes last year (including £45.5m in the UK), down from £119.4m in 2021, because of fewer property acquisitions and a reduction in income and gains from the urban property portfolio directly owned by trustees. Taxes included £23.9m in corporate income tax and £20.7m in annual property taxes. Grosvenor is owned by UK tax domiciled trusts.
The business is making a push into social housing with a scheme in Chester, near to the duke’s family seat, Eaton Hall. It is retrofitting 30 homes into what it says will be high-quality, sustainable homes for vulnerable people, where social care professionals will provide wraparound support.
Preston said the duke, who inherited the business on the death of his father in 2016, was keen to help vulnerable young people, whereas his father was more focused on military charities. Grosvenor is aiming for hundreds of such homes, including in partnership with housing associations. It also has 700 affordable homes in Mayfair and Belgravia that date back to previous dukes.
