COMMENT | Ugly ducklings of property funding

Ducklings don’t get much uglier than a post-war infill warehouse near Bootle docks with all the attributes – or possibly more accurately, lack of them – that it suggests, writes Dougal Paver, strategic marketing advisor to the Chrysalis Fund.

The occupier’s business has stayed the course for decades but growth opportunities, changes in materials handling technology and suppliers’ and clients’ palletisation and delivery requirements are now placing demands that the building just can’t meet. And he is a manufacturer, not a property business, so his first thought each day is not real estate.

That said, he is an owner-occupier and there’s a plot of cleared land next door which could support a complete re-engineering of the site to make it fit for purpose: higher eaves and bigger loading docks; a larger turning circle for trucks and safer ingress and egress, too, with less impact on neighbours; and a much more efficient picking, packing and racking infrastructure, with room for capital equipment to support the growth of the manufacturing process.

Total operating costs will be reduced, the efficiencies and productivity gains it will generate will further enhance operating margins and clients will benefit from shorter lead times. Who’d have thought that property could be key to so many strategic gains?

And yet.

The low capital value of the asset, particularly when set against land acquisition and construction costs, as well as the capital equipment to support the expansion, knock the whole spreadsheet out of kilter as far as a traditional funder is concerned. Computer says no and that’s your lot.

It’s a frustratingly common scenario across the North West, and the Chrysalis Fund was established to take a much rounder view of such opportunities where they occur in the Liverpool City Region.

By giving itself the freedom to offer debt, equity, a combination of both or another instrument it has been able to turn such ugly ducklings in to the swans they ought to become. Scale is important, too, if it is to achieve the regenerative impact it desires, so the fund doesn’t commit less than £1m nor would any single commitment exceed 20% of the fund’s size or 60% of a project’s value.

The key is to focus on the risks, not the input costs. In a scenario such as the one above the viability issue is related to capital values, whereas the out-turns of the investment all lead to revenue and margin gains, not to mention jobs growth or protection. So in terms of the tactical value to the business – as opposed to any balance sheet risk related to land values – it’s a deal worth supporting and would likely attract a blended approach from Chrysalis.

Whether or not you operate or advise an ugly duckling, they needn’t remain so for long. Chrysalis Fund has a £35m rolling finance facility to support just such scenarios and you should speak with them to see how they can support you.