Kenmore: The big dealers who lost the plot

AS THE clock struck half past three on Thursday, John Kennedy braced himself. The 58-year-old founder of Kenmore Property Group knew that at that moment, administrators from Grant Thornton were publicly breaking the news of his company's collapse.

Kennedy was well aware that over the next couple of hours, his mobile phone would be ringing non-stop as the hungry media pack raced to get the inside story on how one of Scotland's best known property developers had met its end.

Mixed in among the calls from journalists were likely to have been messages of condolence from some of the many agents, property lawyers and fellow developers with whom Kennedy had toasted deals over the past 23 years, usually in the swanky surroundings of Oloroso, the Edinburgh restaurant above Kenmore's offices on Castle Street.

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But Kennedy, whose personal fortune is estimated at 105 million, was in no mood to talk. "I'm just on my way out the door," he told Scotland on Sunday politely but firmly.

It may not have been intentional but Kennedy's choice of words could not have been more fitting. After enjoying more than two decades as one of Scottish property's biggest dealmakers, Kennedy has indeed been shown the door.

Although Lloyds has agreed to extend emergency funding so that the firm can continue to trade as a going concern, 21 of the Kenmore Group's companies have been placed into administration and a further two into receivership. The group's private equity arm and its Kenmore Capital fund have also been taken over by joint administrators Rob Caven and Martin Ellis at Grant Thornton.

Although Kennedy was clearly still struggling to overcome the shock of the collapse on Thursday, few outside the firm were surprised.

Kenmore's troubles were, one agent said, "Scotland's worst kept secret". Rumours had been circulating for months about its impending administration or a possible merger with another Scottish developer.

Although property circles are notorious for their tittle-tattle, on this occasion there was a greater sense of gravity. For weeks, the property sector has regarded Kenmore's collapse as a virtual fait accompli after lawyers were called in by the developer's backer, Lloyds Banking Group, in the summer.

Kenmore was one of several well-known Scottish property heavyweights whose success over the past few years had been fuelled by Peter Cummings, the former HBOS banker with an appetite for throwing money at property-backed ventures.

Cummings swiftly exited after the takeover of HBOS by Lloyds last year. However, it is estimated that Lloyds Banking Group inherited property loans and investments of around 70 billion from the deal.

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When collapsing commercial property prices first sparked fears over a number of HBOS-backed developers last year, Cummings offered Kennedy a 67m lifeline before packing up his desk at Bank of Scotland's headquarters at New Uberior House last December.

But the extra loan failed to silence the gossips. It wasn't long before the air at Le Di-Vin wine bar, a favourite property haunt in the West End of Edinburgh, was thick with further rumours that Lloyds was about to pull the plug.

Speculation reached fever pitch last month after it emerged that two Kenmore directors, Rob Brook and Andrew White, were separately trying to stage manage buy-outs of two different parts of the group. Brook, who was managing director of Kenmore Property Group, was frantically seeking to raise funds for a buy-out of Kenmore's 1.8bn asset management division. At the same time, White, who headed the group's Middle Eastern operations, was holding discussions to buy the regional business he managed. Both bids are understood to have stalled after Brook and White failed to raise sufficient investment in time.

Lloyds Banking Group last week would not comment on the Kenmore administration but concerns are growing about several other companies that were heavily backed by Cummings during the boom years. After the 350m HBOS-backed Silverburn shopping centre in Glasgow was forced onto the market in September, speculation has been mounting about Lloyds' inherited commercial property book.

During the recession, property consultants had anticipated a large number of distressed sales as falling prices led to a series of covenant breaches. But the expected fire sale failed to materialise.

As Nadir Khan-Juhoor, a partner at Knight Frank, explains: "There was an expectation for a long time that there were going to be lots of forced sales and quite a few people with cash were hanging around to see what they could pick up. But that hasn't happened as much in Scotland as elsewhere in the country."

Many property experts anticipate that now both Lloyds and Royal Bank of Scotland have a clearer idea of their future structures follow this month's rulings by the European Commission, the long-awaited distressed sales may finally emerge.

Alasdair Humphery, a director at Jones Lang LaSalle in Edinburgh, says: "The banks are now in a place where they can do this work with their portfolios."

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Humphery argues that they may also have been biding their time before forcing sales through.

He says: "Six to nine months ago you were looking at a market that was losing 3-5 per cent a month. Now there's more confidence that the market is there."

In recent months, prime properties with long leases have been attracting fierce bidding wars as property funds, which are once again receiving substantial monthly inflows, desperately hunt for appropriate targets for their money.

However, Humphery suggests that the banks are unlikely to dump large numbers of assets on the market in one go – for fear of driving down prices. "Banks are now more sophisticated than they were after the last crash in the Nineties and are less likely to push through a fire sale."

Chris Dougray, a director at DTZ in Scotland, agrees that after a long period of internal uncertainty, the banks now have a clearer idea of which property assets they do and don't want to keep.

He says: "Banks, generally speaking, have now established strategies for moving forward. It is under control. They have an opportunity just now to dispose of investments let on long leases since there is a real depth of demand from investors for this type of stock. Pricing is almost back to where it was in some sectors."

One well-placed source suggested that Kenmore won't be the last administration over the next six months.

He said: "It's a changing landscape, there's no doubt about that. By spring next year it'll likely be a case of 'let's see who is left standing'. There's a lot more to come."

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Rumours are already spreading that another heavily HBOS-backed property developer is on the verge of collapse. As one source said: "One of them is already dead in the water."

But Bruce Cartwright, partner in business recovery services at PricewaterhouseCoopers in Scotland, argues that given the worst of the recession is now over, banks will be reluctant to force developers into administration. Instead, Cartwright said, there is likely to be a large number of financial restructurings announced over the next couple of months.

He says: "We are seeing now that the banks are taking direct control of situations. They are principally looking to find 'consensual solutions'. There are more restructurings in the pipeline. We are by no means at the other end of them."

Whether it is more administrations or further restructurings, few disagree that the demise of Kenmore is a worrying sign for the Scottish property sector.

As Dan Macdonald, chief executive of Macdonald Estates Group, summed up: "It is not good news for Scottish property at all. People have been asking me, who is next?"