View from City Road: Rosehaugh reminds us of the risk

BROADGATE is one of the best property developments ever seen in Britain, a monument to the skills and vision of Godfrey Bradman and Stuart Lipton, who masterminded its construction for Rosehaugh and Stanhope Properties respectively. That makes it doubly unfortunate that it has also become a monument to all that went wrong with the 1980s property boom.

The lessons from Broadgate are all financial. First and, with the benefit of hindsight, most obvious, is that the property market can go down as well as up. Second, financing long-term ventures on the scale of Broadgate almost exclusively with debt - Rosehaugh Stanhope Developments had just pounds 101m equity but pounds 1.25bn debt - involved an unacceptable degree of risk.

That was compounded by an accounting system that allowed the two partners to keep the debt associated with RSD off their balance sheets, despite the fact that it dwarfed their own borrowings. A project the size of RSD could never have been tackled by one company on its own, so a joint venture was essential to spread the risk. But the details should have been shown on the face of the accounts so that shareholders and bankers could have been clear about their exact exposure. That might not have discouraged the banks from lending the funds but it would have given them fewer excuses when things went wrong.

Rosehaugh's receivership turns the logic of joint ventures on its head. In theory, the parent company is protected, and its exposure limited, should a joint venture go sour. In practice, RSD was so large in relation to Rosehaugh that it became a drain on both management and resources, fatally weakening the rest of the business.

Mr Lipton was optimistic yesterday that Stanhope will avoid Rosehaugh's fate, and it does look in better shape. Its business is more structured, with fewer joint ventures. It has positive net assets, although the latest valuation will reveal a further decline. Most of its developments are let, although the income is not yet enough to cover interest and overheads.

Investors looking for a punt on recovery should remember that Rosehaugh agreed a deal with its bankers at the beginning of the year, and that had another year to run. So far, banks have been reluctant to call in receivers to property companies if they can avoid it, if only because that offers no better prospect of a return. Rosehaugh's receivership shows the risk can never be completely discounted.