Property and porn

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A Property Week investigation reveals the secret workings of some of the industry's shrewdest operators – who work closely together to invest the proceeds from girlie magazines and sex shops. Giles Barrie reports here on Paul Raymond and David Sullivan

Lifting Britain's bar on the sale of hard-core pornography may for most property men only cause titillation in the bedroom, but for a small band of the industry's most private entrepreneurs it spells wider excitement.

For Paul Raymond, David Sullivan and Ralph and David Gold, the decision by the Home Office to bring UK censorship laws into line with the rest of Europe will boost the value of their property kingdoms.

As Eamonn Connelly, the man who runs the property arm of tycoon Sullivan's Sunday Sport-to-mags-to-Birmingham City Football Club empire confirms, the easing of the 'R' restriction lifts profits for increasingly busy sex shops.

When your tenants include Super Mags, Pirate and Swedish Strip in Soho's Brewer Street, you need them to be lifting profits when another key factor in your fortune comes into play – shrewd judgement in property investment.

Raymond's renowned fortune is soaring in value as Soho booms. Sullivan has expanded into the area and the Golds are now rapidly growing their own development vehicle, Greenwich House.

But how and by whom are these property companies run? What is their strategy? And what protests do they face as the sleazy businesses that fund their work are increasingly frowned upon? Property Week has spoken to the property men within the secretive porn barons' empires, and what emerges are canny investors sitting on exponentially increasing wealth whose closest property associates are each other.

They control up to £750m of property between them and, as kindred spirits, often work together on deals and joint ventures. They are entirely pragmatic about their work, which is funded by the proceeds of top-shelf titles that often degrade women.

John James, Raymond's son-in-law and a director of his main vehicle Soho Estates, believes more mainstream men's magazines at times go as far, if not further, than his bosses' titles.

But James says Raymond will not give interviews because of earlier rough treatment.

He continues: 'I've read in the paper that he's a person with long hair and long fingernails, but he's certainly not Howard Hughes and he's certainly not going nutty.'

When asked if he ever suffers from protests or difficulties with dealing with the proceeds from porn, Connelly, who controls £150m of property, says: 'No. We've even bought from the Church Commissioners. If anyone had a problem with us it would be them.

'We are careful to restrict sex shops. We recently did three lettings in Brewer Street, and in all those we specifically prohibited the sex shop. We are landlords to three sex shops in one stretch and there is no need for any more.

'Public companies maybe wouldn't have sex shops in, so they come to us, and why not? The whole scene is no longer 'under the counter, hide it under your coat stuff',' he says.

Premium sex

With the lifting of the 'R' restriction Connelly is now looking forward to some imminent rent reviews on those shops, which should lift £70-£80 Zone As well above £100 – and the shops can easily pay. Another sex shop recently paid a £250,000 premium to take some new space.

But the most pragmatic of all is Raymond. A devout Catholic, he has been known to rip out pages of Escort, Razzle or Men Only if he spots a crucifix on any of the girls posing in them.

While taking a back seat at Soho Estates, the reclusive 75-year-old Raymond still makes the big decisions and, claims Connelly, frequently discusses property with Sullivan.

Ex-Barclays man Joe Daniel left Soho for Frogmore in April having instilled some financial rigour over his five years running the company, and has now been succeeded by Raymond's nephew Mark Quinn. The urbane, quiet, measured 36-year-old is a stranger in property circles, whereas James is known as a bon vivant who runs the management side of the business and knows the estate backwards.

One property man recalls meeting James in the Caribbean: 'He was proud of who he was, going on about how great Soho Estates was and talking big numbers about how much it was worth.

'He was also gambling, putting big money down on the table and seemed very proud that he lived in St James's. But equally he was interesting, and not a dislikeable person,' he says.

There have been reports that Soho Estates is worth £600m, but these are discounted by Paul Raymond Group financial controller and Soho Estates director John Warden, who has been with Raymond for almost 20 years.

He tells Property Week: 'I would guess it's nearer £300m.' He explains the firm's strategy: 'We only ever buy freeholds. We do redevelop occasionally when we buy something that needs it, but as a rule we don't.

'The publishing side makes £22m a year, and what happens with rich people is that you only need so much to live. When I started Mr Raymond was losing £250,000 a year, then we started to make money. And once you start to make money, unless you get involved in corporate takeovers, it's difficult to grow quickly, but we just amass.'

He continues: 'With the compounding effect of that estate we've managed to make £300m, but to make much more than that would have been impossible with our strategy.' Warden reveals that the company is primarily run for the benefit of 19 trusts of which the main benefactors are Raymond's 15-year-old and 11-year-old grandchildren, whose mother was his late daughter, Debbie. One of Raymond's favourite sayings as he surveys his portfolio is: 'This is all going to the grandchildren'.

Frustrated developers

Warden says the grandchildren now receive around £1m a year between them to live on; some of the proceeds from Soho Estates will go to them when they reach adulthood and more will be handed out during their lifetimes.

Warden explains that with managing director Quinn and James both trustees working to a strict trust document this gives them little scope for manoeuvre as the business moves forward.

'We do get involved with refurbishment and redevelopment, and I know that John James would like to be slightly more expansive, but they are not permitted to by the trustees.'

'And Soho Estates couldn't be sold off.

There would be terrible tax problems. Someone offered me £300m a few weeks ago, but if Paul sold he would pay Capital Gains Tax at 40% and that would be madness'.

Warden also reveals that selling off this part of the Paul Raymond empire would be difficult because it owes money to the publishing arm.

He also says there are actually four different companies holding property assets, with some 'tiny little ones set up for historic taxation reasons'. In some cases, he says, two Raymond-controlled companies own split properties, with one VAT-registered and the other unregistered.

But he says the firm is changing its tactics slightly: 'We are not just restricting ourselves to Soho. We have bought around £50m of property in three other areas such as Hampstead, Kensington & Chelsea and Notting Hill.

And he is proud that if Raymond did decide to do something radical, Soho Estates easily could too. 'We are not geared up at all, but we've got £50m in the bank and we could raise a lot more at the drop of a hat.

Either David beats Paul [to deals in Soho] or Paul beats David. They discuss property a lot

Eamonn Connelly, Conegate

'There have been some big deals we have looked at. We put in bids for the Trocadero before Burford bought it, and I believe they over-paid for that. Neither were we prepared to pay too much for Rock Circus when its site was up for sale.'

'Paul Raymond is very reluctant to borrow because he was involved in a redevelopment which went wrong in the 1970s and the banks crucified him for it.' Finding out even more is difficult – Raymond's adviser Carl Snitcher bans all interviews and agents have little interaction with Soho Estates.

Raymond's estate is primarily in Windmill Street, bits of Brewer Street, parts of Wardour Street, Cranbourne Street, Dean Street, Frith Street and large sections of Soho's 'high street', Old Compton Street.

He also owns Queen's House in Leicester Square and company figures show how the estate is growing.

All valued at cost, Soho Estates' fixed assets were worth £40.8m in 1994, rising to £54.3m in 1995, £67.9m in 1996, £73.6m in 1997, £82.2m in 1998 and £113.4m last year.

Over the same period, rental income (turnover) rose from £3.93m to £11.7m and profits before tax from £808,343 to £9.5m.

It is little wonder, with Soho rents doubling over the past two years alone – and it's not just sex shops that are feeling the pinch. A rent review currently being argued could see office space treble in cost from £236.80/sq m (£22/ sq ft) to £645.84 (£60), and a one-bedroom ex-council flat recently sold for £193,000.

Likewise, Sullivan's property vehicle Conegate, which says Connelly holds 50% of its portfolio in Soho, has seen profits and investment property values soar.

Its fixed assets were worth £32m in 1997 and were valued at £49.7m last year, with pre-tax profits rising from £6.3m to £7.9m last year.

Connelly says Sullivan now only wants to buy in the West End, having at one time owned property all over the UK and getting caught with unlet property in the recession. Like Raymond, it also owns property in the King's Road, Camden and Hampstead and Connelly estimates the whole portfolio is worth £150m. He owns 80 to 90 freeholds, and is also planning a £10m-plus residential redevelopment at Green's Court behind Brewer Street.

And the best news of all is that values will continue to soar, with Westminster City Council's decision to clamp down on A3 licences meaning those premises that already have them become even more valuable. 'In a way, it's fantastic news for those of us that are here,' Connelly says.

Conegate too, has very little gearing and, like Soho Estates and Greenwich House, can complete on deals very quickly.

White Druce & Brown manages much of the portfolio, and in London it very rarely sells, relying on uplift from rent reviews.

Connelly reveals: 'We are always active – we never stop buying. We like unworked stock and something with a bit of redevelopment potential.

'When we discuss whatever new purchase, David [Sullivan] picks up the angle very quickly. What we don't like, and what David gets very upset about, is when you go to best offers and when you feel that someone else has sneaked in via the back door to outbid you.'

Connelly says he would 'love to do something really big' in terms of an investment deal in partnership with Raymond. Conegate has already discussed putting together a big joint venture with the Golds in Brewer Street and Sullivan is well known for bringing them in to spread his risk. He has strong links to the brothers, and is a co-investor in Birmingham City Football Club with them.

The easy-going, relaxed Connelly, who has been with Sullivan for 21 years, has – with his boss – been lured into the thankless task of following the perennial underachievers and his diary shows fixtures for months to come.

But it is not filled with the usual litany of property industry gatherings – lunch at Claridges, the Knight Frank golf day, Investment Property Forum dinner, combined with laboured efforts to learn about the internet.

Property's porn men operate outside the market and, like Raymond, Connelly says Conegate is not interested if an investment is offered on open sale.

And on deals in Soho generally, he says: 'Either David beats Paul to them or Paul beats David. They discuss property a lot.'

One of the few agents to have worked closely with Raymond says he learned a huge amount from him because his thinking process is quite unlike the normal property establishment's.

'Nose' for a deal is one thing when amassing a £300m-plus estate – being unemotional is another. The word is that Raymond only ever got misty-eyed about buying the former Rialto cinema site just off Soho because an early blue film he had been involved in had been shown there.

Otherwise, he avoids the usual surveyor's approach of calculating what space will cost to convert, then adding a profit and deciding to charge by relating it far more closely what a tenant can afford to pay.

He weighs up all aspects of the tenant's business, considers the impact of the economy on the business and then works out what to charge – reversing normal practice. Those close to him think he would be very nervous about dot com occupiers.

He is also renowned as a very good buyer just below the market level, moving gently and remaining inactive in a strong market, preferring to pick off distressed sellers when the economy turns. And once he has named his price, it never moves.

And while Sullivan relies on agents to manage its properties, Soho Estates manages its portfolio in-house. With some of its grubbier tenants, a visit to sort out a problem or dispute is far more effective than a phone call from Hanover Square.

There are some criticisms of Soho Estates, too, with some local agents claiming it doesn't manage its properties as intensively as, say, Grosvenor. But Sugar Reef and Ronnie Scott's look smart enough, even if the Archer Street head office does not.

Monopoly men

So what drives men who have made a fortune from pornography into property? First, they are making the classic switch: putting the proceeds from their cash generative, less-than-respectable businesses into a rock-solid investment. An investment whereby the owner can be seen as a Pillar of – and a giver to – the community. A master of all he surveys.

Publishing is high margin once a venture gets clean off the ground, and if you can persuade readers to take out subscriptions, its money up front before the working year has even started.

As David Tearle, Greenwich House managing director and close associate of Ralph and David Gold, says: 'There's an old saying – All you need to make loads of money is loads of money'.

There's also ego – the 'Monopoly factor'.

One developer who has worked closely with Raymond says that once he buys a building he is always attracted to what sits next door.

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