Inside Westbrook’s £400M Dolphin Square Revamp

When Westbrook Partners first bought into Dolphin Square in 2006, tenants were angry a private equity firm was buying their famous building.

A Westminster Council official told them not to worry — there was no way Westbrook would be a long-term owner of their homes, as it could not make money holding the building and renting their flats out. Instead it would sell them off piecemeal, giving them the chance to own their flat. It is what private equity does, he said.

Eleven years later, how wrong the council were. 

Westbrook’s investment in the 1,229-apartment Dolphin Square has achieved success by doing the opposite of what you might expect from private equity.

Westbrook has held the building for eleven years, and just unveiled plans for a major redevelopment that will see it invest £400M in the building on top of £40M already invested. The process will take until around 2025, taking its ownership period close to 20 years.

It is one of the savviest investments in recent London history, trebling the value of the building without pushing out residents, and creating one of the few private-rented blocks in London of a size and value comparable with major multifamily schemes in the U.S.

Westbrook’s U.K. head Mark Donnor told Bisnow that rather than looking to push rents up, as one might expect of a private-equity owner, it wants to keep them at their current level.

Studio apartments can be rented for £275 a week and one-bedroom flats from £410 a week. Donnor said this means a couple earning £27K a year each could comfortably afford to rent a flat 20 minutes’ walk from the Houses of Parliament.

“Dolphin Square has always been a middle-market proposition, and we want to keep it that way,” he said. “When the majority can afford to rent with you, the asset will be fully occupied, and we like the property fully occupied. When you move rents out of reach of the deep middle-market, demand goes down.”

That breadth of demand has included myriad famous residents since Dolphin Square was built in 1937. They include Christine Keeler and Mandy Rice-Davies, the women at the centre of the Profumo affair that helped bring down the Conservative government of the early 1960s.

More recently in John le Carré’s novel "A Legacy of Spies," Dolphin Square is a central location — in the book, many of the apartments are rented out by MI6 as safe houses.

Its redevelopment will be a major undertaking. Westbrook began consultation with local authority Westminster Council a year ago and will submit a planning application early next year. The redevelopment will start in 2020 and likely take up to five years.

It will create 275 new apartments, taking the total to 1,395, principally through the addition of another storey on top of the existing structure and also by splitting larger flats down into smaller units.

To give an idea of the scale of the task, the redevelopment will include the replacement of 7,000 windows, 30 elevators and the original 1930s plumbing, and the refurbishment or replacement of all of the 1,229 apartments and four miles of corridor in the 1M SF building on a 7.5-acre site.

Dolphin Square is split into 12 units or “houses” and Westbrook will refurbish and extend two or three houses at a time, decanting residents into equivalent units elsewhere in the building if they wish to stay in Dolphin Square and paying the expense of moving them out and moving them back.

A row of new mews houses on the Western part of the site will create additional on-site affordable housing and the building’s gardens will be extended from 2.5 acres to 3.5 acres.

The large building on the northern side of Dolphin Square, Rodney House, will be completely demolished and rebuilt. It has 165 serviced apartments, a health club, restaurant and shops. The number of serviced apartments will be increased to 200 and the health club will be moved underground and extended.

“We are keeping the serviced apartment element because we want to capture every element of residential demand, whether you want to stay for six nights, six months or six years. We like the optionality for the tenants and the broad appeal,” Donnor said.

Tenants on traditional assured shorthand tenancies are staying 18 months on average, Donnor said. There are 215 tenants who have fixed rental payments of 50% of market level on leases that run until 2034.

Getting to this point has been complicated enough for Westbrook. When it originally bought into the scheme in 2006, it paid £190M for a head lease running until 2034.

It originally made a return by reducing the running costs and improving occupancy levels — when it bought into the scheme it essentially only just broke even, and Westbrook undertook 700 leanings in its first 18 months as leaseholder.

But it had longer-term plans. It used a legal process called enfranchisement to get to a position where it could forcibly buy the freehold from insurance company Friends Life in 2015 for £176M. This took more than five years of legal wrangling, with Friends Life trying to block the process.

After the freehold had been bought, it made economic sense for Westbrook to undertake the major redevelopment, Donnor said.

It paid £366M for the two leases, invested £40M in the original refit and has likely paid tens of millions of pounds more in legal fees. But accounts for the special purpose vehicle that owns the building show that it was valued at £850M at the end of 2015, with £35M of income. It refinanced the building with a £514M loan from M&G and MetLife in 2015.

The redevelopment could add more than £500M on to the value of the building, taking the value north of £1.3B. It is the only remaining investment in the Westbrook fund that struck the original deal, and the life of the fund has been specially extended to allow for the new development. The original investors are clearly very happy with Westbrook’s strategy.

“I knew when we bought this asset that it would be a huge, lifetime project,” Donnor said. “With that in mind you want to make sure it is a success for everyone, particularly the people who live there.”

It is a success that has been achieved by taking the typical private equity playbook — buying wholesale and selling retail, or short-term renovations and taking up the price — and doing exactly the opposite.