Opinion - A case of Just Trillium?

Those of you who have braved the post-Christmas sale at Ikea will quickly wonder whether the phrase 'the customer is king' exists in the Swedish language. And when you finally return home to assemble your new pine bed and find that it is missing a few vital ingredients – and, on phoning the shop, you are told that you are the one who will have to go and pick up the missing parts – you will probably be in need of a few choice Swedish phrases yourself.

A similar customer policy has long been adopted by the property industry. The only thing that makes Mr Landlord visit his tenant more than once every five years – which is when he wants to yank up the rent by some massive amount – is if his tenant is behind on the rent.

But decades of the high inflation that made the landlord lazy and rich have come to an end. An era of low inflation, which began under the last Tory government and has carried on under the Blair administration, has led to lower property value growth.

This has forced the poor old developer to come up with more sophisticated ways of making the occupier pay higher rents – by providing a proper and flexible package of services for which the occupier is prepared to pay extra.

Most landlords have simply been paying lip service to this new-found customer focus. But at the end of last year, two significant events occurred that could truly augur a sea change in the sector.

First, Regus, the global serviced office operator, whose business depends entirely on the happiness of its occupiers, floated in New York and London to a rapturous reception from investors. Second, Land Securities, the UK's largest – and, arguably, the dullest – property company, bought corporate outsourcing and PFI specialist Trillium for £330m (£165m in cash and shares to Goldman Sachs and founders Martin Myers and Manish Chande, plus the assumption of £165m of debt).

The Trillium acquisition is the surest sign that Land Securities has abandoned its traditional asset accumulation and rent collection approach to property. It now looks ripe for an image change under the new leadership of chief executive Ian Henderson and his likely successor, Peter Walicknowski, who has joined the company from the more dynamic confines of global property developer Lend Lease.

The move was greeted as enthusiastically by investors as the Regus flotation, and Land Securities' share price has been flying high ever since. But is it justified and will the deal encourage a host of similar property investor/corporate outsourcing company mergers? For the good of the much-criticised property industry, it would be a relief if the answer were yes. Sadly, it is likely to be a resounding no.

On the plus side, Land Securities is acquiring one of the UK's most significant PFI contracts – the 16m ft2 office portfolio of the DSS. Equally important, it is taking on board tested risk-modelling skills and the regional property management infrastructure, including 600 staff, to make the project work. Trillium's price tag of £330m appears to equate to a historical price/earnings multiple of 17.

That may seem reasonable, but Trillium's current business is one fixed-term contract, not a perpetual corporate earnings stream, with the valuation characteristics of a depreciating long-term UK government bond with a net present value of around £100m. The DSS properties are inherently undesirable, being mostly short leasehold, old, secondary and in off-pitch locations.

If Land Securities and Trillium were to win either – or, preferably, both – of their bids for the BBC and the London Underground property PFI contracts, then the deal would look better. But don't forget that Trillium failed to secure a deal with the Abbey National, and with the Inland Revenue and Customs & Excise in the STEPS contract – losing out in both cases to major rival Mapeley.

The future of Mapeley is another interesting talking point. Clearly the company, run by Robin Priest, is not going to remain under its present ownership – Soros Real Estate Partners, Fortress Investment and Delancey Estates – for very long because the first two are not long-term owners.

The sale of Trillium has given Mapeley a tangible value and, effectively, put it into play. The options are a flotation or a trade sale. The first is more likely than the second, despite the Land Securities/Trillium merger. There are no other property companies approaching the size of Land Securities – in portfolio terms – and no other with nearly as many government tenants.

An acquisition of Mapeley would, therefore, not suit many, if any. Possible buyers include British Land, whose chairman, John Ritblat, is always open to a good deal, Chelsfield, whose chairman, Elliott Bernerd, is also a legendary dealmaker, and Marylebone Warwick Balfour, one of the most dynamic of the smaller property companies.

But, don't hold your breath. Land Securities' new business model has a much higher risk profile than before and the Trillium contract is far too complicated and hard work for your average egotistical, sharp-suited property developer.