CREO changes some terms of management agreement

PROPERTY INVESTMENT vehicle China Real Estate Opportunities (CREO) has eliminated terms from a management deal that led to it paying £44 million in fees to a shareholder’s subsidiary.

Last year, CREO paid its investment adviser and manager Treasury Holdings China fees of £44.77 million, compared to £3.6 million in 2007.

The management company is a subsidiary of Treasury Holdings, which along with developers John Ronan and Richard Barrett owns over 50 per cent of CREO. The fees are tied to performance and the increase in CREO’s net asset value per share. This grew 59 per cent to £13.24 in 2008.

Last March CREO said the increase in the value of China’s currency, the remnimbi (RMB), against sterling boosted the company’s net asset value per share, which in turn increased the fees.

Along with this, CREO bought back 3.5 million of its own shares last year, which also increased the net asset value per share.

In a statement yesterday, CREO said it has changed the terms of the management agreement to “eliminate from any future performance fee calculation any increase in the value of RMB against sterling; and any increase in net asset value per share arising from the company repurchasing its shares”.

As a result, from January 1st this year the fee will be determined by reference to the company’s net assets on December 31st, 2008, in RMB.

If the company were to repurchase its own shares in future it will adjust the value of its net assets to eliminate the impact of such a move.

Shareholders were reported to have been unhappy with the fee increase as the company made a non-cash loss of £99 million last year, which resulted from foreign-exchange movement on dollar-denominated debt.

A note by Stephen Lyons, analyst with stockbroking firm Davy, suggested yesterday that the move resulted from “shareholder frustration”. However, other sources point out that when the original deal was done in June 2007, nobody would have predicted that sterling could have weakened rapidly against the RMB.

The British pound lost over 20 per cent against the RMB last year. CREO produces accounts in sterling as it is listed on the London Stock Exchange.

CREO has a range of commercial and retail investment properties in Shanghai, Beijing and Tangdao. At the time it published its 2008 accounts in March, its properties had more than 90 per cent occupancy.