£106.6 million land sale at Skelton Grange for development of a hyperscale datacentre

Harworth, a leading regenerator of land and property for sustainable development and investment, has exchanged contracts for the conditional sale of 48 acres of land (the “Disposal Plot”) at its Skelton Grange site in Leeds to MSFT MCIO Limited (“Microsoft”) for a total consideration of £106.6 million, payable in cash in two tranches linked to phased completion of the sale. The conditions are customary for a transaction of this nature and the Group is confident they will be met. The disposal price represents a premium to the Disposal Plot’s book value.

The Disposal Plot comprises two adjoining land parcels:

Plot 1, which comprises 27 acres, will be sold on an unserviced basis for gross consideration of approximately £52.9 million. Completion of the sale is targeted for H2 2024. The book value as at 31 December 2023 was £39.0 million. Alongside completion of the sale of Plot 1, the Group will be reimbursed approximately £0.5 million for the costs it has incurred in securing additional power capacity for the site. Servicing of Plot 1 is expected to be completed by Harworth as development manager under a separate development agreement, which would commence after the transaction completes.

Plot 2, which comprises 21 acres, will be sold on a serviced basis for gross consideration of approximately £53.2 million. Completion of the sale is targeted for H1 2026. The book value as at 31 December 2023 was £12.9 million. The forecast total servicing costs are £5.1 million.

There is no current rental or other income associated with the Disposal Plot and therefore no reduction in rental income for the Group as a result of the transaction. The Group expects to recognise an increase in the book value of the Disposal Plot at each reporting date as the transaction progresses towards completion.

Harworth intends to use the net proceeds to support an increased focus on the direct development of Grade A Industrial & Logistics properties from its strategic landbank which will be transferred to, and then retained in, its Investment Portfolio, driving an increase in recurring earnings, alongside new investment opportunities.

This sale constitutes a Class 2 transaction for the purposes of the Financial Conduct Authority's Listing Rules.

Background to the Skelton Grange development

The former Skelton Grange power station site was purchased by Harworth in December 2014 for c.£3 million, with remediation and enabling works commencing shortly after. The site is located to the south-east of Leeds and the work undertaken by Harworth as master-developer since acquisition is an integral part of the regeneration of the area, bringing in significant investment.

Since acquisition, Harworth has optimised the planning status of the site, securing approval in November 2023 for 800,000 sq. ft. of Industrial & Logistics space, and most recently in May 2024, a reserved matters approval for a further 320,000 sq. ft. of Industrial & Logistics space. Previous transactions that have contributed to the creation and realisation of value at this development include a 19.5-acre land sale to Enfinium in 2020, on which it is developing a 49MW energy-from-waste (‘EfW’) renewable electricity generation facility for its own operation, and the grant of a lease in 2021 to facilitate the development of a c.100MW Battery Energy Storage System (‘BESS’) facility on a 5.7-acre demise. Harworth acquired a further 21 acres of adjoining land in 2023 to enhance the development potential of the overall scheme.

Upon completion of the transaction, including anticipated cost plan spend, Harworth will have invested c.£36.7 million in the site and generated £135.7 million of sales. The Group will retain 16 acres on which to promote c.250,000 sq. ft. of employment space. This is in addition to the c.77 acres owned by way of joint venture with The Aire Valley Land LLP at a neighbouring development, Gateway 45.

Once the development is complete, Skelton Grange is expected to provide c.250,000 sq. ft. of Grade A Industrial & Logistics space, a hyperscale datacentre, a BESS facility, an EfW facility, and c.28 acres of land returned to a natural habitat alongside improved green travel infrastructure, which Harworth estimates will represent in excess of £4 billion of inward investment providing a substantial boost to the local economy.

Increased focus on Industrial & Logistics direct development, utilising extensive landbank to grow Investment Portfolio and drive increased recurring earnings

As the Group moves into the second half of its growth strategy to deliver £1 billion EPRA NDV by the end of 2027, Harworth believes there is a clear opportunity to maximise shareholder value by focusing on growing its Investment Portfolio through the development of its next generation of Industrial & Logistics sites which combine high quality logistics space with complementary energy uses. Sites of this nature are well-suited to high value use classes such as datacentres and advanced manufacturing, and are critical to the growth of the UK economy.

The Group’s Industrial & Logistics pipeline totals c.38 million sq. ft. of which sites with the potential to provide up to 5.5 million sq. ft. are in, or about to enter into, their development phase, and sites with the potential to provide up to a further 12.8 million sq. ft. have an allocation in a local plan or are awaiting determination, forming the next wave of sites to move into development. The Group’s extensive Industrial & Logistics pipeline is expected to deliver potential GDV of £0.8 billion over the next five years with a targeted yield on cost of 6-8% for the vertical build stage.

Going forward, Harworth intends to acquire, develop and retain on completion more of its prime Grade A Industrial & Logistics developments to increase the size of its Investment Portfolio and drive growth in recurring earnings from rental income. The Group expects the Investment Portfolio to grow in the outer years of the current plan and accelerate in the years beyond, targeting a total Investment Portfolio of approximately £0.9 billion by the end of 2029, through a combination of retained developments and selective acquisitions as the core portfolio is refined to be 100% Grade A. The planned growth of the Investment Portfolio is expected to create an opportunity for the Group to enhance the income component of shareholder returns as improved recurring earnings will allow increased dividends to be declared. The Group, therefore, intends to review the dividend policy on an annual basis as it delivers on the planned growth of its Investment Portfolio.

Alongside development for retention and investment, Harworth will continue to manage its Strategic Land portfolio to create value from sales of serviced land for development, including selectively acquiring and accelerating the delivery of Residential sites to provide a steady funding platform for the growth of its core Industrial & Logistics portfolio, and will continue to utilise capital light funding and partnership structures to maximise returns for shareholders. The Group now expects its balance sheet to be weighted more towards Industrial & Logistics assets, reaching over 85% of its total land portfolio by the end of 2029 (currently over 60%).

Placemaking to create best in class schemes, and sustainable places where people want to live and work, remains at the heart of Harworth’s approach to development, and the Group remains on track to deliver £1 billion EPRA NDV by the end of 2027.

Lynda Shillaw, Chief Executive of Harworth Group, commented: “Since re-listing in 2015 Harworth has successfully completed a number of significant transactions that create value for our shareholders but this sale at Skelton Grange is the Group’s largest to date and is yet another exemplary case study that demonstrates the successful regeneration of brownfield land. It highlights Harworth’s capabilities in identifying and acquiring complex sites, creating planning-friendly masterplans that maximise site potential, and deploying timely and effective investments into remediation and infrastructure. This transaction further builds our expertise to include datacentres and evidences the growing spectrum of industries that continue to be attracted to the schemes that Harworth brings to the serviced land market.

“Over the last three years and, despite volatile market conditions, we have been successful in implementing our strategy, scaling the business and continuing to deliver market leading returns. We remain confident that we will reach our goal of growing our business to £1 billion of EPRA NDV by 2027 and in our ability to continue to scale the business beyond this. Despite this operational resilience, elevated share price discounts persist across the listed real estate sector, and so with the aim of maximising both total accounting returns and total shareholder returns for our investors, we have undertaken a detailed evaluation of our strategy to determine where our focus should be in the second half of our strategic plan period.

“Today, over 60% of the value of Harworth’s business is in the Industrial & Logistics sectors, and as we move into the second phase of our growth strategy we expect this weighting to increase, to over 85% by the end of 2029. The continued successful delivery of our Residential sites is integral to our strategy as the proceeds from land sales provide a steady funding platform for the Industrial & Logistics development programme. We will retain more of our own prime Grade A Industrial & Logistics directly developed properties and therefore expect to see our Investment Portfolio grow in coming years, reaching around £0.9 billion by the end of 2029. We see this increased focus on Industrial & Logistics development as an opportunity to both maximise shareholder value, and position the business for longer term sustainable growth and returns as we create an Industrial & Logistics business of significance in the UK market and within our regions.”