Commercial Property Blog
All posts by Paul Smith
It’s not too late for Cardiff to adapt its ill-conceived LDP
Cardiff’s emerging Local Development Plan (LDP) is long overdue, largely owing to criticisms and questions over its deliverability. Current proposals raise concerns about the scale of development; 45,400 new homes focused on four greenfield locations around the outskirts of the city by 2026.
This concept, comprehensive development dominated by large tracts of volume housing, has been commonplace for years and examples can be seen in the vast estates surrounding places such as Swindon, Bradley Stoke and Emmerson’s Green around Bristol.
This poses serious challenges. Each of the proposed allocations is likely to be too large for a single developer, creating the need for consortium agreements. Before a single house can be constructed, land assembly agreements will have to be concluded, together with negotiations on the related planning and obligations.
Transport links are another fundamental issue, with major upfront infrastructure commitments needing to be funded and implemented.
It’s unfortunate that Cardiff Council is looking at the LDP from an isolationist point of view when there is significant opportunity to work in conjunction with neighbouring councils, such as Vale of Glamorgan, delivering smaller developments in more locations; an approach that would be more achievable in the timescale and could include complimentary transport strategies.
This was seen recently in Tewkesbury, Gloucestershire, which was on course for a large-scale housing operation before opting instead for a ‘pepper pot’ allocation; an expansion of small villages in the surrounding area.
In Wales, rural communities could certainly take more new homes, and this could see housing stock made available sooner on a smaller scheme basis, linking into and supplementing existing infrastructure.
Of course, development on greenfield land could be avoided altogether if Wales opened up brownfield sites for development by adopting central government initiatives designed to facilitate a change of use. Feasibility is key, but perhaps a less onerous approach to planning policy could make this a viable option.
It’s astonishing that local planning authorities cannot work together to produce a more comprehensive plan on a wider scale to distribute growth commensurate with a complimentary transport strategy. In so doing, perhaps the city could avoid a sprawling, voluminous development of indistinguishable houses, no different from our neighbours in Bristol.
Mike Rees is a partner in Bruton Knowles
Retail Rocks: Insane? I'm totally rational, honest....
Who in their right mind would buy a shopping centre in a secondary town or the third shopping centre in a bigger city today?
Consumer expenditure has been battered by recession and government funding cuts, retailers are either failing or rationalising their store portfolios and any growth in the retail sector is via the internet not the high street. Anything other than super-regional shopping centres are doomed. Doomed, I tell you!
Yet, there are an increasing number of investors who are brave or foolish enough to be buying and it seems that yields are stabilising or potentially even tightening. Against this backdrop, Ellandi are inviting active market participants to debate the relative merits of the secondary shopping centre investment under the banner – ‘Retail Rocks – stairway to heaven or road to hell?’ This event takes place tomorrow at the Geological Society (Rocks / Geology, get it?)
Shopping centre yields for secondary assets are now 8.5%+. A number of schemes have traded at 10%+. This compares to an average yield for all shopping centre transactions of 6.93% between 1998 and 2011. Simultaneously, cash yields or bond yields have fallen to all-time lows, creating an enormous spread between shopping centres and risk free rates. Shopping centres appear to be cheap on a historic basis. Many assets are now trading at 50% to 65% of their peak values.
This discount to historic pricing and the availability of attractive income yields, within a very low yield global investment arena, is starting to attract interest not only from specialist investors but also yield-hungry global investors, a good example being PIMCO’s recent JV with New River Retail.
Cash-on-cash returns look especially attractive to investors if a modest quantum of senior debt can be used, especially given that the all-in cost of debt is low. Applying 50% leverage at say 4.5%, to an asset yielding 9% gives an investor a theoretical cash-on-cash return, before reinvestment, of 13% p.a. Ellandi’s portfolio earns an average cash-on-cash of 15.2%. There are not many investments that offer such strong cash yields.
But can you finance these assets? Debt remains challenging and is likely to remain so for the foreseeable future, as banks de-leverage and apply new regulatory capital regimes, such as slotting. However, senior debt funding remains available at leverage points of 50% to 55% LTV for reasonable quality shopping centre, with strong occupancy and proven sponsors. However, this credit criteria still leaves many shopping centres that cannot be funded. In time this may well become the major determinant of pricing with debt fundable assets at 8% to 10% yields and un-fundable shopping centres trading to cash buyers at 15%+?
Some will argue that secondary shopping centres only look cheap in a historical context and that we are now in a different paradigm, where higher yields accurately reflect the increased risks. They warn that investors should not ignore the likelihood of on-going retailer failure, falling rents and increasing vacancy rates.
Our portfolio of 7 value and convenience-orientated shopping centres, with 338 retail units, gives us a very good barometer as to real tenant demand and letting activity. It is a tough letting environment, yet, we completed 52 new lettings in the last year and our portfolio only has a 5.7% vacancy rate. It is not the desperate picture you would glean from reading the FT of a dying, decaying, urban wasteland.
There are strong retailers with good businesses and strong customer following who are keen to take new space and to extend existing leases at the right price. The critical consideration is do they or can they make money in a given location. We are proud to have recently become 99p Stores’ biggest landlord. They are a good example of an acquisitive, dynamic business well suited to the current retail environment.
We invest significant time and money in ensuring that our shopping centres offer pleasant environments with high quality amenities, such as free wi-fi and cost effective parking, and integrate well within their wider communities. None of this is rocket science but it assists our tenants and improves the shopper experience. This has ensured that rental income has remained robust and that tenants view our shopping centres positively.
The internet is undoubtedly a ‘game changer’ for retailers. Yet, the retail industry now acknowledges that it is part of a ‘multi-channel’ offering so ‘bricks and clicks’ will be the future. Most internet sales operations still lose money as retailers battle with how to provide cost efficient delivery and logistics. Convenience, low value and low margin goods (much of the retail market) will still need shops. There will be store rationalisation as part of a multi-channel world but it is unlikely to lead to wholesale shop closures or the death of town centres.
I don’t contend that there will be a sudden improvement in consumer confidence or dramatic economic growth in the UK. However, there seems to be consensus that the darkest hour has passed. Similarly, retailers are now in better shape: the weakest have failed and the survivors are operating at far greater efficiency. The strongest retailers are now evolving from cost cutting to reinvesting in their brands. It remains a tough retail environment but widespread systematic retailer bankruptcies are hopefully behind us.
If one accepts that we are moving towards a relatively benign economic environment, underpinned by very loose monetary policy, then the prospect of buying assets that offer relatively stable cash flow at a yield that is 7% wider than 5 year sterling SWAPS and 6.5% wider than the 10 years gilt yield is appealing. This is especially the case for investors that seek income orientated returns.
Obviously, there needs to be careful stock selection and capable asset management, this is a time for working with specialists, but the general thesis of buying high yielding shopping centres in a stabilising economic environment appears highly rational to me. Admittedly, it is not a ‘no brainer’ and there are arguments to be made both for and against this investment thesis. We expect a lively debate at ‘Retail Rocks’.
Morgan Garfield is founding partner of Ellandi. www.ellandi.com
The cyber supermen from Google are not easily taxed!
To the Odeon Leicester Square to hear Eric Schmidt and Jared Cohen, the magnificent Google men, talking about the “New Digital Age” – which happens to be the title of their latest book.
Complimentary copies were given away to all attendees last week and, this being the day after the furore over the UK taxes Google is reportedly not paying, it made me feel mildly virtuous about handling one of their non-taxable products.
Saying that, 90 minutes in the company of these cyber supermen who sprinkle their stardust while explaining how mobile technology is improving the lives of people in some of the world’s poorest and most conflict-ridden countries left me feeling positively evangelical.
No scruples here about the malign evils of the internet – like techno James Bonds they are on the side of the good guys, the overwhelming majority, who ultimately will triumph over the tiny minority of Goldfinger villains out to spoil things for the rest of us. With Android sales about to top one billion units, it certainly pays to side with the majority.
Though the book devotes a chapter to the future of nation states, very little time during the interview was devoted to the role of technology in government and public administrations, apart from revealing vignettes about such countries as Estonia and Singapore being ahead of the pack. Cohen attributed this to the government ministers responsible for such innovations being computer scientists.
When the appearance of a mobile phone in Chad can move mountains, you wonder why we struggle here to implement a comprehensive NHS database or a seamless welfare benefit system.
Lessons? Schmidt and Cohen were quite clear in their view that the “good and evil” debate is sterile because the tech-juggernaut’s advance is inevitable. In a world where the rich/poor divide is widening, mobile technology is perhaps helping to level the playing field. Above all, the Google men don’t wait around for change to happen before they react. Instead they “imagineer” what change will look like and design the solutions others have not yet thought of.
Perhaps this is a manifesto for the property developer of the future.
David Levenson is group finance director of Network Housing Group. He writes in a personal capacity.
Why Housing Associations should look to make the most of commercial assets
When we attempt to examine the impact the recent welfare reforms will have on Housing Associations (HA’s) and the income they generated from existing housing stock, and factor in the reduced support from the government and decreased bank lending, it isn’t hard to see why many HA’s are looking for ways to diversify their income streams and maximise returns from assets unlikely to be affected by these reforms and developments.
Some HA’s have diversified by introducing retail bonds, a means by which they can obtain financing to fund their future growth. For those not choosing this route or unable to partake due to their charitable status, attention must be given to alternative ways in which extra revenue can be generated to safeguard against the potential misfortune that could be brought on by the welfare reforms.
Many HA’s are sitting on what could be millions of pounds worth of assets in the form of commercial and retail properties. How should these portfolios be managed and further developed so HA’s can start to tap into what could be a very lucrative revenue stream?
Now more so than ever, HA’s need to take a much more active role in the management of their commercial property portfolios. Efforts need to be put into broadening these portfolios via improved management of existing stock, the acquisition of new stock and the development of new commercial projects.
Business tenancies see HA’s acting as commercial landlords on properties they have built or acquired over the years and in order for them to fully understand the size and potential of the commercial portfolio, a thorough audit will be required. This in-depth analysis will provide the perfect opportunity to review rental income and determine if all rent has been collected and if there is the potential to implement an increase in rent.
It is also advisable for HA’s to look at commercial properties that are ripe for redevelopment - sites that could, once regenerated, attract tenants and improve the social area and possibly the surrounding neighbourhood.
Traditionally, and in a lot of circumstances justifiably, many HA’s concentrate their efforts on the social housing element of their portfolios, especially as they make up the largest proportion of their business. If time and investment, however, is put into auditing and managing commercial portfolios the rewards that could be realized could be significant. There are many commercial property specialist companies who can assist with this work if capability and capacity issues within the HA restrict the amount of time that can be devoted to it.
HA’s should not shy away from stepping out of the comfort zone that is housing. They should embrace the opportunities that await them to compete in the commercial property sector; opportunities that will, if done shrewdly, generate income and ultimately benefit the social housing sector, which can be subsidized through the additional income generated.
Matt Kerrigan, Partner, Hitchcock Wright & Partners
Liverpool - a safe haven for commercial property investment?
It’s true that the commercial property sector hasn’t had an easy path since the global financial crisis of 2008. Prices fell by a staggering amount and remain lower than pre credit crunch highs.
That said though, thanks to its low correlation with the fluctuating and erratic nature of the stock market, commercial property can still be a lucrative form of investment and opportunities available in Liverpool highlight perfectly why this is so.
The many opportunities currently available in Liverpool are positioning the city alongside the few big international players. Exciting pipeline developments for Liverpool also demonstrate that confidence in the future success of the city is running high and that investors are willing to back plans to keep the city thriving.
Since its successful run as Capital of Culture in 2008, Liverpool has been hotting-up as a commercial property investment destination.
The ongoing development of the historic docks, the hugely successful Liverpool ONE complex and the development of the Echo Arena and the BT Convention Centre, which attract big name performers and conferences, are just a few examples of the major developments that have helped ear mark the city an appealing destination for investment funds.
Can Liverpool keep this momentum up though? I can confidently say yes, I think they can!
The once glory days of the vibrant docks could be set for a return thanks to major plans that will enable Liverpool to play a significant role as a key distribution hub for the North West region and the wider UK.
Couple this with the fact that Liverpool and surrounding areas are at the forefront of the UK’s offshore wind industry (some of the worlds largest wind farms are located just off the coast) and it isn’t hard to see why more and more businesses and investors are choosing Liverpool.
As commercial regeneration steps up a gear significant business and investment opportunities will be rife.
The proposed Liverpool Waters £5.5bn regeneration scheme intends to transform a 60hectare docklands area into a world-class mixed use waterfront boasting retail, hotels, residential and commercial office space, all of which will undoubtedly, when teamed with other projects, bring more investment and jobs to the city.
The opportunities don’t stop there. Highly acclaimed designs, recently given the green light, will see the Pall Mall commercial district of the city transformed. Such developments will provide the catalyst for future developments that are hailed as vital in the city’s drive to compete as a world-class business centre.
Recent figures state that since the end of Q3 2009, UK-based investing institutions have increased the size of their commercial property portfolios by £8.2bn. Data which highlights perfectly the renewed belief in the market.
UK institutions responsible for the management of pension plans are still the biggest owners of commercial investment property and the key to sound investment is via a diversified portfolio with different properties across different sectors and different geographical locations, which Liverpool is certainly able to offer.
Matt Kerrigan, partner, Hitchcock Wright & Partners
Putting the case forward for maintenance and repair
The recent approval of the Growth and Infrastructure Bill together with promises from the Government to fund new housing development no doubt has its advantages.
Indeed, the Government promises that momentum in the housing sector will build, and in particular I note the potential for stalled homes, of which there are an estimated 75,000, to be completed as a positive development for the housing and construction sector, as well as the wider economy. That said, a concern that I’m sure must be felt among many, is that there is a more immediate need for ongoing repair and maintenance, particularly with housing, that will surely facilitate more immediate growth and build the foundations for future development.
The latest Office for National Statistics (ONS) data revealed that repair and maintenance output in housing fell year-on-year by 8.6% December 2012 to February 2013. But contrary to what the statistics suggest, particularly within housing associations, repair and maintenance is an ongoing priority and a recurring costly outlay. The National Housing Federation revealed that £3.5billion was spent on repairs and maintenance in 2011, highlighting that there is a very apparent need for work in this area to be prioritised.
Despite much of the funding for housing associations coming privately to enable improvements to be carried out, many local authorities have transferred their homes to housing associations in order to fund improvements so they can meet the Decent Homes Standard. This, as a case in point, again reiterates the fact that repair and maintenance needs to be addressed before the Government pumps money into funding new houses.
In order for the housing sector to move forward, I believe that a holistic review of the materials used in social housing in particular should be implemented. When costs have been - and continue to be - the key driver for specification, there is a tendency to be short-sighted and not look beyond the specification stage of a build. By satisfying the short-term goal - that is to build quickly and cheaply – social housing is at even greater risk of needing repair and maintenance in the long-term, which means even greater expense. If the Government funds new housing, surely we are taking a step forward to take two steps back? - We are only adding to the sheer number of houses in need of repair and maintenance.
If this was made more of a priority, I believe we would start to see positive progress that would build the foundations for future growth. In short, if we fix the existing problem, there is no doubt that more households will be homed as a result and momentum in the sector will begin automatically. Money will also be saved in the long-term, which is what is needed in order to help the economy recover and for it to show consistent growth.
Gary Carter is UK general manager at Fermacell
To Brazil and back: a look at retailers and investors
Why Brazil?
In January many of us decide that we need to join a gym. I decided that I would instead dedicate some time to exercising my mind ,instead of my hamstrings, and so signed up for the first event being organised by the new Brazil outpost of The School of Life.
The road congestion is so bad that the five hours I’d allowed from arriving for my first trip in Brazil to get to the course was not enough. And I had laughed when friends advised that I would struggle to make the start of the course unless I booked a helicopter.
Brazil has the highest density of private helicopter ownership in the World, because tailbacks of over 200 miles are regular occurrences in Rio and So Paulo.
In fact the demand is so strong from the 10 new millionaires being created every day in Brazil that successful people show their wealth by having incredibly expensive Hermes, Gucci or Prada makeovers of the passenger areas of their helicopters.
My objective is to return to London after a week on this course with a robust plan -incorporating the suggestions and ideas formed in So Paulo.
We are to cover a wide range of topics over the week. After the first day I am already buzzing with ideas that I want to share with my Marylebone team on my return to my desk.
Day three
In my first 3 days exploring São Paulo the only global chains that I have seen so far are McDonalds and American Apparel.
There are a number of strong Brazilian retailers such as Daslu. Lucia Piva de Albuquerque and Lourdes Aranha opened their first space in the Vila Conceicao district in 1958, by converting a single 125,000 sq ft building into 23 sections.
The space had no windows or signage, with everything being designed to be discreet.
The Daslu business continues to set new trends. In my view they have developed an approach of their customers feeling they are friends of Daslu, rather than being just customers. They now have 70 boutiques across Brazil.
The space at their flagship is redesigned every 2 or 3 months to reflect the new collections, which now stocks the leading aspirational fashion labels as well as the Daslu brand. In addition, they have secured stockists for the Daslu merchandise in over 70 corners across Asia, Europe, the Middle East, Africa and the Caribbean.
Nearly 2 million sq metres of new shopping centre space has been built in the last 2 years in around 40 centres and developers are planning refurbishments or extensions to most of the existing leading centres, to respond to the incredible new wealth being created in the 5 or 6 major conurbations.
Before I came to Sao Paulo I was interested to read that levels of Internet purchasing are low in Brazil, but I now realise that Brazilians like shopping in “real life”. Advances in infrastructure and technology have meant around a third of the population could now shop online, but the levels of Internet buying has not increased in line with access.
In the last 10 years there has been escape for many people into the middle class, or Class C as it is known in Brazil, with 30 million people elevated in the last 5 years. Research I have read suggests that another 30 million will join Class C in the next 5 years.
Rio and Sao Paulo are dominant, having 50% of the total “institutional” retail floorspace of the whole country.There are 150 cities in Brazil that have a population greater than 150,000.
I believe there is huge opportunity for developers and investors.
The always pioneering Westfield realised that malls in Brazil also provided security for shoppers, in a country where vacancy has been running at less than 3% and in an economic climate where sterling has halved in value against the Brazilian real in the last 5 or 6 years.
They invested 440 million Australian dollars to acquire a 50% stake in São Paulo based Almeida, bringing 5 malls into their existing 125 mall portfolio.
This was the first major investment by Westfield in a new marketplace since it entered the UK in 2000.
Sao Paulo
I had read about the emerging district to the West of São Paulo and so was delighted to have the chance to explore the neighbourhood with some locals.
It is only 10 minutes from the Centro, but is full of great indie shops and over 100 cafes,in mainly single storey buildings, with wide pavements and no sniff of danger. The area reminds me of Silver Lake of nearer home Dartmouth Park. A small town in a huge city, with a bohemian atmosphere.
I saw beautifully curated shops such as Estudio Manus, who sell special objects they have selected from around the world.
I fear that Vila Madalena may have lost the individual character next time that I visit- we have all seen how places such as Borough Market, Notting Hill post Richard Curtis and SoHo in New York have changed.
So to the future of Sao Paulo and the rest of Brazil. The incredibly bright Chad Pike has committed $500 m into a fund to develop up to 20 centres alongside Tenco and other Brazilian companies, particularly in the fast emerging market in Northern Brazil, where the boom in agriculture and other commodities is fuelling consumer spending. The Tactical Opportunities fund is concentrating on cities with 250,000 to 500,000 people.
Brazil last year was once again recognised as the emerging market in the Association of Foreign Investors survey. I believe Brazil represents an amazing opportunity for brands such as Superdry and Debenhams to access growth that is not available to them in the UK.
It is also exciting for developers and investors. Simon Property Group entered Brazil in 2012 through a JV with Malls Participacoes to develop outlet centres and their first is in SP. The old and new money in Brazil both like global brands and a large part of the population are natural shoppers - Japanese and Italians.
In our terms, there appears to be a complete absence of any formal planning. There are expensive apartment blocks with 24 hour security guards (sitting in their huts behind razor wire) next to buildings covered in graffiti by the pixacaos. I was surprised by the lack of billboards in the centre, but these were banned 5 years ago and seem to have been replaced by the graffiti.
The beautiful parks provide an escape, because São Paulo downtown has been in decline.
São Paulo was at least 20 years ahead of London in creating extraordinary public areas on a vast scale from redundant industrial buildings. MASP (the Museu de Arte de São Paulo) was completed in 1968. The whole building is on bright red arches suspended 3 storeys above grade, creating a community space for markets, concerts, picnics and protests.
Oscar Niemeyer hoped that Copan and his other functional buildings would allow people to express their own creativity by using the spaces creatively. In the same block he designed huge private apartments alongside studio flats for less fortunate citizens.
The shopping malls are changing rapidly and I was interested to see that developers are innovating.
Exciting new developments include the 5 storey Cidame Jardim, built by JHSF and filled with natural light and a swish roof terrace. Armani and Hermes sit comfortable alongside Carlos Miele and the best chocolate in SP at Chocolates du Jour. Arrival on foot is not easy, with most people arriving by car, taxi or helicopter.
In contrast, there are over 90 million visitors every year to Conjunto Nacional ( a David Libeskind project built in 1958 ) which has residential above mixed commercial and Cine Bombril- one of the best cinemas in São Paulo. The digital clock and thermometer are a daily reference for Paulistanos.
A former 1980s department store has been converted into Eldorado providing a range of shops, cafes and restaurants - with the only all year skating rink in the basement.
There are several markets including the Ceasa and Feira da Republica, but they are incredibly busy. At Rua Ribeiro de Lima, a collection of over 50 streets now form a huge wholesale district in a former industrial area. There is a hotel there for those that travel in from all over the state of SP and VIP customers can stay free of charge. It is important to remember that the State of SP is larger than the whole of Great Britain.
What can our property sector learn from Sao Paulo? Shopping centres that are refreshed can survive the onslaught of new developments, indies can trade happily alongside global brands, genuine mixed use can work, culture and artistic ideas should be at the heart of our cities (not stuck on the top floor, or away from pedestrian access ) if we create safe and exciting developments with a sense of place people will still enjoy physical shopping. We may need to install helipads on the leading centres!
I have thoroughly enjoyed my first visit to Brazil. I am certain that I will be back.
How to Help Cyprus' Starving Footballers
When footballers get poor, you know things are bad. Premier League players say anything less than £55,000 a week is “disrespectful”! They should spare a thought for their colleagues in Cyprus.
Many Cypriot footballers haven’t been paid for five months; some are even receiving Food Aid. Clubs are merging to make minimum ends meet. Imagine Ranger’s insolvent fate overtaking every UK club; or suddenly seeing Robin van Persie selling the Big Issue. That’s what Cyprus is like for footballers.
Poverty is spreading through the island like a blight. The electricity regulator has cut prices by 5 % so people won’t be without power and, in Paphos alone, 10-15 new applications for food aid are made every day. The serpent has entered this former paradis fiscale (the evocative French phrase for tax haven).
Mrs Thatcher’s omnipresent death debate has also come to Cyprus. Just as in the UK, her memory divides rather than unites. Some Cypriot commentators have begun to call (in the name of “Thatcherism”) for still deeper public spending cuts and privatisation of state entities. Others, pointing to deep poverty and lack of demand and domestic industries, are asking for substantial investment from EU structural support funds.
Just as in the UK, the shrill tone of the debate and its suspiciously simple terms - “Cut or Spend”, “Black or White”, “Bouffant Boudicca or Wicked Witch” - probably indicate that the political elite don’t know what to do about the deficit and recession. They are ignorant armies fighting in the dark. They urgently need to find a path through that darkness. Eurozone politicians have a moral obligation to the Eurozone’s suffering people. They owe them political courage and a plan with larger horizons than anything tried so far.
Massive problems, like the Eurocrisis, require massive response. Sadly, Eurozone’s governments are only doing what they think their electorates will let them get away with. Europe needs a “Grand Bargain”. Each country’s individual government bonds should be replaced by Eurobonds. Then, if investors want to buy into Germany, Finland or France via government bonds, they would also HAVE to buy into Greece, Italy and (yes) even Cyprus. The crisis would end for the Eurozone periphery, but at a cost for the core. Eurobonds would need to be coupled with banking union and making the ECB lender of last resort. The leap into Eurobonds requires political courage and economic sacrifice. But the alternative is to go on for years applying bail out (and bail in) bandages to each new fissure in the Eurozones’ crumbling crust.
There is another (slightly wacky) move that is being canvassed - to call in all €500 notes. It is believed that there are €290 billion of these in circulation. I say believed, because very few honest people have ever seen one. It is estimated that perhaps up to 90% of them are in criminal (or at least shadowy) hands.
So, call them in, set a date after which they will become worthless and require those handing them in to explain where they got them. Europe’s modern day Ronnie and Reggie Krays will feel very uncomfortable. A few ten of billions will stay hidden in black holdalls and any €500 notes that are not returned, will be a benefit to the ECB.
Turning to the Japanese is also an option. The Bank of Japan has just launched the biggest quantitative easing programme in history. Its purpose? To jolt the Japanese economy out of 20 years of “Zombism.” “Abenomics”, named after its prime ministerial champion, should provoke lower interest rates and higher inflation in Japan. Faced with this spend it or lose it situation, Japanese investors are turning to higher yielding “risk assets” in the Eurozone periphery. Cyprus, for all its troubles, still a favourable corporate investment base, may be able to attract some of them.
“Cyxit” is not an option. If Cyprus left the Eurozone, it would suffer mass devaluation, unemployment and blocked access to bail out funds. Like cold turkey, the bail out hurts, but it works.
Cyprus’ predicament shows the profound urgency for a Europe wide solution, not an ailing country by ailing country one. You can’t cure a consumptive continent with a sticking plaster.
Bruce Dear, Head of London Real Estate, Eversheds LLP.
German tourists in Cyprus would be well advised to pretend to be Russian
When you land at Paphos airport, the first thing you see is a golden advert for Russian Commercial Bank. The second thing you see is a silver advert for Russian Standard Vodka.
When I was young, “The Russian’s are coming!” was still scary. But what actually happens when they do come? They set up banks, drink vodka and sun bathe in designer bikinis. If only we’d known!
The porter says some Russian men are too macho and vodka soaked. Being from England - land of blancmange bellies, binge drinking and tramp stamps - I can’t judge them. I also sympathise with them. Russian history would drive you to it. Russian history is not something a man survives on a sensitive demeanour and a glass of water.
Take, for example, a scene in Vasily Grossman’s great Second World War novel, Life and Fate.
The Russian high command are clustered on the Volga bank. The water is on fire with tank petrol. German shells snow down. The Russians are battle planning; reading maps by the flames’ light. Does anyone say, “I think we should tone down the macho thing and drink less vodka”?
They deserve their vodka and most of them will still be able to afford plenty of it here.
Our media say that bank deposits had to be “hair cut” because so many were held by tax avoiding Russians. Even if that’s so, people here say most Russians got their money out well before the EU barber brandished the hair clippers.
Before the bail-in, at least SIX THOUSAND (current official figure) businesses and individuals emptied their Laiki (ironically pronounced “Lucky”) Bank and Bank of Cyprus accounts.
The consequence of this capital flight? Last November, Cyprus was €17 billion short; now its €23 billion down! And, as usual, it’s the middle class who will suffer the heaviest burden. They are rich enough to tax; but not rich enough to get advance warning and good avoidance advice.
Now there’s a public enquiry about the money’s moonlit flit. How did people know what was coming? The only certainty is that probably many more than 6000 accounts were emptied, and that the Cypriot government leaked like a tuna net.
Cyprus really needs the Russians and all tourists to go on spending. Fifteen thousand families here are in food poverty. Bakeries have slashed bread and milk prices to help them survive. All over the island fund raising concerts and events are being held to help feed them. Behind the dis-embodied Eurozone analysis, there is a genuine humanitarian crisis.
Property prices are tumbling and rents falling. To help under pressure occupiers, the government has frozen commercial rents for two years. KSIA (Cyprus’ BPF) has asked landlords and tenants, during this “tragic moment”, to work together on rent holidays and reductions to keep businesses running.
There is even a rumour that there will a second deposit hair cut, extended to all banks and Co-ops, because the first hair cut hasn’t raised enough money…
The Turkish north (or “breakaway regime” as they still call it here, nearly 40 years on) has gone into advertising hyper drive:”We don’t use the Euro. We use the STABLE Turkish lira.” They aim to raise their tourist numbers by a third by undercutting the South’s hotels. Southern Cyprus is embattled on every front.
But Russians will not patronise Turkish hotels - Turko-Russian relations are very poor. In the south they are linguistically at home - most hotels employ dozens of Russian speakers. They are also religiously comfortable - many churches hold both Greek and Russian Orthodox services. We heard of Russians who have been bringing their families here for forty years. There is a tradition of wealthy Russians coming to Cyprus, as they once did to the Cote d’Azur.
In the winter of 1916/17 the hoteliers of the Cote d’Azur closed the Russian Orthodox Churches, put away the Tsarist elite’s beloved sweet champagne and candied brandy, and looked forward to welcoming them again in 1918. They never came.
But then they had Great War and Revolution to contend with. They say they won’t let a mere Eurozone crisis put them off Cyprus.
After all, as Putin put it, the Euro’s problems are good for Russia’s banks and businesses - people will switch deposits and investments.
By contrast, a delegation of German MPs here has just diplomatically pointed out that Cypriot banks were “casinos for tax avoidance” and needed to be “destroyed”. German tourists in Cyprus would be well advised to pretend to be Russian.
Bruce Dear, Head of London Real Estate, Eversheds LLP.
The Zombie Survival Guide: Top Tips For Retail Leases For 2013
Christmas 2012 was the year multi-channel really hit home. Nearly 1 in 5 used click and collect, while just over 10% of all shopping was carried out on-line. For 2013, successful retailers must offer a strong multi-channel offer. But change takes time. And as HMV, Blockbuster and Jessops have shown, sometimes change may come too late to save a business without radical restructuring.
For landlords, for shopping centre owners and for developers looking for retail tenants, recent events have thrown a renewed focus on how they deal with the retail ‘walking dead’ – retailers that keep selling despite financial figures that show no sign of life. For some, it’s a sign of suppliers, landlords and funders working together to bring them back to life , but not all will be saved, and landlords must consider how to protect themselves from becoming victims of the zombies.
Hope for the best, prepare for the worst: Landlords need to future-proof leases as best they can. When signing a new lease, there are some must-haves and these include: pushing for rent deposits (which are financially ring-fenced to protect income stream); and ensuring that landlords have a quick, clean exit strategy should tenants breach lease obligations – e.g. landlords ability to evict tenants for non-payment of rent.
Protect your incentives: Retailers are still expanding. For landlords, the desire to sign a pre-let or fill vacancies may see them offer tenant incentives like payment of fit-out costs to entice a retailer to take space. But these incentives must be carefully structured so that the landlord is protected if the tenant becomes insolvent before or soon after they take occupation e.g. payments may be timed so that retailers are only paid after a period of occupation.
Pre-pack problems: After the collapse of La Senza and Jane Norman, the administrators and new companies put licence arrangements in place so that the new companies could occupy and trade from stores without any formal link to, or consent from, the landlord. The landlords’ income streams may be maintained, but they have no contractual link with the company in occupation and therefore no right to commence proceedings directly for any breach of the lease e.g. to force them to deal with repairs. A new lease should be a priority to protect the landlord’s property.
Dealing with issues at an early stage can help landlords avoid facing nightmares on the high street.
By Allan Wernham, joint managing partner and partner in the real estate team, and Cassie Ingle, senior associate, Dundas & Wilson.
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