Commercial Property Blog
All posts by Richard Walker
Over 1,500 jobs were saved back in July when retailer Internacionale entered into a pre-pack arrangement in which it was bought by a new company backed by existing shareholders.
And Internacionale is not the only retailer to be saved from administration by a pre-pack– recent high profile pre-packs include Dreams, La Senza and Game. In total there were 728 pre-packs during 2012, nearly one in three of all administrations. When used properly the pre-pack process can save jobs, minimise disruption to the business and reduce the costs of the administration process.
This can help preserve the value of a business and so creates a better return for creditors. However, a perceived lack of transparency and a fear that the process is being used to cherry pick the best assets and abandon the rest has led to criticism.
So, in light of an exhaustive Insolvency Service report now set to be published later this year, what does the future hold for an insolvency process that is set to change substantially in both how it is interpreted and implemented by industry practitioners?
For real estate, the impact of your average pre-pack is most often felt by landlords of properties occupied by the insolvent tenant. Generally speaking in a pre-pack involving leasehold property, the insolvent tenant will allow the new purchaser to occupy properties that are purchased on a temporary and non-exclusive basis.
The idea behind these arrangements is that it gives the purchaser immediate access to ensure continuous trade while the landlord’s consent to a formal transfer of the lease is sought.
The benefits from a landlord’s perspective is that the property will remain occupied (and in the case of retail properties, open and trading) avoiding a potentially problematic void. Also, following the Goldacre case, any rent due for payment between the period ofappointment of the administrators, throughto the termination of the occupancy arrangements should be paid.
The downside for a landlord is that after the new occupancy arrangements are agreed between the insolvent tenant and the buyer as part of the pre-pack, the landlord may have to deal with an unexpected and unconnected third party occupier.
Also, the landlords of the less profitable and desirable properties that are not sold may find themselves with an insolvent tenant who simply shuts up shop with all the associated issues that go along with this, such as business rates. That said, if the stage of pre-pack has been reached, the closing of these stores was perhaps on the cards in any event.
In view of the arguments both for and against, earlier this year the Insolvency Service commenced a review to establish whether pre-packs are a beneficial insolvency tool or whether the process needs to be subject to tighter controls.
While the outcome of this process is not expected until (at least) the end of this year, an updated version of the procedural guidelines relating to pre-packs has recently been released.
This update looks to achieve a greater degree of transparency - requiring a more extensive level of reporting to creditors and also a clearer differentiation of the various different roles that an insolvency practitioners is required to undertake in a pre-pack - and is perhaps a sign of the nature of changes to come.
Cassie Ingle is a senior associate at Dundas & Wilson
“Here is something that would never happen in London. A major law firm’s lease comes to an end; the landlord doesn’t appoint lawyers or surveyors.
Instead, he pops in to see his law firm tenants and agrees the new lease himself. Then, still without surveyors or lawyers, both parties sign the new lease and, untroubled, go back to their core businesses of rentcollection and legal advice.
This happened recently in the Central Business District of Stockholm,one of the most sophisticated real estate markets in the world.
Why wasn’t the landlord frightened about negotiating the lease alone,especially with lawyers? Why wasn’t a new draft lease produced, followedby a UK style agony of negotiation?
Consider England and Wales’ renewal process - an over elaborate and antiquated duet of court proceedings and amendment ping pong. Why didn’tthe parties go in for something similar here!?
The answer is: this is Sweden and England and Wales need to watch and learn.
Since the 1960s, Sweden has had a suite of market wide standard leases which, combined with its statutory leasing code, take the pain away from leasing property in ways UK professionals can only wish for.
How do the Swedes do it (and what should UK investors look out for when buying Swedish leases)?
Here are the highlights:
1. The Swedish Property Federation (Fastighetsagarna Sverige) developedowner friendly lease forms in the 1960s, and these are now uniformlyaccepted;
2. Tenants can agree these forms because (except where expressly stated)Chapter 12 of the Swedish Land Code (“the Swedish Code”) protects their position. The Code is more flexible for commercial than residential
3. Swedish leases can be of any length - up to a maximum of 25 years (or 50 years outside planning controlled areas). Any lease of over nine months can only be terminated by notice (of no less than nine months);
4. The Swedish Code allows for forfeiture on “naughty tenant” grounds, such as non-payment of rent, subject to some protections if the tenantmakes good;
5. If the landlord terminates the lease, then, in certain non-defaultsituations, he must pay limited compensation and help the tenant findnew premises; and
6. Usually, tenants can’t assign the lease without landlord’s consent -but if the landlord says no without due cause, or doesn’t answer thetenant’s request for three weeks, then (in certain circumstances) thetenant can end the lease.
UK landlords may balk at the Swedish Code’s more tenant friendlyprovisions. Hands up landlords who want tenants to be able to terminateif no consent to assignment is forthcoming within three weeks!But that is not the point.
The English and Welsh leasing market isgarotted by the ritual gavotte of 1954 Act proceedings and lease renewalnegotiations.We need to remove these bureaucratic blockages to the market. The newmodel commercial lease the BPF is preparing will be a big (and welcome step in the direction of speed and commerciality.
But perhaps it is time to go much further. If we were only brave enough,we could abolish the 1954 Act, introduce standardized propertydocumentation across the market, and even give a word saving leasingcode the force of law.Of course, there will be many voices of vested interest against. Butperhaps we have nothing to lose except boring and repetitivenegotiations.Our gain would be a stream lined and more economically efficientcommercial property market.
Perhaps one day, we will all be Swedes.
Bruce Dear, Head of London Real Estate with Tord Svensson, Real Estate Partner, Eversheds Stockholm.
Stereotypes… Being British I have to talk about the weather and yesterday morning the fog in Munich saw those due to arrive rip up their schedules and frantically start again.
One friend, due to arrive on the first flight from Heathrow arrived after we had finished the first course of dinner at 9pm last night.
Another told the tale of condensing four hours of meetings in one hour prior to the Savills reception; his main aid in condensing the meetings was asking people to come to him rather walking through all six halls to find them.
This brings me back to my main point from yesterday – momentum. Everybody is saying that this year is all about momentum and that the time lost yesterday was precious – four out of the five previous years at Expo have been about protecting what you have, this years is about growth and not on the margins but substantive growth.
I co-hosted a dinner last night at Haxnbauer, a stereotypical Bavarian restaurant; starter was a cold platter of sausage, ham, cheese, radish and pretzels; main was roast veal and pork knuckle with potato dumplings and the only nod towards a vegetable, sauerkraut.
Beer flowed throughout, then the Kirsch, leading one guest to depart. Conversation around the table, which included guests from the UK, Germany, Hungary, Malaysia and Jersey was about new deals, new entrants to the market, growing a new book of business and optimism.
Again looking back for the last five years, stories around the table have been about survival, disputes and deals going south. Progress.
The fog lifted yesterday and the sun briefly made an appearance, not that you would have noticed in the conference halls.
I seem to recall since 2008 I have departed a grey skied London to arrive at Expo with the sun shining in Munich, and feeling that however depressed the real estate business in the UK has been, the weather in Munich somehow made Expo not quite as depressing as it might have been.
This year I departed a sunny London to arrive in damp and cool Munich – but with a real estate market gaining momentum. I like the symmetry of that.
Nick Ellis is a consultant solicitor at Keystone Law
Monday morning in Munich, a blanket of fog covers the city and for the first time in eight years the usually reliable metro system delays my arrival at the convention centre.
The fog is matched by some “foggy heads” that I meet on the train, the hangovers from the end of Oktoberfest – which ended last night - are evident all around me.
Momentum is the word I keep hearing in presentations and meetings; it appears that northern Europe real estate markets confirm the London trend of recovery and now it is a question of how much momentum they can create.
To those occupiers thinking of taking more space one thing is clear; markets see rental growth as being the driver of investment.
Therefore, occupiers are going to see an increase in rents over the next couple of years, with the City and West End leading the way and surpassing the record levels set in the last boom.
It’s been interesting to hear about the source of growth in occupier markets; London is deemed as the location of choice for the TMT sector, with Google, Amazon and Bloomberg all well progressed with relocation plans around the capital.
The sector appears to be shifting from the Thames Valley into London, the perception being that London is where these businesses need to be to attract the best talent.
Interestingly News International cited their move to “baby” Shard as being driven in part by recruitment and retention issues.
London’s traditional end users in the financial services sector are now being rapidly caught up by the tech sector.
Law firms are thin on the ground in terms of conference hall stands, but rest assured there are plenty of lawyers working the rooms and no doubt they will be working the restaurants and bars tonight.
Some of them may have some surplus space in London to feed the hunger of the TMT sector and might also be able to tell a cautionary tale of signing for too much space on a pre let. Only some of them……
Nick Ellis is a consultant solicitor at Keystone Law
‘How can it be worth buying a residential property for £35m only to knock it down?’ One may well ask. ‘Put this former carriage house and stable elsewhere and it would be worth a fraction of the price.’
However, this classic response is irrelevant.
Opportunities to create a complete new build Mayfair mansion like this, as opposed to the usual comprehensive refurb, are few and far between.
Although the figures seem extraordinary, the potential to significantly increase volume in such a sought after location, goes someway to explaining the incredible price tag.
Forget the existing asset for a moment, what the purchaser is essentially buying is the opportunity to create a new 16,000sqft house. This amount of potential space for £35m equates to c.£2200 per sq ft. It is not unusual to pay this kind of price for a property requiring modernisation in the area.
For example, a large double fronted period building requiring complete redevelopment back into a single residence was sold earlier in the year for c.£1800 per sq ft and the market has moved on since then.
Why is it so surprising that one has to pay a similar amount to create a new build - it can be easier to create something from scratch than try to carefully alter the layout of an existing fragile, period building.
Frightening as it may sound, the figures part of the equation is easy, it either ‘works’ for an investor or it doesn’t.
The key to making this opportunity a really successful investment, is to correctly understand the living requirements and aspirations of the potential owner.
Everything to do with house should be tailored towards achieving this goal. In this location, it is easy to get carried away with projected square foot prices etc but ultimately, if the property doesn’t appeal, these expectations can go out the window. Instead, the house will be difficult to sell at a premium and a long drawn out sales process with several price reductions inevitably awaits.
Never before has the presentation of a property for sale been so important.
Record sale prices raise the bar and drive the market but a lot more goes into achieving these prices than first appears.
Successful investors and developers are now increasingly aware of the importance of many factors in the process beyond just the traditional design and build quality of a project….marketing has become big business!
Therefore the question for our former carriage house, is not just about who has the necessary resources to purchase but also who has the combination of ability and vision to deliver the project.
This new Mayfair mansion will not be built overnight and so, if the development work is carried out to the high standards of quality demanded by purchasers at this level with all the extra factors taken care of, a figure of £65m can be achieved.
Oliver Russell is head of property acquisition at Charles Russell LLP
This week, for the first time since becoming an Institute of Directors member, I attended the Annual Convention which was held in the Royal Albert Hall. The event boasted an array of speakers to die for and was punctuated by the venue’s “famous” box lunches (which quite frankly was less than impressive, in my opinion).
I decided to go because Jack Welch, former CEO of General Electrics, was to make an appearance. It was a shock to discover he was beamed in by live satellite but nevertheless was as impressive as I always thought he would be. He has launched an online MBA with the Jack Welch institute, which the website advertises for an eye watering $36,000!
Much will be written on the various speakers and the topics discussed, however, I wanted to put down my perspective on the presentation from Google UK Managing Director, Dan Cobley. He gave a stimulating discourse on the wonderful world of Google and its approach to business and its achievements.
Two things struck me. First, a lot of the innovative companies have a great foundation but a launch pad and semi-monopoly position makes it easier to be enormously radical than a mass-market commodity. Secondly, the limitless of creativity to maintain and maximise dominance in a market place is truly awesome.
Recently Chainbow made some quantum changes and we continue to drive residential property management into new spheres. There will always be the core aspects that will be our bedrock but the revolution continues to create a marketplace where customers are really king and service is given without suspicion or cynicism.
Mr Cobley imparted some extraordinary perspectives but none more so than the ‘moon shot’ philosophy alongside 20% staff ‘free time’ during a working week. Natural conservatism within most businesses would cause worry on people swinging the lead. In my experience, any time spent team building, embracing responsibility from staff members and generally motivating and rewarding is the most effective.
Of course there has to be profitability and performance at the forefront of activity and endeavour. This is the bottom-line but a dream built on firm foundation is always a desirable thing.
Mr Cobley expanded the moon shot theory into a Google philosophy of shooting for a 10-times differential when doing things as opposed to a 10% improvement. He said to get an extra 10% is a slight tweak of process or delivery. To get 10-times you have to fundamentally rebuild. And that is the exciting bit. Translating this to my industry, leads me to ask how can we make residential property management 10-times more effective and deliver 10-times more customer service?
So in short, what will we do to change the world in which we work? Watch this space. Although having seen Mr Cobley walk around in Google glasses for an hour, I can’t see it catching on. It is a bit like the Captain Scarlet ear pieces – trendy and fun for a while but I don’t think it will last long-term!
We had been doing business with Lehman for over ten years and they were deeply embedded in a number of our portfolios.
With the demise of Bear Stearns in March 2008, we began to think about the unthinkable and how to secure our company in the event of further failures. We had no idea that Lehman was in trouble at that point but it seemed like prudent financial management to review all of our funding mechanisms.
Lehman’s collapse was as much a shock to us as it was to everyone else. We knew at that point that the world had changed and that Boultbee’s future would depend on our financial acumen and resources, not waiting for administrators to sort out the situation.
Our major exposure to Lehman was in Sweden, where we immediately began restructuring to replace Lehman wherever possible, and where it was not possible, we either sold the asset or put in our own equity. We decided we had achieved maximum value in the Nordics and that it was time to refocus our activity on growing a mixed UK portfolio.
We worked intensively for over a year to restructure the remaining Swedish investment portfolio as part of the plan to divest assets in the Nordic regions and refocus investment activity in the UK market.
Within 18 months of Lehman’s demise, we were not only on solid foundations but growing the business further. Leveraging is now done on a completely different basis and we are far more cautious about spreading risk. This was an experience that was character building and a frantic period to live through but we aren’t anxious to repeat it.
Clive and Steve Boultbee Brooks
I joined Lehman’s in 2005 shortly after Ian Henderson retired as CEO of Land Securities when he wished the assembled analysts “ … lots more REITs to analyse in the future!”
Previously at Citi, I had written a controversial sector “Buy” note in 2003 “REIT Petite” - with apologies to Jackie Wilson - anticipating a real estate re-pricing and successful introduction of REITs. The sector had already doubled in value by 2005.
The mid 2000’s was a period of unprecedented economic growth and debt was increasingly popular with property shares having quadruple gearing with a yield shift driving capital values, capitalised developments costs, balance sheet debt and – the wild card - if the UK Treasury’s consultation paper introduced a viable REIT model, then the long run average 25% discount to net worth would evaporate. If REITs could then buy buildings with shares, the sector could expand be relevant again.
In one meeting at Lehmans in 2007 I remember committing investment banking heresy by saying that property values might fall at some point in the future. On another occasion after a two minute phone call $600m was authorised for a property transaction. In April 2007 I called the top of the market in a note called “The End of the Gold Rush” – the clue is in the title - which didn’t prove popular reading internally but the signs of unsustainable “irrational exuberance” were all around from the conspicuous consumption at the MIPIM conference to a junior analyst demanding to be paid $1m.
Low real interest rates had stimulated an asset price bubble fuelled by new financial products that were not stress tested and became strained and centred on market liquidity failures. In September 2007 Northern Rock saw the first run on a British bank in 150 years.
In 2008 we wrote that “REIT shares could go down as well as plummet” and the snow balling effect of the sub prime crisis on the global financial system was becoming more widely understood with Bear Stearns failing in March 2008. We had all thought that Barclays or Bank of America would buy Lehman Brothers, the fourth largest US investment bank, but BofA bought Merrill Lynch instead and Barclays walked away and American International Group (AIG) begged a bail out from the Federal Reserve.
The events of Sunday September 14th were extraordinary even by investment banking standards.
Banks were going under – even those “Too Big to Fail” (still the definitive account of the financial crash by Andrew Ross). That weekend began with hopes that a deal could be struck, with or without government backing. On Monday Lehman Brothers filed for Chapter 11 bankruptcy protection with $613bn of debt and it also held credit default swap contracts with a nominal value of $800bn.
On 15th September I had gone to work as usual thinking the bank would still be rescued but instead the worst economic crisis in living memory had begun. Global stock markets came close to collapse, the dollar fell sharply, and the yield on two-year Treasury notes fell below 2% on fears that Lehman Brother’s assets would be dumped on the market and the ripple effect of Lehmans being cut loose, or perhaps made an example of, was vastly underestimated by the US authorities.
I became unsure whether we would be able to meet our next mortgage payment with savings locked into now worthless Lehman paper. You could smell the fear and not without a little schadenfreude news reports showed dazed Lehman employees leaving 25 Bank Street carrying their cardboard boxes. That evening I was Nigel Hugill’s guest at the O2 Arena at a Stevie Wonder concert. I left as “For Once in my Life” was being played out.
The following day the administrators, PriceWaterhouse, called me at home to remind me that if I did not turn up to work I would be in breach on contract and within a week, the Japanese bank Nomura had agreed to buy Lehman’s equities division in London. All bets were off and we didn’t have to sell our house, but some of the 50,000 workers who were soon to lose their jobs at Citi would not be so lucky.
It was back to business under different livery and I was warned that my sector was “ … in terminal decline and would take decades for it to be rehabilitated”. Exactly two years after “The End of The Gold Rush” I bought back into the sector in a note “Don’t look now - NAV and Target Price upgrades”. The thesis was that Quantitative Easing (QE) would lower UK gilt yields and the UK currency and as a result UK property would become the sterling yield trade of choice and REIT shares rocketed.
Dick Fulds (CEO of Lehman Brothers from 1994) career came to an ignominious end along with that of his lieutenants. A few years later I met a US real estate executive who reminisced “Lehmans was almost as smart as Goldman’s but not quite and so it had to be quicker, more aggressive and more leveraged”.
Now dinner party chat is often questions whether the 2008-10 crash was really that bad. The answer is no, it was worse. RBS had briefly been the largest bank in the world and after the crash it was the largest company in the world with equity plus debt of £3.7tn. A senior RBS executive had to ‘phone the Chancellor Alistair Darling in 2008 to tell him that RBS would run out of money not in a few weeks but in a few hours. It was worse than 1949 and came close to being as bad as the Wall Street Crash and Depression of 1929.
Mike Prew is managing director of equity research and head of real estate at Jefferies Intl.
In the mid 1970s, when I was a youngster in property, we had an economic and property crash which led to a lot of the secondary banks going to the wall without any real repercussions to the primary banks that were the bedrock of the UK.
Probably, because of that experience, I never foresaw that a downturn in real estate values could have this calamitous effect of bringing down our primary banks, in particular RBS and HBOS, as well as Northern Rock, which was a mini Lehman. The hordes of people queuing up at Northern Rock to get their money out was something you saw on films but not in the real UK world.
It was, of course, naive of me to believe that banks couldn’t go bankrupt, that “nothing was as safe as the Bank of England”. Ironically, of course, nothing was as safe as the Bank of England because the tremors caused by the Lehman collapse meant that you were worried about everything.
Fortunately, foresight did not completely desert me, as I realised in 2006 that the real estate market had got so hot that it would be crazy not to do some sort of big corporate deal. My intention was to stick together some of our properties with one of the large Australasian property companies that were eyeing the UK to create something of real value.
It took a year to negotiate the deal with Valad, which bought the bulk of our UK and European property empire along with our listed fund and asset management platform. We concluded it in July 2007. I don’t think we could have concluded the deal in August or September. It was really that period when the financial markets began to realise that property was overpriced and the cracks appeared. By 2008 the cracks had become a massive gorge and, then, the Lehman collapse shook foundations around the globe.
Because I hadn’t had any dealings with Lehman, I read about their collapse more like it was a story. But reading the story made me realise that this world of ours had changed. The relationships that good companies, particularly in real estate, had always had with their financiers was changing day by day because the financiers had much bigger problems than the guys holding the real estate. That was what I saw to be the real problem.
From a personal perspective, I began to appreciate the knock-on effect with what happened at HBOS, when a lot of old colleagues that I had worked with began disappearing. That made me recognise that our relationship with the old Bank of Scotland and, then, HBOS was changing rapidly.
The new HBOS within Lloyds has been hamstrung, so the bankers haven’t been able to work in co-operation with clients to accord with the clients’ sensible requests; their task has been to try and get the clients to accord purely with their requests. When you’re a big private company which fully understands the obligations of banks, the relationship has got to work two ways.
The banks should recognise that, if you’re dealing with corporations that have been in the market for a long time, have worked in periods of downturn and are well managed and understand the market, they should work with them in order to get the best results. Life has been so calamitous for banks that they’ve been unable to sort the wheat from the chaff and get to grips with working in harmony with reputable and knowledgeable clients.
Lehman changed the ground rules. It’s more difficult for entrepreneurial corporations, particularly private as opposed to public ones, to make the progress that they would have been able to have made before. Some good private companies that I know with good people behind them have gone to the wall.
It’s a great pity that the banks that were financing some of those private companies have not worked in a much more constructive way because it was the banks in so many ways that created the headache for these companies. Sure, you can say they over-borrowed but the banks should have worked more closely with some of these companies to get the best results for their own shareholders.
The banks have gone through a nightmare, they have been thumped and clobbered, so it is no wonder they have had to take stock and attempt to put in some sort of process to stop it happening again. But it is how they have gone about this that has led to the relationship between bank and client being lost.
The collapse of Lehman Bros was really the culmination of an extremely nervous year in the capital markets when the real estate funding tap was already drying up.
The preceding fifteen months had seen the collapse of Bear Sterns and Northern Rock, the latter following the biggest run on a bank in 100 years. Thus the collapse was not without warning for those who could read the signs.
We have always known that the markets are cyclical, they go up and then they go down. It has certainly happened in the past and even now we see the London residential market showing signs of exceeding everybody’s expectations.
We know that a correction is always clearly inevitable. And perhaps the Lehman collapse was the correction many anticipated.
Fortunately on our most visible development, London Bridge Quarter, we have the good fortune of having an extremely strong partner in the State of Qatar who, as long term investors, stuck by us during the market upheavals which followed the collapse of Lehman’s. The results are now visible for all to see and both they and we take great pride in its successful completion.
Lehman’s collapse certainly took the steam out of the market. Unfortunately it highlighted the depths to which some elements of the market had sunk and we are still paying for that today.