Commercial Property Blog
All posts from: January 2010
I make no apologies for returning to bankers and their bonuses after Michael Portillo raised the issue again at today’s Investment Property Forum annual lunch.
The event, at the Park Lane Hilton, was attended by 600 people and Portillo was the speaker after lunch.
After trotting through his now-familiar gloomy prognosis on the economy, Portillo launched into a theme which is touching an increasingly raw nerve among the fund management elite.
Why do they get paid £300,000-£500,000 a year for managing vast amounts of money when investment bankers get ten or a hundred times as much for doing little more?
Portillo seized the moment by saying: `Banks have been a juggernaut driving through the global village.
`The result is that the relationship between politicians and bankers has almost completely broken down.
`So the first reason for the current crackdown on bankers’ bonuses is pure politics.
`The second is revenge – revenge against the people who are perceived to have dragged down the western world. This needs to be qualified, because in many cases politicians are as much to blame as bankers’ for their economies’ collapse.
`The third reason for the backlash is fairness.
`Why has the gap widened so much between the richest and poorest in society?, Portillo astutely observed.
My colleague and our assistant editor Mark Shepherd shrewdly points this out in today’s Property Week, illustrating the chasm that is real estate’s north-south divide.
Again, I make no apologies for quoting Andrew Ross Sorkin’s `Too Big to Fail’.
The executives who dragged down Merrill Lynch and Lehman received tens of millions of dollars on leaving after their appallingly misguided work.
Something is wrong in the relationship between banking and the rest of the business world – and resentment within the property community is beginning to grow.
As Portillio summed up, bankers have had 18 months now to re-define their remuneration and relationship with society but have just continued to reward themselves excessive pay.
That’s why the crackdown is beginning now – and not in September 2008.
I am even more gripped by Andrew Ross Sorkin’s `Too Big to Fail’ after President Obama’s dramatic move to limit the activities of investment banks last week.
Anyone in property reading the 600-page thriller could not have failed to notice the huge role real estate played in the ultimate collapse of Lehman in September 2008.
As JP Morgan, Goldman Sachs, Morgan Stanley and the rest were frog-marched into the Fed to lead a rescue of Lehman, its real estate ailments were raised time and time again.
Page 321 says: `Part of the problem was that there was still huge disagreement over what Lehman’s assets were actually worth, especially its notorious commercial real estate assets.
`While Lehman had been valuing that portfolio at $41bn, consisting of $32.6bn in loans and $8.4bn in investments, everyone knew it was worth far less.’
Ross Sorkin goes on to explain that rival bankers estimated that at this time the Lehman commercial portfolio was worth $17-20bn, a fraction of its property-related debts.
What is the link with the President?
While Obama is keen to limit the proprietary trading activities of banks that also take deposits – and Lehman didn’t – it shows the mess that investing directly in real estate can cause.
A mess that is leading to a more general disillusionment within property with fancy financing overall.
British Council for Offices President Mike Hussey, addressing 1,100 guests at the BCO’s annual dinner at London’s Grosvenor House Hotel on Tuesday alluded to as much.
`Let’s not raise for another financial instrument to raise performance,’ he said.
Property fund managers are weary, too, of watching investment bankers skimming huge amounts of money off giant transactions with little or no skill.
And if there is a little less money floating around property – as long as what is left is `real’ and not synthetic funding – what’s wrong with that, is the general feel.
With bankers having to limit their bonuses it will be intriguing to see how agencies also deal with the publicity surrounding handing out big bucks.
Remember – what was good in the noughties may not wash in 2010.
What are you most sick of: catching colds off your kids, being sweaty on the tube while you freeze outside or reading the onslaught of contradicting predictions itching from the scalps of every company alive? Meanwhile. you're trying merrily to remember Christmas and look forward to Mipim which can't come soon enough.
Given that I’m a single, bald-headed cyclist who will never marry, the only one of those that applies to me is the last one. Hence last Thursday’s EPRA annual predicto-fest evening with Nabarro was a highly enjoyable affair.
The top table chief execs corner featured Chris Grigg (British Land), Francis Salway (Land Securities) and Ian Coull (Segro). If you’re Alex Ferguson this would amount to – in the same order as above - Michael Owen (the new guy in town, slowly making his mark but with one of the best pedigrees in the league), Ryan Giggs (award-winning industry personality of the year) and Wayne Rooney (stoney faced big hitter you wouldn’t start on). A-list stuff.
And from the off, it’s a team game. No bickering, ego-jabbing or posturing but a selection of snazzy moves and jazzy words for an industry keen to defend its Reits title. At times, they’re laughing and joking, huddled round each other at the end of each half.
“Reits did very well indeed when you consider what happened to other ownership structures in real estate,” Chris Grigg proclaimed, “they’ve been disaster tested and have come through this extraordinarily well.” Launching a fine ball to Francis Salway he predicted a resistance to higher gearing adding that “people will look more closely at length of debt interest coverage.”
Salway’s calm response was familiar – those trusted twinkle toes have been playing the same trophy-winning game for years. “London offices could see quite a sharp recovery in rents,” he says, “although retail will be patchier and at much more modest levels across the UK. However, there's been a realisation over the last eight weeks how close we are to recovery in London offices.”
Truth. But the defence sees that one coming. The audience will have to wait a little longer for the Land Securities chief to come out with some actual figures. They don’t have to wait long.
“We could be set for double digit annual rental growth in London offices but not in retail, although this has been priced in already as London offices trade at lower yields,” Salway adds, scraping the post. Demand will come from occupiers upgrading to fresher buildings. Plus, 2010 will be a year of net employment across quite a few sectors. (As long as you don’t work for Cadbury or the civil service, presumably).
Before the play has a chance to switch, Grigg comes back making the point that retail recovery will be “very location specific - centre by centre”. He adds: “In secondary shopping centres, it’s still very difficult to get much interest from occupiers although there’s a tendency towards, dare I say, competition at the top end.”
Retailers are more confident about the South than North and almost all of them, he adds, “have been surprised across the country by the resilience of underlying consumer demand”.
So the retailers aren’t doing as badly as some would have others believe. It’s an open goal, but we’ll allow it.
Segro’s target man is a little more cautious however, saying that occupational markets remain tough and that the coming months will be challenging for industrial property.
He nearly knocks one into his own net with the twist that vendors coming back, quickly absorbing any money chasing assets could risk recovery. “As we ve seen prices rise, vendors sitting on their hands may take advantage of this. The liquidity available has been chasing not that many deals. The election will have an influence as well. The possibility of a hung parliament will cause uncertainty and the Conservatives would hit public spending.”
Free kick to the opposition. Luckily none of our henchmen makes any oblique political statements of intent and the ball sails harmlessly wide.
As the game moves back to Reits, to their financing and future, Salway begins a legendary run down the left.
He says that earnings and dividends are growing in significance, adding that over-renting has made it hard to make this the main focus, stating that NAV will remain the main metric in the medium term. He finishes in style, adding: “I think we’ll get some new Reit launches and more equity raising by existing Reits. I think we could see smaller sized rights issues linked to individual opportunities. I also think we'll have more very specialised Reits.”
Not to be outdone, Grigg returns to the fray, swiping aside the threat of fire sales as loans mature as banks see the value of their books rising. “At the prime end of real estate we remain relatively sanguine that the amount in banking cans doesn't bother us. There's more likely to be more downward pressure on the lower end of market, but there's an element of self-regulation about that so if banks see prices falling they will hold on to the assets they have.” The crowd are on their feet and this enthuses Ian Coull.
“We will see speculative development in areas where there's a clear need for re-alignment of supply and demand,” he states, stamping on the face of empty rates. The referee doesn’t see.
As stoppage time approaches – all nine minutes of it given we’re playing at Old Trafford, Grigg grabs the ball for one final rout up the right.
The APS has fulfilled its purpose, he turns, shimmying round debt with a confidence not seen since his masterstroke against Argentina. It’s a remarkable resurgence. Foreign buyers have more options he adds, agreeing with Salway that the weak pound is no longer holding investors’ interests at the same levels.
His parting shot is over gearing levels, although he deliberately avoids expressing a view how highly geared a listed prop-co should be.
“When you're at top of the cycle often 60 per cent of people don't think you are and that's when deals get done,” he says, as some clever sod in the crowd points out that if British Land got bought out at the top of the cycle their shareholders will have got a good deal.
But it’s Coull who has the final word. “Gearing has to be linked to where we are in cycle,” he says. “The lesson is when we are coming into a downturn we have to be lowly geared. Gearing up when values are rising isn't a bad thing.”
And the whistle goes. It’s been a good game for the Reits. But can they keep it up until the close of the season? Who knows. But at least you don’t have to waste any more time reading anything that offers you the kind of cast iron prediction that doesn't really exist any more.
The paint was almost peeling off the walls at the RICS’s newly-refurbished lecture theatre last night – as property’s election race got off to a rip-roaring start.
Grant Shapps, the Conservative Housing spokesman, came under strong fire from a 100-strong audience of Property Week and Building readers in an event we organised with the RICS.
As co-chair of the occasion with Building’s Housing & Regeneration Editor Joey Gardiner what struck me straight away was the passion and vigour of the debate.
When we teamed up with the RICS for a series of pre-election presentations in 2005 the occasions and participants were little better than lacklustre.
Communities Minister Yvette Cooper was smug at Labour’s anticipated success, and the Conservative John Hayes was very late, very average and is now shadow for lifelong learning.
Last night, however, Labour housing doyen Nick Raynsford locked horns with cocky Conservative Shadow minister Grant Shapps in a vigorous debate over `Localism’.
This is the Conservative plan that will see councils incentivised to promote new development by centrally matching the increased council taxes and business rates that result.
Raynsford believes the plans are ludicrous and un-costed, and has done research to show the plan will cost £2.3bn which the country doesn’t have within three years.
Shapps’ retort? That Labour’s planning regime isn’t working, and something needs to be done to get house-building started again.
With strong backing from a sceptical audience, Raynsford was the winner on the night – but no one is betting against Shapps and the Conservatives in May…
Read more in Property Week on Friday, and in detail in our Residential section next week.
In neat black woollen dress, diamond earrings and pearls, Lady Louise Patten today looked like an elegant lady spy from the 1960s of James Bond.
First up as a witness at today's employment tribunal hearing with former Tim Wheeler today, the former Brixton chairman started by sliding a stiletto deep into her former chief exec.
A corporate veteran, Patten kicked off: 'I have never met a CEO who has worked with such disregard for his company but with such a regard for his own financial position'.
Anyone who thought this war would settle on the steps of the London Central Court would have seen the error of their ways on arrival at the sterile Kingsway venue.
In one room were Wheeler, with short hair, charcoal suit, and sober shirt and tie plus advisers from law firm Farrer & Co.
In another former members of the Brixton board, including Wheeler's former deputy Steve Owen and his short-lived successor Peter Dawson.
Patten continued to detail how Wheeler had attempted to 'extract' an extra £1.88m to supplement his pension from Brixton, and how his relationship with his former close colleagues had broken down.
But there are likely to be two sides to this story and we can expect Wheeler to make a passionate case.
I can't guarantee it, but this looks to me like a fight to the finish. It will also lay bare the inner workings of a property company in crisis mode at the height of the crunch.
As my colleague Nick Duxbury warned in Property Week last Friday this is going to turn out very nasty indeed.
With that, and needing to attend a Marks & Spencer board meeting tomorrow, Lady Patten continued with her elegant but savage attack.
Even if you don’t dabble on the stock market, chances are you’ve heard of the "spring selling season"
Logical, then, that the stock market follows this natural momentum.
The Investors Chronicle’s esteemed Companies Editor, Simon Thompson, tells me that one of his favourite trading strategies is to buy a selection of house builder shares in the first week of January, and then sell them three months later.
It sounds simple, but if you had followed this strategy for the last 30 years, you would have made a profit on no fewer than 25 occasions, netting an impressive 10.9 per cent average quarterly gain.
Most of the big builders released trading statements last week. Having grilled all the chief execs, I will publish the IC’s recommendations on which shares offer the best prospects in this Friday’s magazine. So why has the snow been a factor in my stock picking this year?
Here’s why. One of the best indicators of future sales is the level of site visits. Unsurprisingly, the snowy weather has caused visitor numbers to plunge. However the level of website enquiries has greatly increased. Barratt chief Mark Clare tells me website traffic rose 100 per cent over the cold snap, and Bovis chief David Ritchie also reports a big uptick.
This prompted me to have a closer look at all the house builder websites. We shop online for everything else.
The prominence of the government’s HomeBuy Direct initiative is understandably great (though the quality of information for first time buyers varied greatly). The builders offering the most information about negotiating the seized-up mortgage market stood out in my mind.
Downloadable brochures and site plans are ubiquitous, and Redrow is experimenting with video (though I found the shots of models flouncing around show homes a bit twee).
It was interesting to see that Bellway is offering "try before you buy" on four schemes, where you can rent a new home while you save for the deposit. Several builders had "land wanted" appeals, showing how the market is tentatively recovering. And Bovis has developed a separate site for selling retirement properties (including important FAQs like "Can I bring my pet with me?") However, it is fair to say that Barratt’s website is streets ahead of its rivals. Simply laid out, with clear information for first time buyers, investors, and those looking to trade up, its search function is by far the most advanced. Take a look.
December appeared to be the same as every other year.
The restaurants, bars and pubs were over full with too many people that can’t take their alcohol and the shops along Oxford Street were full with Christmas shoppers.
Banks were trying to pay excessive bonuses to their staff and the central London investment market was in full swing with yields under 5% being paid.
If you’d just returned from a 3 year trip to moon base alpha you could be forgiven for thinking same old crazy world, when will it end?
Our office party on the 18th December, for our 6 month old business, was a low key affair.
Lunch for the 3 of us at The Audley followed by drinks for a few friends and family for the rest of the afternoon.
The bill came to £138.50, which was really £88.50, as Rob had just won the business card draw for a £50 bar tab.
Prior to Christmas we had 6 deals in solicitors hands, of which we managed to get 3 over the line, one on Christmas Eve.
We also managed to get one of our earlier deals paid, which meant we could have a more relaxed Christmas than if we hadn’t.
There are still 3 deals to conclude. Working for yourself really does focus your mind and allows you to dedicate time to doing the deals. You can, because there is not the distractions around, that people in larger firms have to endure.
I have always enjoyed coming back from the Christmas break, as it feels like you’ve had a proper break, as the temptation to get on the laptop/blackberry goes away as there is nobody on the other end.
One thing we all had time to work on, was our new website, which will evolve over the coming months.
I hope 2010 will be a better year than the last 2 for everybody, which isn’t asking a lot, as they have been 2 of the worst since records began.
I won’t do the rest of the Michael McIntyre sketch and you can guess what my stocking had in it.
I think this will be a tough year, as the depth of public sector cuts, tax and VAT increases, interest rates due to rise eventually, weakness of the £ v €, could make people think about not spending again, which could lead to the dreaded second dip...... It was funny to see the infighting and cool level of support for Gordon Brown yesterday, just in time for the general election. I saw that some bookmakers had the Conservatives at 14 to 1 on to win. The bookies don’t often get things wrong!!
I am on the train back from Manchester, where all the talk is of 'Project Bluebird', 'Project Boomerang' and now 'Project Beckford'.
I have been hearing about all this while chairing the judging for Property Week's North West awards, of which more later.
First, 'Project Beckford'.
Football fans will know what this is all about.
For non footie fans, here is an explanation.
First, Leeds striker Jermaine Beckford scores the winner to knock Manchester United out of the FA Cup.
Next, Cushman's Manchester associate Jonathan Baucher lands a confidential 25000 sq ft office requirement, from a local firm wanting to move.
Baucher is a fan of United's deadly rivals Liverpool: cue wind up for half the city's agency community, and Project Beckford.
The retort? Watch out Jonathan, because United agents are queuing up to launch 'Project Long', which all football fans will also understand after this week....
More significantly, 'Project Bluebird', understood to be for a European bank, is rumoured to be taking wing again through Jones Lang LaSalle.
Starting at 50000 sq ft, and rumoured to later rise to 150000 sq ft, this would ignite Manchester if it was chosen over other competing cities.
Finally, Cushman is also hunting for around 25000 sq ft in Project Boomerang, and is rumoured to be looking at Stockport's Peter House and Manchester's Piccadilly Place.
The codenames are interesting because it shows corporates are looking to move cities, presumably to save cost.
Also, possibly, that moving office right now might be seen as an extravagance even if it is the right thing in property terms to do.
As to the NW judging, we had 35 experts from the likes of Allied London, Ask, Bruntwood, Barclays, MEPC, Langtree, Town Centre Securities and Whitbread through Malmaison's doors.
Three agency categories were incredibly close, but there are some cracking winners all round.
Thanks to everyone who took part, including the new client category judges from the North West’s best agencies, and I will see you at the North West Conference and Awards at Manchester Central on Thursday February 11.
My biggest surprise this morning was not opening the curtains to see unforecasted snow, but rather opening my copy of the FT to see that British Land is planning to manage a £300 million buy-to-let fund.
The CR Property Fund will be launched this week with a small investment from British Land and will look to raise money from wealthy investors, many of which will be based overseas. Once bolstered by debt, the equity raised will buy homes worth on average £500,000 to £800,000 in prime areas of London, all of which will be managed by British Land. The fund is looking to capitalise on the gap in the market left by buy-to-let investors who have either lost their appetite, or more likely funding, for residential property.
It is encouraging to see such a sizeable and ambitious fund launched onto the market. However, for me it is even more exciting to see the fund managers talking of a move towards a US-style model of service for tenants providing “a five-star landlord service to three or four star properties”.
Our parent company CORT has been providing furniture rental and associated services to portfolios of this type in the US for over 25 years. Indeed, it was exactly this type of US-style model crossing the Atlantic to the UK that Berkshire Hathaway anticipated when it invested in our business two years ago.
We are encouraged and excited by the movement of such a big player into this style of residential portfolio. It may be British Land but it’s a very American style of residential portfolio…
I have had breakfast, coffee or lunch with the chief executives or senior partners of four of the top 15 agencies in the last week – and here are the big themes that emerge.
1: Consolidation: there is a growing mood that globally and in the UK 2010-11 will see some big guns tie the knot.
All completely anecdotal, of course, but DTZ, Cushman & Wakefield, Lambert Smith Hampton, GVA Grimley and BNP Paribas Real Estate are all the subject of merger gossip.
Some will be bought, some will buy, is the chat, mainly on the basis that it is hard to see really powerful growth for anyone other than through consolidation in the year ahead.
2: Mass exodus: although many firms no longer stick to the traditional March/April bonus season and there isn’t much cash to be doled out, many still expect departures from big firms then.
It is intriguing, though, that all the four bosses I saw are looking to recruit.
A year ago no one was hiring – now some are talking ambitiously about cracking the City office market as it recovers first with what would be very expensive hires.
3: Property management: to a man, our bosses said this is the field they want to grow in.
Consistently under-rated as a discipline, those who tackle property management with the right level of discipline can make margins of more than 40%.