Commercial Property Blog
All posts from: June 2011
Office conversions aren't only threat to City
Property developers have long been known for wanting to have their cake and eat it. Then perhaps securitise it. So it’s no surprise that having lobbied hard to enable commercial buildings to have their uses changed easily a row has broken out over the City being ‘threatened’ by planning relaxations.
It makes sense to refit old empty commercial buildings into homes where possible. But of course City planning chief Peter Rees is wholly correct: handing over swathes of office space to posh home converters would restrict future office supply, harming London’s competitiveness.
Of course, what no one will actually say on paper is that filling the City with new homes would also send it the same way as Soho where you can’t buy a pint after 11.00pm because of all the whingeing families piled high above the streets. It wouldn’t happen in Tokyo. Or Rio. Or New York.
Only in Britain do we serve to denigrate what’s great about it all in the name of ‘local democracy’.
One quick glance further to the east tells a similar story where, surprise, surprise, the news around Southend Airport’s expansion plans has been met with disdain locally. There’s apparently a bird’s nest in the way of the runway they want to extend and maybe a church nearby as well. It’s a micro-sized replica of London’s broader debate about extra runways, which has been reignited by Willie Walsh’s promise this week to expand in Madrid with Boris reiterating his desire for a Thames Estuary airport.
Officials are yet to clarify whether the money for Boris Island will come from cutting prison sentences or a cheeky loan from Greece.
The serious point though is that office conversions aren’t the biggest threat to the long-term prosperity of London’s commercial sector. Unless we get a credible policy on the table to expand runway capacity in London – and the UK – we will loose our hub airport status. Routes will disappear as British Airways and co focus on Paris or Madrid. The choice will be between Heathrow or Paris.
If that happens, and Britain lacks enough aviation capacity to support growth, regular, direct long-haul routes made viable by planes feeding passengers from closer destinations (which is what defines a ‘hub’ airport) will die off. The attraction of London to world-beating business will follow, particularly if the trend over decades to come is to be far more China focused. And if firms chose to base themselves in Paris or Amsterdam because of their superior links to China and India, they’re unlikely to want offices here.
Understandably, the property industry isn’t going to want to involve itself in a highly political debate when it has its own issues to sort out. But as one of the few sectors that really understands the benefits of long term planning and investment, it should perhaps see what opportunities are to be had in sticking its head further above the parapet.
Hunt shoots down Heritage, but localism is nowhere to be seen in Broadgate row
Everyone’s got their priorities and last week we got to see those of the Communities and Local Government department as Eric Pickles’ aides told the Evening Standard’s Joe Murphy that the communities secretary wanted to save cash by renting out the ground floor of Eland House in Victoria.
They said that a Tesco or Waitrose food outlet could raise one million pounds a year in rent, adding that it was “a serious proposal”.
Of course, as a senior Land Securities source quipped, “if more money could have been made with retail there, it would have been done years ago”, but you can see the logic. At 25 yds away, the local M&S in Cardinal Place is a bit of a walk at lunchtime. And Mr Pickles clearly has many other more pressing matters to attend to.
Like the housing crisis, the planning shake-up or the fact that no one in his office told English Heritage about localism.
Despite it being universally approved by everyone in the City, British Land’s £340m UBS facelift has had to fight tooth and nail to win final approval today. But while Chris Grigg, Adrian Penfold and co will be having a merry old celebration, it raises a serious point of how localism can really deliver. This is the perfect example of a development delivering thousands of jobs, hundreds of millions of pounds in investment and countless local benefits, yet local support isn’t enough.
Surely if people want a reminder of how great the eighties were they can hire Boy George to DJ at their son’s barmitzvah rather than stifling London’s revival by claiming we need symbols of 'triumphant urbanism'? It's a phrase right out of the dictionary of nimbyism.
Perhaps it’s how you’d describe the MK shopping centre in Milton Keynes which lost a similar battle a year ago? Except without any sense of triumph.
But of course architectural merit will always be subjective and therein lies the problem: the challenge for the property industry is show that these buildings are more than some bricks, glass and pretty CG images, and to draw people to the wider benefits.
Just as the motor industry is great at singing the praises of jobs generated by new, highly polluting car plants, so developers should sing louder about the 5,000 jobs created in the City and the massive contribution it will make to our stagnating construction sector.
If you don’t like the argument, change the subject. Preferably to one where there’s no debate.
No one can argue over the need for jobs, world-beating buildings and the global brands that occupy them, or that Britain’s increasingly high environmental standards are the envy of developing markets such as China. The new UBS buildings promise to be some of the greenest office space the UK has ever seen and while the size of London’s market is tiny on the world stage, British innovation is world-leading.
Let’s just hope that ministers in charge of its future can get their priorities in order once they’ve finished sorting out lunch.
Learning from the past?
As the old saying goes, if you don’t learn from the past you are doomed to repeat it.
Because the type of investment property that flows through auctions remains relatively constant, it is illuminating to look back over past boom-bust cycles, what messages came out of the auction sales during those periods and how those compare with what we are seeing today.
There is an interesting comparison to be drawn between this cycle and the property cycle spanning the end of the 1980s to the mid-1990s. Whilst the causes of this recession may be different from the 1988-1992 boom-to-bust, the way in which investors are reacting seems to be similar.
The previous cycle saw its boom year in 1988 but negative economic factors began to creep in at the end of that year. However a “momentum effect” had built up over the previous three years and pushed activity on into 1989.
The slashing of the very high interest rates in late 1992 created a demand for the high income return that well-secured property investments provided. Investments let to triple A covenants on 25- year leases, albeit by then over-rented, could be bought for 11%+ .
Led by these special circumstances, the recovery lasted just 14 months with the second dip coming in 1994. Sentiment was heavily against property as an investment medium because of the perceived risks of increasing tenant failure, voids and over-rentedness. Banks were not prepared to lend on an asset class with which they had burnt their fingers so recently.
This didn’t change until 1996 when the debt tap was turned on albeit only as a trickle. We would have to wait for another 5-6 years for the tap to be fully open and the loans to come gushing out.
Fast forward to 2008 and the “momentum effect” was again in evidence. Deep down, most seasoned investors had called time on the market at least 12 months’ earlier and there was an interesting downward blip in activity just before the summer of 2007 when the market paused as in disbelief at the continual rise in prices. This didn’t last long and activity resumed in the autumn of that year.
Analogous to 1989, Investors, IFAs and fund managers - or more probably their clients who thought they knew better - took the view that the outperformance of property would continue. Seeing how well they had done in the past persuaded them to continue investing regardless of what the fundamentals were saying. This was reinforced by some banks continuing to lend freely.
We now know that this all came to an end in 2008 with a 40% plummet in values and a 60% drop in transactions. Peak to trough was quicker this time around than in the early 1990s but what then happened in 2009 was reminiscent of 1993.
The momentum built up over the five years to 2006 took hold again after the spring of 2009 but now demand was not from the debt-driven buyers but instead from the cash-rich buyers They believed they could see a light at the end of the tunnel and prices for certain assets made up a significant amount of the ground lost in 2008.
However the weak fundamentals of property outside Central London became more apparent and by summer of last year what many thought was the light at the end of the tunnel was actually the “demand train” heading in the opposite direction.
So what can we learn from the previous cycle to help guide us into the future?
Well, we are firmly in the second phase of a cycle which has similarities with the 1994-1996 period. Prices for prime assets have held up well since 2008 and on a rolling average basis have hardly changed over the last 15 months.
After the early 1990s crash there was a lack of confidence and a lack of demand. Today, there does not appear to be a lack of demand and there is now also a wider, more accomplished skill base for working property assets.
Prices for the more secondary assets will need to reflect that debt is expensive; that there is a risk of voids; and there may be a need to spend capital simply to maintain the value of the investment. A private property company with good asset management skills and an intimate knowledge of the local market in this environment should do well if they buy selectively.
However there is a big question mark over whether valuations will match the price expectations of sellers and buyers in the next few years. With transaction levels down, there is a paucity of evidence especially at the secondary end of the market. This lack of evidence is not a question of falling sale rates for properties when they are offered and then not sold; it is purely a lack of supply. Owners are simply not bringing this type of asset to market.
So with a lack of supply, investors - and their debt providers as well – have to ask themselves when do they expect this market to recover sufficiently to recoup historic purchase prices/loans? The evidence from the last cycle is that it could be some time.
The question for the property investment community today is: have you learnt from the past and are you really facing up to the future? If so, perhaps you’ve already been adhering to that other old axiom: “Sell in May and go away”.
A Tale of Two Conferences
Two entirely different but equally thought-provoking conferences I recently attended provided some interesting contrasts. The first was the London Business School (LBS) Global Leadership Summit on innovation and entrepreneurship. The second (with which readers will be more familiar) was the annual British Property Federation Conference.
The LBS event was upbeat and gave a global overview of the importance of innovation and entrepreneurship whereas the BPF (as the title ‘ Investment in the Age of Austerity’ suggests) was more downbeat especially after Professor David Blanchflower, former member of the Bank of England’s Monetary Policy Committee, spoke on how he believes the government’s economic strategy is failing.
Yet despite their differences, I was struck by the following common themes:
Innovation: Unsurprisingly, there was no overlap between the audiences with the LBS event being a cosmopolitan, multi-sector affair as befits a leading international business school. Focusing on its theme of innovation it featured titans of global industry such as George Buckley, Chairman, President and CEO of 3M – internationally renowned for their innovative technology, who contended that you can teach innovation and overcome the fear of risk taking.
Surreally, Business Secretary Vince Cable was the keynote speaker at both events although with little common content. He seemed much more comfortable promoting innovative UK business to the LBS audience and highlighted the problems of lack of investment in research and development and the lack of access to business finance. He cited the benefits of the substantial investment by overseas companies into UK plc.
This has parallels with the high proportion of foreign investment into UK property, the significance of which was highlighted at the BPF conference by British Land CEO Chris Grigg, who indicated that only 30% of investors in British Land are UK based. At the BPF Dr Cable focused solely on property and planning related issues.
Availability of bank finance: Lloyds Bank was also represented at both events. Speaking at LBS on how corporates encourage innovation, charismatic Lloyds CEO, Antonio Horta-Orsario assured the audience that Lloyds has its customers’ interests at heart. He confirmed that Lloyds support 100,000 start ups a year although commenting that in "the Darwinian nature of commerce" many ideas don't succeed. He sees UK companies as well-organised but working in silos.
Since companies are more innovative if they shed their layers of bureaucracy, Lloyds are de-layering and segmenting the market around customers rather than products. At the BPF another Lloyds director Truett Tate, speaking on the topic of restoring lending to small businesses, also assured his audience that Lloyds “treasure their relationships.” He insisted that they approve 8 out of 10 applications (although it was unclear how these statistics relate to property company loans). The applications they decline he put down to unsustainable business models and he asserted that these are the vocal 20% we hear complaining.
Where were the women?: A common factor of both events and all the more notable in the light of the recent Davies Report was how few women were on either platform. LBS had one female panellist out of 29 speakers whereas the BPF although fielding no female panellists scored with the Today Programme’s Sarah Montague who as chair once again did a masterly job of putting speakers on the spot with her probing questions.
Social media: As a recent Twitter convert, I noted the voluminous Twitter feed from the LBS audience with a number of panel questions raised from non attendees via Twitter. At the BPF event there were a mere handful of tweets from the organisers, me and the property journalists. As yet very few in the property sector have grasped the potential to gather useful information whilst promoting their businesses.
If according to 3M’s Buckley, you can teach innovation it may be worth investigating the LBS executive programmes ‘designed to turn ambitious executives into great (and innovative) business leaders’.
To see a video interviews with the key speakers at the BPF conference click here.
Susan Freeman is a real estate partner at Mishcon de Reya. Follow her on @propertyshe
HMV - We Can Work It Out
HMV has certainly edged ahead of EMI in recent months in the race for which British music institution will be the first to fold. EMI sold off HMV nine years ago, but many will feel today’s eye-popping £240m bail-out is simply one final sweaty encore as the performance draws to a close.
Two years on from the summer of CVAs that saw Focus DIY, JJB Sports and a few others grab life-lines and we’ve seen them fold as many predicted at the time. Landlords rightly used it as an opportunity to show people they were willing to help and successfully batted back false claims they were to blame for the stores’ failures.
It’s fair to say though that the emotional pull of HMV – with memories of skipping school to buy the tunes that soundtracked our youth – is somewhat greater than that of sheds selling footy shirts and hammers. But something tells me HMV’s State-backed bank lenders don’t harbour any fond memories waiting outside to grab a first pressing of Morning Glory. They’d have been too busy watching Countdown.
One plus is that calls for those bailing out occupiers to get ‘something back’ seem to have been heard. With the banks grabbing 5% of the HMV, this could bode well next time landlords feel the need to agree a CVA. And the rumour mill suggests that a retailer with over 700 stores is close to toppling over, so there could be more tests to come.
However, with the British music industry undergoing such turmoil at the hands of pirates, iTunes and supermarket discounting, is the demise of our last remaining record chain simply an inevitability? Quite possibly.
HMV dumped Waterstones for 82% less than it paid WHSmith back in 1998, but sales trends for records and DVDs are going the same way as books. Faster broadband products – like BT Infinity – and the increasing use of entertainment hubs don’t paint a rosy picture for physical media sales. Kids these days don’t do b-sides.
No other retail sector has faced as much of a battering. The lucrative singles market has been wiped out and margins on what remains have been slashed at with a quarter of albums sold in supermarkets. Fierce price squeezing on this kind of scale is hurting not just HMV but labels and publishers too.
That said, why do you never see iPod fill-stations in HMV, where digital music lovers could purchase music and films digitally in-store with the swipe of their credit cards? Why were no music communities set up around HMV branches, using sites like MySpace or Soundcloud, harnessing the massive interest in online music to maintain footfall? And why didn’t they stick a few quid into vintage guitars – the best performing asset class in the world?
The point is that HMV has missed many tricks here to capitalise from an online boom in the real world. It has prime retail pitches across the UK, but what use have they made of them? Hopefully, the two-year maturity of today’s deal with give them time to sort themselves out, let’s hope they can work it out.
Obama, ash clouds and gale force winds in Ireland
It is always great to visit Dublin, where I was earlier this week. The only downside was the combined effects of President Obama’s revised travel plans, predicted Icelandic ash clouds and gale force winds combined to make travel arrangements as hazardous as some aspects of the Irish property market!
Dublin’s retail pedigree is undoubted and I was reminded of this by the superb quality of the Brown Thomas department store and overall grandeur of Grafton Street; the pleasure of strolling down Wicklow Street and having the chance for a cup of coffee in Fallon Byrne deli which has a touch of Dean and Deluca.
The appeal of Dublin to American brands remains strong with Forever 21 having recently opened and Abercrombie & Fitch soon to arrive.
The underlying story is not so bright as inevitably rents have fallen significantly in many locations, the Chartwell Land mega scheme is on ice and proposed redevelopment of Arnotts department store no longer on the drawing board.
The picture in the surrounding retail locations to Dublin also looked, at least superficially, equally rosy with Hollister fitting out at Dundrum and barely a vacant shop in the 1m sq ft plus Blanchardstown.
So whilst no one doubts the economic pain in Ireland, at least things are still looking bright in the shop window.
Things seem to have gone quiet for now on the concept floated of retrospective legislation for upward and downward rent reviews which is not without risk at this stage in the economic cycle for encouraging further investment in the Irish property sector, although this remains on the agenda.
The mood however was bright following visits by the Queen and President Obama and no doubt sales at Guinness have gone through the roof with pictures of the President swilling pints of the black stuff being beamed around the world!
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