It’s hard to believe there are only six weeks left before the Christmas break and the posting of year-end results for our respective organisations.
At the beginning of 2014, I was a little bit grumpy as it was unclear what the year ahead was going to bring and I was concerned about how we were going to add to the success of the past. This was a common theme, as although the period since the bottom of the recession has been far from easy, many organisations have used this time to redefine strategy, reshape their teams, execute on sale of non-strategic assets, recapitalise balance sheets and enter new markets to take advantage of dislocation. During this period, real estate has provided pretty good returns for investors despite a challenging and uncertain market backdrop.
In North America, the autumn is a time to celebrate ‘the harvest’ with Thanksgiving day holidays in October in Canada and November in the US (it is a little colder in the Great White North, so we bring the crops in a month earlier…). The farmer is the focus and families and communities get together to feast on the bountiful yield that has been provided from the land and the careful cultivation over the preceding year.
By contrast, I have come to learn that autumn in this fine country is a time where we clean our weapons and head out to the countryside to go ‘shooting’ with friends and colleagues. Again, there is a celebration at the end of the day of day where ‘the take’ (I am sure someone will correct me for the improper use of terms but please work with me on this…) is counted, sold off and a feast of a different sort enjoyed by ‘the hunters’.
Hunting vs farming
Reflecting on these separate traditions, I can’t help but compare and contrast farming with hunting and the parallels for our business at this time of the year. Across the board performance is the best we have seen since before 2008. Letting activity and occupancy are up, with businesses finally willing to make space decisions to meet employment growth or consolidate fragmented locations to drive efficiency and cultural change. Major lettings such as Schroders, Amazon, M&G and Omnicom have provided excellent development returns for projects that not too long ago seemed very unlikely to be built in this cycle. One of my favourite phrases — ‘full buildings are worth more than empty buildings’ — has clearly played out again, with developers seizing opportunities as opposed to waiting for better offers.
From a capital markets perspective, we have seen the wall of money bring even more new sources of capital focused on investing in London, driving prices higher than many people thought was possible. And if I believe everything I read in the press, projects that have been underwater for the past five years such as the Pinnacle are poised to be recapitalised at numbers beyond comprehension only a year ago — nice trophies for the hunter!
The debt market is also plentiful with margins compressed due to increased competition, base rates still at historic lows and rate hikes seemingly being deferred by the Bank of England well into 2015. This situation has aided many in competing for acquisitions and also facilitated refinancing of existing assets on significantly improved terms.
All of this has happened during a period of unprecedented global geopolitical change and uncertain macroeconomic conditions. At home we dodged the bullet on the Scottish referendum in September but if Canada’s experience with Quebec is any example, this is just the beginning of a long debate on how a new federation will work with significant devolution of power from Westminster. Next is the general election in the spring, with at least some form of new Europe discussion to flow from there. As we know, markets do not like uncertainty — witness the equity market correction two weeks ago — and investors are clearly watching more closely than ever.
If nothing else, the future is certain to be filled with many new challenges and those who have prepared their business during the past few years and ‘farmed’ their portfolio for return will be best placed to weather any future storms and take advantage of new opportunities. One of the chief economists at a global bank said it best in a recent presentation with a single slide titled ‘It’s Complicated…’. That pretty much sums up where we are at in my mind this autumn. Happy Thanksgiving!
Paul Brundage is executive vice president and senior managing director Europe for Oxford Properties.