Last year was an eventful one for the real estate market. While London office investors had to deal with the fallout from the Brexit vote and its potential effects on the occupier market, those in the retail and residential sectors grappled with ongoing shifts in demographic trends which are changing the way people want to shop and live.
- Richard Bains – managing director, Chancerygate
- Phil Cann – UK head of investment properties, CBRE
- Charles Maudsley – head of retail, leisure & residential, British Land
- Owen Michaelson – chief executive, Harworth Group
- James Muir – head of UK & Ireland, Patrizia
- Geeta Nanda – chief executive, Metropolitan
- Steve Norris – chairman, Soho Estates; senior adviser, BNP Paribas Real Estate
- Simon Ringer – partner, head of property funds, Bridges Fund Management
- David Sleath – chief executive, SEGRO
- Darren Williamson – partner, national head of real estate, Freeths
- Liz Hamson – editor, Property Week (chair)
Meanwhile, the industrial sector enjoyed a surge in demand due to the inexorable rise of online delivery and serviced office giants provided a welcome boost for take-up figures in the wider office space.
With these changes looking set to continue to dominate the property agenda in 2018, solicitors Freeths gathered a panel of experts from across the industry at a dinner in London on 1 February to discuss the outlook for each sector and pinpoint the key challenges and opportunities for investors in the year ahead. Property Week’s editor Liz Hamson chaired the event.
The big story in recent weeks has been the Presidents Club dinner, which has brought the subject of women’s representation in property back to the top of the agenda. Could we see more action on this issue in 2018?
David Sleath: We do have an issue with diversity and inclusion in our industry: for example, only around 12 per cent of chartered surveyors are female. But in some of SEGRO’s businesses we have a diversity issue which is the opposite way around. In Poland, we employ around 75 per cent women and 25 per cent men, which is linked to us having a very strong female leader in that business who is a great role model. There are a whole raft of really good things happening in the UK, such as the formation of [campaign group] Real Estate Balance and Property Week’s own diversity campaign.
James Muir: Patrizia has a relatively high number of female employees – around 40 per cent – and I think the wider industry has been progressing too. Companies have signed pledges and are making progress on diversity, independently of the need to react to events like the Presidents Club.
Simon Ringer: When we recruit for property roles, nine in every 10 CVs we receive are from men. Why aren’t there more talented, smart women coming into investment and development?
Charles Maudsley: Around 50 per cent of our professional staff do not come from a real estate background for that reason. It is much easier to train people to do the property side of things than to train them in wider business skills.
How do you think the Brexit negotiations will play out and how will the industry be affected?
Steve Norris: I believe the deal will be something along the following lines: we will take back control of our laws, but we won’t change many of them because the vast majority are perfectly sensible. We will take back control of our borders, but we won’t close them because that would be economic madness. We will leave the customs union and the single market, but in the process we will end up with a deal which is remarkably similar.
Richard Bains: The real risk is not the outcome of Brexit, but the outcome which could be consequential to that – the potential for a change of government. A few months ago, I would have laughed at anyone who said there was a real chance of Jeremy Corbyn becoming prime minister, but now I think the odds are about 3-1 at the bookies.
SN: Being obsessed with Brexit means that the government has no other agenda and the Tories fought probably the worst election campaign in most of our living memories in 2017. But the choice is not between the Tories having a majority of 50 or 100, it’s now a choice between the country being led by Corbyn, McDonnell, Abbott, Thornberry, fill in any other extremely unpleasant blanks – or Theresa May. I promise you that if the next election was to be held in 2018, it would not return a Labour government.
So are we unlikely to see an exodus of big international companies, as some predicted following the Brexit vote?
CM: When we last reported in November, British Land had more space under offer in London than we have had at any time in the past five years. It takes three to five years to build a new headquarters and big businesses have realised that moving 3,000 staff to Dublin or another European city is not currently a realistic option – so if they have a space requirement, they need to just get on with it. That makes sense when you look at what companies like Facebook and Apple have done with their new headquarters.
SR: I agree with Charlie: there aren’t many empty buildings in central London. You have got companies like Amazon who are taking 600,000 sq ft at Principal Place, and these guys aren’t going anywhere. But we have found that when you get to the stage of signing a deal, these large occupiers will say: “We’ll just think about that for a bit longer.” That is the effect of Brexit.
SN: The number of banking staff in the City could fall, but for different reasons. Research we did at BNP Paribas Real Estate found that there has been a leaching of around 5,000 people a year out of the City because of the rise of artificial intelligence, which is meaning that the financial and legal sectors do not need to employ as many administrative staff.
Phil Cann: London office take-up was 13m sq ft last year which was a good outcome. Interestingly, 10 per cent of that was flexible workspace which I think is going to grow and grow and grow.
Does everyone agree that there is more mileage in the serviced office space?
SR: We own a serviced office business called Flexspace, which has 58 sites and 3,000 tenants, mainly in the Midlands and the North. In some of those sites we actually have waiting lists for tenants and the rents are going up and up.
PC: Vacancy rates are rising quite dramatically in the second-hand space, which is where WeWork have done their damage. That is space that would ordinarily have been taken up by companies looking for up to 5,000 sq ft, but they are taking up flexible offices instead.
Darren Williamson: That isn’t just about Brexit; that’s about lifestyle change.
CM: The internet has made us all fussier about where we live, work and play. If you can get a better standard of accommodation by going with a serviced office provider, that’s what you’ll do.
JM: Macro trends like technology, urbanisation and demographics are playing out across Europe and driving demand for serviced offices and the private rented sector. We might look back in 10 years and realise it was these trends that were driving changes in the occupational market rather than Brexit.
How is the investment market performing?
PC: £39bn is our estimate for the level of London investment capital this year. We were probably about there in 2015 and then it dropped off around the time of the referendum. The surprise about last year was that there was around £67bn of investment across whole of the UK.
CM: I was in the Middle East for a few days last week and a lot of the fundamentals about why people there like London from a capital markets perspective still exist. There is the extra boost of currency depreciation, which means that there is almost as much money as ever.
“Houses are affordable outside London, so there is a buoyant market out there”
SR: I’ve been doing this for 30 years and normally there are people saying “I’m coming out [of the London market] now; I’ve had a good run” – but very few people are saying that at the moment.
Owen Michaelson: Money has been trickling out to the regions, because it has had nowhere else to go. I never thought I would see sub-5 per cent yields in the North, but we’ve now got sub-4 per cent yields in some areas. From a residential perspective, it doesn’t matter what the politics are – if there are 70 million people and still the same amount being born every year, those people need houses. Houses are affordable outside London, so there is a buoyant market out there.
Industrial is having a bit of a purple patch – will that continue?
OM: The manufacturing sector is having a revival at the moment – we are doing a lot of deals and people are paying a lot of money.
DS: Industrial was stellar in 2017. Total returns were 22 per cent, almost double the average for all property sectors. That made it the sector’s second best year for 28 years, beaten only by 2014. The internet trumps Brexit: there are profound structural changes taking place and that is driving occupier demand to the point that there is very little land available for development. I don’t think it’s going to change any time soon.
CM: But the industrial sector is struggling to find a solution to the need for last-mile delivery. Now, the smart retailers are beginning to look at how they use their store network as their delivery system.
Lots of retailers struggled in 2017 – how will they fare this year?
CM: Shops are acting as a showroom now, because 26 per cent of all online transactions are first viewed in a store. The retail industry has always been through change: when you look at who the top 50 retailers were 10 years ago, a lot of them are not around today. So what we have to be prepared to do as retail landlords is evolve.
PC: The very good retail is getting even better, but some of those larger store formats need to have some flexibility. If you’re a supermarket and you have a 100,000 sq ft store in which you only trade on 60,000 sq ft, why don’t you put 20,000 sq ft of Amazon logistics in the back of it?
What about the residential sector?
SR: When I started out it was shops, offices and industrial. In the last five to 10 years, it has become so much more interesting – we have got student housing, residential, healthcare, assisted living, co-living. A lot are demographically driven and I think the property industry has woken up to see that there are a whole lot of more interesting things we can do, that we can make money from and that are great businesses.
Geeta Nanda: It all comes down to affordability. People are queuing up for our shared ownership properties, particularly in London, because it is the only way for a lot of young people to get on the ladder. The second-hand housing market has slowed quite significantly, but I don’t think that’s just to do with Brexit, I think that’s to do with confidence more generally. And then there is the local planning context, for example in areas like Haringey and Elephant and Castle, where some really significant schemes have struggled to get over the line.
What do you think of the London plan and the 50 per cent affordable housing target?
SR: At our scheme in Croydon, we are doing about 35 per cent affordable housing because of the structure of that deal. But we have also just got an approval at Abbey Wood next to the Crossrail station, where the affordable housing is 12 per cent, which has been signed off by Sadiq Khan. It’s not about setting the level at 10 per cent or 50 per cent; it’s about whether you can buy the land at a certain price.
GN: The price of land will find its place once everyone is used to delivering that level of affordable housing, but with Brexit and local politics all over the place and real difficulties on the construction side, you do really worry about how you are going to hit the 50 per cent. We do a mix of tenures on many of our sites but we can only make affordable housing work if someone else puts in the land or we make money from private sales to cross-subside the gap.
SR: I was with a very large landowner this week which is trying to build a huge development in London and has very deep pockets. But the company is now considering not building the scheme, because it believes it can only deliver it with a certain amount of affordable housing and that it will now end up losing money.
Is the planning system acting as a barrier to development?
CM: You have to fight for every 0.1 per cent of your return. When I look at what we spend in planning fees for all the projects we have got going on, it is a horrific figure and that is without certainty of when you are going to start and what the construction costs are going to be. The barriers to development are pretty high at the moment.
RB: At Chancerygate, we buy land which is generally zoned for employment. It has probably already been industrial and we are planning to redevelop it into another industrial scheme. We are not taking any land away from housing, but the biggest issue for our business is still getting through planning – it is really tough, even where everything is compliant with policy.
Could housing being a cabinet position [following its amalgamation into Sajid Javid’s Communities and Local Government Secretary role] make a difference?
GN: It’s not in a name: it’s about what you do. I am optimistic that, whatever happens, we will work around it, because that is what we have been doing for years. Land and finance are important, but more than that we need stability to get the things done and having a framework that you know isn’t going to get pushed around and which gives you that longevity to get on with it.
SN: Javid has been talking about all these muscular housing policies recently, but Theresa May is an instinctive nimbyist. She is terrified that, if ever we do anything that weakens planning policy, the Tory shires will desert us in their millions. But research shows that people are now more worried about housing availability than they are about building near to where they live.
Finally, who thinks this year is going to be stronger than last year overall?
PC: Although we forecast a weaker economic outlook, we expect that income-driven performance over the medium term, combined with strong demand for property exposure on both the debt and equity side, will ensure investment volumes remain robust.
Investment volumes will hold up well over the next few years and we will also see a continuation in the trend for large ‘platform’ deals that has been growing steadily over the last couple of years.
CM: I think you are going to see a much more polarised market and the gap between winners and losers across all the sectors is going to accelerate.
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