The value destruction going on in our towns and city centres presents both the greatest challenge and the biggest opportunity in my 30 years in the property industry.
Our industry is familiar with economic cycles but not used to big structural changes in the occupational markets.
The way the commercial industry has organised itself as sector specialists operating in silos makes it harder to solve today’s challenges. This structure is along skill lines and profit lines, with interaction between skills and profit centres often relatively minimal.
Housebuilders, meanwhile, are a different animal altogether; a career in housebuilding is as different to working in commercial markets as lawyers are to accountants.
We are facing a challenge that will keep us all busy for a generation: fixing our towns and city centres. But to invest in and advise on town centre regeneration, investors, funders and advisers need to be sector-agnostic. The approach and methodology used to analyse the potential of a site or empty building needs to be without bias towards one use or another and a breadth of know-how is needed to assess the costs and risks of each.
The knowledge gap is never wider than between the commercial and residential approach. The latter is fundamentally different because it is consumer-facing, while the commercial industry is business-facing. Housebuilders sell to the public, with all the nuances that come with that market.
At Addington Capital, we have acquired/leased/refurbished/built nearly 2,500 homes in the past seven years in 15 UK cities and towns, and learned that consumers in each submarket behave differently and demand different things.
The commercial side of property is fast tooling up to embrace BTR and PRS – but that is a tiny, albeit growing, part of the residential universe. Is it a PDR opportunity or a new-build? Is it C3, C4, student housing or retirement/care or social housing? Is it for rent, to buy or in fact a hotel? It is hard to find the breadth of advice to properly answer these questions while the industry is working and training its professionals in sector silos.
Most stakeholders in our towns and cities – the fund managers and councils – need expert advice to mitigate value destruction in retail centres and ensure a transition to the best sustainable uses. Most of the professionals on the principal side come from a commercial property background and find it difficult to see the wider picture.
We will also need capital providers with the right skills but also a rare combination of appetite for risk and the necessary patience these projects are likely to demand. These opportunities are going to need capital more driven by equity multiples than IRRs. Private equity funds provide the bulk of risk capital in our markets but their impatience could be a barrier to entry.
Of course, property advisers and some forward-thinking investors are trying to adjust to today’s market by creating mixed-use teams on to which they co-opt experts from the different silos. While this an imperfect solution, at least it’s a step in the right direction.
But there is still some way to go. The dislocation of the retail sector and value destruction we are only just starting to witness will offer immense opportunities for businesses that are able to adapt. The solutions will inevitably be complex to evaluate and difficult to fund and execute, and the capital will need partners and advisers that are agnostic to use and fit for purpose.
Matthew Allen is principal and co-founder of Addington Capital
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