London Chapter - Lambda Alpha International

The Spanish Property Market

2009-12-14T12:32:00.000-08:00

The Spanish Property Market – is the fiesta over for the time being?

Imma Vall, Associate at Property Market Analysis (PMA), has been analysing the Spanish Property market for the past 5 years, and she demonstrated to us in her talk at our lunch on 10th December 2009 her mastery of the subject, giving us her ideas with flair and humour – but it was a bit like being a cheer-leader at a wake!

Spain has suffered more than most in the current recession, with unemployment approaching 19%, economy decline of 3.8% and running, and profound Budget deficits – it almost made an Englishman feel he was well off and should be thanking Alastair Darling. Imma had no doubt, therefore, that the fiesta was indeed over; it was now the time of the hangover which she could see lasting for 2 years at least. Addressing commercial property, there was an over-supply of offices and retail, with many prestigious schemes being mothballed whilst part-built – ghosts that may haunt the Spanish skyline for some time to come. For built-out vacant office space, lettings were a triumph for the letting agent, and of only partial value to the landlord as rent levels have tumbled c 20% and rent-free periods of 1 year in a 5 year lease were not uncommon. In retail, the larger Spanish companies were surviving, but their life-support comprised closure of units in Spain and reliance on foreign units; it was not uncommon for new shopping centres to open with 40% occupancy – 60% would be a dream. Consequently developers are in trouble across the board.

Against this depressing back drop at the 'real' level, there was a surprisingly ebullient investment market for anything of quality -- prime site, good tenant. Beyond that, darkness, but, for the farsighted the outline of genuine value. However, if you need finance, no way! Bank lending is effectively unavailable; even for a good client and a bank wishing to help, there is no possibility of syndication, and thus no deal. To those at the lunch, this was something of a surprise, as our impression was that Spanish Banks had come out quite well from the 'credit crunch'.

Looking to the future, Imma reminded us that the Spanish property market has always been more volatile than most. In large part this has arisen from the economic dominance of construction companies – give them money they will build, without much apparent consciousness of market cycles. In answer to a question, she thought that this might continue to be true in the future – a cautionary thought for a putative investor. However, for commercial space, particularly offices, Spain now had a considerable price advantage; present value levels, anyway in good locations, should, in principle, only go in one direction, but the date of going was not in next year’s diary. Nevertheless, we should not forget that Spain is often the point-of-entry of choice for the burgeoning South America economies.

Several questioners raised the problems of the Spanish Residential market. This, Imma agreed, is in greater gloom than commercial property, with a profusion of its own mothballed ghosts. There was little chance of the Government acting as ‘white knight’ because politicians have chosen to demonise residential developers. A 4-year recovery profile seemed the most optimistic possible.

Not the happiest of lunches, then, but in the best of company, and with a talented guide to the body under dissection – No! Not as bad as that! It will come back to life. Really! And perhaps the best time to buy a corpse is just before it revives.

Michael Mallinson

Visions of the Future

2009-11-16T14:54:00.000-08:00

The Global Property Market in 2030 by Dr Angus McIntosh, Partner & Head of Research King Sturge – International Property Consultants.

It is one of the great human delusions that we should like to know what the future holds. Thus it was that suitably delusional Members and their entirely sane guests attended our Lunch on 29^th October to hear Dr McIntosh lift the curtain on what is in store for us.

Fortunately, perhaps, Angus was wise enough to tease us only with scenarios. He explained that he is participating in a project sponsored by the RICS Foundation that addresses the future under the title of his talk. The project is not yet completed, and he felt unwilling to reveal the precise level of the IPD Property Index on 1^st April 2030; rather, he thought it better to discuss some of the key issues that might drive that figure. He identified six such drivers:

Demographics. During the period under consideration, the global population would continue to grow, perhaps nearing a peak of 10 billion. The numbers alone will put enormous strains on the Earth’s resources, particularly of food and, as one questioner made clear, water. The rate of growth would, in itself, be significant, but so also would its distribution; would the areas of high growth also produce the ideas that would help them manage the strains they would feel; there are grounds for pessimism.

Economics. Would governments follow, and would their populations allow them to follow, policies that would reduce economic inequalities? If they did not, there would be increasing risk that excluded peoples would, under the pressures they would experience, revert to various forms of obscurantism, not least religious extremism.

Governance. The principles of governance followed would be a decisive factor. For all its weaknesses, the European Union is, conceptually, highly enlightened, seeking to follow a broadly inclusive ethos; compare that with the ‘gated’ and protectionist ethos in most parts of the World.

Environment & ecology. We are all only too aware of Climate Change. Whether or not governments can bring the issue under control, changes will occur that will be highly disruptive to current patterns of, particularly agriculture. These may or may not increase the tendency towards food shortages, but they will certainly complicate solutions. Under this head, Angus included the effects of pandemics in congested and mobile populations.

Technology. Potentially more positive, the pace of technological change continues to accelerate; by 2030 we shall have at our fingertips technologies that we do not presently dream of – he particularly drew out bio-technology and drugs. Will these inventions be divisive or inclusive?

Information. Information is growing very rapidly; because of the internet, its distribution can be seen as ‘flat’. It can be accessed by anyone from anywhere.

Using these ideas, Angus sketched three scenarios for each of Europe, Asia, America and the World:

EUROPEAN SCENARIOS

Bastion: Depression; Oil and resource collapse, social inequality, rising violence – cities like fortresses.

Web: The triumph of global corporations, economic success, but sustainability only a buzz word – urban sprawl, housing inequality, gated communities

Zion: Carbon neutral, high quality of life, equality under the law, culture and recreation dominate

ASIAN SCENARIOS

Orient Express: China dominates; Australia and New Zealand sustainable expert; India faces corruption; Infrastructure problems

United States

of Asia: Mass urbanisation; Social unrest; Piracy of things and intellectual property is rife; only Singapore and Hong Kong lead the sustainable agenda

Broken promises: Increasing complex social problems in China and India, only Australia and New Zealand have clean technology; City planning in disarray and sustainability for many (in smog filled cities) very low priority

NORTH AMERICA SCENARIOS

Happy in the dark: Major worry over energy shortages and its repercussions on the whole of American society

Oil & Vinegar: There is a retreat behind borders and buildings. Social inequality & migration a major problem - political tension is rife,

Micro fanaticism: At a local level sustainable leadership dominates society and drives national governments.

GLOBAL SCENARIOS

Free trade and technology

VERSUS

Unrest and unequal societies, hence social tension - perhaps with religious fundamentalism

VERSUS

Knowledge, social values and a high quality of life. A sustainable future.

Because of the profundity of the issues raised by Angus, I have allowed my notes to be more extensive than usual. Whilst many of the points would have been in our consciousness already, to hear them drawn together so coherently was a privilege for us, and gave them perspective.

Michael Mallinson

Investing in the Indian RE Maket

2009-09-11T09:10:00.000-07:00

Still too spicy for some?

A presentation by Sharad Gohil, Managing Director of Arpan Real Estate Limited (10 September 2009).

The main summary of the talk confirmed that Indian property market is not for an unseasoned investor as local partnerships and legal structures need to be watertight to protect an institution’s interests. Too spicy for some – probably!

General Overall Economic

Sharad confirmed that prior to previous thought; no market was immune to a global crisis that we have just been through. Earlier optimism that India and China will save us has not happened. This was an interesting point so when was the last time you heard the term ‘decoupling’ ?? (No such thing!)

Sharad mentioned the following key statistics:

Main Indian stock exchange (SENSEX) down 40% from its Jan 09 high
$6bn of foreign funds had flowed out of India during this period, reacting both to slowing growth and perceptions that the market was over-valued. Probably this was also a result of the west having their own problems as cash was needed to sort out their balance sheets!
Indian GDP was 6% pa for 2008-09 fiscal year, but the World Bank is now forecasting 8% pa for 2010, ahead of China at 7.7% pa for the same period.
Inflation was negative for the year to the end of June 2009, the first time in 30 odd years.
2009 onwards has seen more optimism and the Indian government has seized on this in planning $559 bn of infrastructure upgrades over the next five years of which 70% would be state funded, and the other 30% to be funded by the private sector. I would question whether this will all happen. India is running a massive budget deficit and this could have been just political posturing to get the Congress Party re-elected which happened.

For institutional property investment there are three main areas on which to focus:

1. Capital Structure

2. Due Diligence

3. Knowing your Partner

Sharad discussed each of these in detail.

1. Capital Structure

Joint ventures (JVs) tend to involve a local partner who is already the landowner. It is usually only the land which constitutes his equity contribution to the JV. The historic owner can make huge profits by just entering into the JV from day 1. Local partners are unwilling to dilute their stake or provide more equity in the downturn. In the boom times, pre-sales of residential were the general model. As this dried up and Indians began to lose their jobs, the residential market crashed overnight. Local developers have been adverse to cut prices/rents. The reason is a BIG EGO! They cannot be seen to be the first to slash prices as it is perceived to have a knock on effect on their other developments and their reputation.

A JV should be structured so that both parties put in a mix of capital and land to ensure that the building completes on-time as well as interests being aligned in the upcoming sales period.

2. Due Diligence

Indian Bureaucracy is a minefield. Legal due diligence can be long and protracted and proving title can be very difficult. Much of land has fragmented ownership as well as charges which banks use as collateral. A relic of the feudal system and numerous family disputes!

Foreign investors need a good local lawyer to unravel all the ownerships in an effort to obtain a clean title. The key pitfalls are:

Floor Space Index (FSI) – This is a local law different by region, which mandates development densities. It must be checked in advance in case your 200,000 sq ft office block you were planning to build can only be a 50,000 sq ft office on the foot print of the land you have just purchased!
Zoning – This is essentially planning, but many Zones have complex hidden covenants – eg timing and land restrictions that your lawyers need to be aware as part of due diligence.
Arbitration – It is essential to have an arbitration clause in place with all contracts to settle disputes. It must be in a foreign jurisdiction such as Singapore or the UK. To take the matter to and Indian court could take up to TEN years!
Title – It must be held at the local registrar.

3. Knowing Your Partner

Knowing your partner is the key to a successful development and investment. The local partner should have a better grasp of planning issues, neighbouring property disputes and local government liaison (involving brown paper envelopes?)

The local partner is usually the most powerful one. Investors should be under no illusion that they are the lead partner! There is the need to agree ‘tagalong’ and ‘dragalong’ rights so partners can exit together. The local partner should be a large scale developer with a good regional or national track record to greatly minimise the risk.

There is a definite need to further educate Indian partners further about Western business and institutional investment needs such as risk return profiles. Foreign investors were merely perceived to be expensive sources of debt!

Conclusion

There was a definite Indian property bubble (as with the rest of the world) and the weight of money chasing potential 35% pa plus returns added to this.

The Indian property investment market is a difficult market to understand and crack. However, returns are there for investors who want to be educated in dealing locally and are prepared to do proper due diligence and not just rush into deploying capital quickly with another eye looking at launching their next fund!

Property values are likely to still continue to ease across the board for at least another six months. When values improve, it will be on the capital market side first. Occupier demand will continue to remain weak for some time except for certain residential sectors (mass urban/suburban low to middle income housing).

There are good long term prospects for India generally based on a five to seven year strategy. However, a lot of reforms are required and the business and legal infrastructure needs to be much improved.

Shailendra Shah MRICS

Investment Fund Manager

Canada Life UK

Please, Mr Banker, can I have some more?!

2009-06-23T09:52:00.000-07:00

Mr. Jonathan Rhodes, Director & Head of Valuation of Capital Markets at G L Hearn – Property Consultants -- gave an outstanding presentation to the LAI London Chapter, entitled: "Lending to commercial property -- 'Please, Mr. Banker, can I have some more?!'"

If I had been Jonathan, I might have said ‘no!’, and sat down to enjoy the rest of our lunch on 18th June. That was, after all, the essence of his message. However, he was also a bit like Elijah (well, despite my age, I don’t actually know what Elijah looked like) and, in an excellent and richly fact-filled talk he chose also to offer some prospects ‘no bigger than a man’s hand’.

The recent history of bank lending is a cautionary tale of over-optimism, lax control and cavalier attitudes to securitised risk. Whilst, in your scribe’s view, this will all have been forgotten by 2019, Jonathan traced out the present emaciated and over-stretched state of the banks; as he noted, Lloyds Banking Group (vice Halifax Bank of Scotland) and Royal Bank of Scotland are, in effect, the largest landlords in the UK. With two thirds of present debt expiring within 4 years, and with the 35-40% fall in values decimating LTV ratios the banks have been forced to take a cautious and phased approach to retrieving their exposure; this has frustrated the hoard of circling vulture funds. The banks’ position has been slightly relieved by low base rates, which has made re-financing a little more reachable. They are also helped by a strengthening investment market for the ‘best’ properties – the Germans being particularly active, but a wider range of Funds are starting to see good property as a ‘least bad’ haven. This has encouraged debt-equity swaps with a 3 to 5 year work-out.

Nevertheless, banks generally are seeking to de-leverage and recapitalise. They are also running scared about the riskiness of their clients and further slippage in values. As a result – ‘no!’ There are only about 10 possible sources of lending, and these are all highly selective and risk-averse: only those with the right property and who can show themselves to be the right borrower with a good track record need apply. If you get over this hurdle, you will get no more than 65% LTV and have to pay 200-250 basis points margin. Any property that can be seen as secondary, carrying undue risk or involving residential is poisoned from the word ‘go’.

Now for the cloud – a good thing because it promises rain! Wholesale money markets are starting to unblock, which will relieve the liquidity of banks’ stock. i.e. money. As the property market improves, the fundamentals of borrowing/lending will look more interesting. Perversely, this may be particularly so in the secondary market once fear of small business insolvencies recedes. Maybe soft rain will start to fall in 2010 at the top end and 2011 at the secondary. However, terms will remain tight, with hedging fees against inflation staying high because of governmental indebtedness; for a long time, banks will look for better terms for less risk. This mildly optimistic outlook carries one underlying assumption: that politically driven calls for ‘better’ regulation cause no material damage to the banking structure.

You will recall that the worshippers of Baal came to a sticky – perhaps investors in property - and banks, need to learn from their example and convert.

Michael Mallinson, London Chapter Scribe

The Death of Town Centres

2009-05-01T13:17:00.000-07:00

Mr. Simon Quin, Chief Executive, the Association of Town Centre Management was our guest speaker for the Chapter luncheon 30th April 2009.

The Association of Town Centre Management (ATCM) is Europe’s largest membership organisation dedicated to promoting the vitality and viability of town and city centres. As footfall slumps, retail vacancies are soaring and investment ceases, and town and city centres are facing major challenges to be considered now in advance the recovery from recession.

Mr. Quin said that the current recession had seen a return to the concern expressed in the early 1990s about town centres becoming ghost towns as retailers cut back on their operations or, worse, were driven into receivership. This prompted a change of approach towards the concept of Town Centre Management, bringing together the respective resources of local government and the private sector to stimulate town centre revivals.

Initially the impact of Town Centre Management was little more than cosmetic, both retailers and developers being too remote from the process. The key change came with the introduction of PPG6, which opened the way to better, more effective town centre planning and management. (PPG6, through a sequential test, gave priority to the expansion of town centres at the expense of out-of-town developments.)

While post PPG6 there has been a renaissance in town and city centres, the principal criticism has been that town centres have now begun to look too alike ("Ghosts to Clones"), with national chains dominating the high streets and with too little exposure to locally owned retailers. Mr. Quin said that the reality was that consumers did want the familiarity of the national chains and there was insufficient demand to support more than a limited number of locally-based retailers.

Reducing the "sameness" of town centres and encouraging a more distinctive look for high streets was the challenge for the future, to create individual "brands". A lead could be taken from work done in downtown Washington DC, not historically a major retail destination but more residential-oriented. With the support of the US equivalent of the Association of Town Centre Management a programme was instituted to bring in shops and customers to the area as a destination worth visiting. Sampling of visitors has shown that area had moved up in popular esteem from "An experience worth having" to "A remarkable experience".

Mr. Quin suggested that creating such a judicious mix of residential and retail in downtown areas should be a good model for the future for the UK, given the problems being faced by retailers in the current straitened times. There are currently 135,000 vacant shops in the UK, 15% of the totality in the larger towns and cities and as much as 25 to 30% in smaller locations. In consequence just about all major developments in the planning stage are now on ‘hold’ pending a return to better times in retailing.

However, the future should not be about simply replicating more of the same by way of the shopping experience. Rather, the advent of the recession should be seen as a great opportunity to get away from the now prosaic and to create "remarkable" shopping experiences, Washington DC-style.

The basis would be to obtain the right mix between residential and retail, capitalising at least in part on revitalising town centre living at the expense of the suburbs and encouraging greater use of public transport instead of cars. The streets would be purposely friendly, some as though gardens, others perhaps covered.

In the residential/retail mix the greater residential content might mean somewhat fewer and possibly smaller outlets, this smaller scale opening the way to the return of local independent retailers, including specialist, even “quirky” shops. This could also support the need for more food stores.

There could be greater flexibility in shop opening hours to reflect disparate lifestyle issues. For example, younger residents will be likely looking for shops, restaurants/cafés and entertainment centres available throughout most of the evening, such that the hours operated by some outlets might have a distinct bias towards later opening and closing hours.

Developing new style downtowns will take time – perhaps 15 years - but will be much aided by the creation of the National Skills Academy for Retail. While it remains uncertain how far people would be willing to travel to a successful new local downtown, the likelihood is that it would be a magnet for outside shoppers.

Among the wider social issues to be considered is the changing population mix, with not only an increasingly percentage of the elderly but also a growing immigrant population. The new style downtowns have to be able to accommodate such differing lifestyle needs. For example, Muslim youths, teetotal, do not wish to have to share evening social space with drunken native teenagers.

Mr. Quin stressed that while he is optimistic about new downtowns, the initial process could be painful for developers, property owners and retailers alike. In June next year there is to be in London a World Congress on World Centres and Downtowns with widespread interest already and a prospective attendance of between 800 and 1,000 people.

In the Q & A session that followed Mr. Quin’s presentation he offered the following observations:

A change of government next year, from Labour to Conservative, would certainly bring a different approach to planning, although the precise direction remains unclear. To the extent that Conservative policies can yet be influenced, the message to the Tories should be to maintain focus on town centre revival and on advancing public transport.

The recent paper from the Adam Smith Institute arguing for getting rid of the Use Class Order was to be welcomed. Local authorities tended to be too restrictive and inflexible to change, seeking to discourage tenants such as banks and dentists on the grounds they did not fit in with the planning "vision", whereas there was clearly a need for such tenants in shopping areas.

Market towns have been surviving the recession better, but conceptually they are already close to being downtowns.

The growth in the Muslim community has led to ghettoisation in some areas, which has to be a matter of concern to be resolved. In Bradford one third of shoppers never go into the town centre, preferring their own local shops, but town centres should be welcoming to all.

Respectfully submitted,
Robert Gibson, Chapter Director, on behalf of the Scribe.

Will the Paris Office Market Escape the Slump?

2009-03-20T11:51:00.000-07:00

Your scribe is a real old throwback; our lunch on 19^th March was on a lovely sunny spring day, overlooking Hyde Park and to also have a young lady talking about Paris made remembering to keep notes a bit tricky.

Fortunately, Catherine Kervennic, Partner at Property Market Analysis gave us a very engaging talk, with lively questions afterwards. Her answer to the question set was simple – ‘no’. After a period of denial last year, reality has struck; vacancies are rising, investment yields are rising and rents are falling. However, in Catherine’s view, whilst Paris will have its ‘slump’, it will not be as deep as those in London, the US and Germany for example. She gave four reasons for this. First, there is less over-supply. Secondly, investment yields had not fallen to such low levels, nor rents risen to such heights; there is therefore not so much ‘unwinding’ to be done. Thirdly, because rents are more modest, tenants, whilst shedding staff (this is, of course, less easy than in the UK), are not so keen to shed the accommodation as well; keeping it until better times return is more affordable. Finally, in response to a question, there is not likely to be much distress-selling. Banks in France are better-placed than in the UK or US and will not be so keen to pull the plug, and anyway office properties are less geared-up, with much being owned by secure overseas sources.

The Paris office market is divided into three very distinct markets: the Central Business District, La Defense and the various inner Business Districts. Each of these has its particular dynamics because each tends to have its own tenant base – La Defense with the large space-users for example. This will lead to some variance. La Defense is likely to have over-supply problems because development is still occurring. By contrast, the Western Business District, with its particular and attractive ambience is proving more resilient. Nevertheless, across the board rents are falling, and Catherine found it indicative that landlords are now less forthcoming on discussing any incentives that they have given.

The decline in rents is having an interesting side effect. In France, in broad terms rents are generally linked, at review, to the building cost index. At most times, this has favoured tenants, but it now works against them. There is a further statutory provision that, if the index has risen by more than 25%, the tenant may opt to use a market comparison, which many are now doing. She wondered if, after this experience, tenants will be so keen to use the building cost index.

As to eventual recovery, Catherine considers that, as Paris entered its decline later, it is likely to start its recovery later. She does not see the ‘busted flush’ of London’s financial ‘expertise’ as an opportunity for Paris to gain competitive edge – London still has a unique advantage. There are also issues about France’s political direction. Whilst the present government was elected on a platform of reform, and has taken some major steps, there are signs, if not yet of reverse, of a certain slowing. This will not assist the present lack of confidence amongst employers.

Despite that, Catherine pointed out that Paris bears a different relationship to France as a whole from London to Britain. Paris is the place to be for many businesses, are there are no equivalent alternatives such as Bristol, Leeds, Edinburgh etc. This dominance must underpin its long term strength.

To me, the image Catherine gave was of a temporary market decline such as those we have experienced several times during my career, declines that, whilst awkward at the time, pass without serious damage. One wonders if that is quite what is happening in London.

Michael Mallinson

What is Jessica?

2009-02-16T11:13:00.000-08:00

Chapter members who attended the lunch on 19^th January heard our speaker Paul Aldridge reference 'Jessica’ and might have wondered what that meant. Here is a more complete explanation from Paul.

"For those keen and hardy souls, I'm afraid to be the bearer of disappointing news - there are not yet any academic papers to hand that I am aware of for circulation."

"Jessica stands for 'Joint European Support for Sustainable Investment in City Areas,' and the essence of the position is shifting public sector funding towards a position of recoverability. In other words, it is proposed that Jessica stand as a 'loan,' but it doesn't have first charge over land in the manner that you'd expect with commercial debt finance."

"Exactly how this works in a tiered hierarchy of returns remains to be seen. A cynic could say if it's not first charge on the asset then it's pretty unlikely to be recovered, but it's just too early to see how it works. I hope that it moves us to a position of more economically sustainable development where the principles of equitable return on traditionally grant funded schemes are accepted, accepting that the risk profile for the parties may have to change to effect this shift. There are working papers in hand with WAG and NWDA, but the nuts and bolts of the project funding approach just aren't there yet."

See the Jessica information at the European Investment Bank web site:

http://www.eib.org/projects/publications/jessica.htm.

"Jessica: A new way of using EU funding to promote sustainable investments and growth in urban areas." (Date: 05/09/2008)

A 6 page PDF file describing Jessica is viewable from the above site in several languages, with the English version here:

http://www.eib.org/attachments/thematic/jessica_2008_en.pdf

Delivering Regeneration - The Role of Local Asset-Backed Vehicles

2009-02-03T09:47:00.000-08:00

How does a landowner without access to finance secure development of his land without either selling it or losing all control via a lease? This conundrum has been with us throughout my career and Local Asset-Backed Vehicles are the latest solution offered. Paul Aldridge and his firm, King Sturge, are at the forefront of the initiative, and he came to our Lunch on 29th January 2009 to explain what they are up to; starting with a single project in 2002, they now have 30 or so in various stages of progress.

The idea is straightforward. The land is placed in a ‘vehicle’, usually a limited liability company in which the shareholders comprise the landowner, one or more development partners, who would be expected to bring substantial ‘seed’ capital, and perhaps a bank or other financier. The company follows proper corporate practice, with regular board meetings attended by directors nominated by the parties who bring expertise as well as exercising corporate responsibility. The vehicle is given a limited life, usually around 15 years. At the end of that period, the company is wound up, profits are taken and the land reverts to the landowner. During the development period the land is ‘drawn down’ by the developer in accordance with demand at a formula-driven price, developed and let.

As Paul emphasised, one of the keys to success will lie in getting the Memorandum and Articles in a shape that properly represents the wishes and interests of each party. There is usually a lock-in period of around 10 years, but thereafter interests can be sold, albeit that they may not be that liquid.

These arrangements are, in Paul’s view, particularly suited to public bodies with extensive or critical land holdings where they wish to bring about development in the interests of regeneration but they have neither the skills nor the financial backing to carry out development themselves; he illustrated this with the projects already under his belt. The general structure is flexible enough to allow for development elements of a ‘social’ or below-market nature, but, of course these must be counter-balanced by sufficient market development to meet the finance costs and the profit expected by each partner. The structure provides an entity that is generally eligible for grants, should these be available, and also wider public sector support; we talked of ‘Jessica’ and ‘Jeremy’, cash streams from the EU that are currently being rolled out for just such vehicles.

In answers to questions, particularly from members who were a little chary of public sector ‘partners’, Paul said that his experience was that their input was generally good. However, as well as getting the structure of the company right, it was also necessary to reach prior agreement on a proper business plan that the board could exercise its corporate responsibility in delivering. The timing of agreement on these matters was often politically sensitive, but in electorally ‘fallow’ times many authorities are quite capable of being business-like.

At the outset, the public body must, of course, select its partner or partners in a transparent and open manner that meets public sector ‘best value’ standards. If this is done properly, there is no difficulty in the chosen developer having exclusive access to the land covered by the vehicle throughout the period of the agreement.

Paul displayed not only mastery of his subject, but also considerable enthusiasm for the general concept. Whilst it is, primarily, a development tool, he is of the view that the content of that development was capable of considerable extension.

With the benefit of hindsight, I think that we did not question him quite strongly enough about the end of the agreement; that tends to be the time when chickens come home to roost. However, we all found the ideas Paul provided both interesting and potentially stimulating.

Michael Mallinson

[Ed. note: see the blog entry, below, for a link to the academic article referenced in Paul's presentation.]

LABVs: Grace & Ludiman Academic Article

2009-02-02T14:57:00.000-08:00

Andrew Ludiman, AMWL Head of Consultancy at King Sturge, at our January 29, 2009 LAI London Chapter luncheon, referenced the following article, which is available for viewing at our web site, in the PUBLICATIONS section.

Title/Citation:

“Local asset backed vehicles: The potential for exponential growth as the delivery vehicle of choice for physical regeneration” by George Grace and Andrew M. W. Ludiman, partners at King Sturge LLP, Journal of Urban Regeneration and Renewal, Vol. 1, 4, 341–353 (Henry Stewart Publications: 2008).

Abstract:

“Nearly half the Regional Development Agencies (RDAs) in England have now adopted the use of local asset backed vehicles (LABVs) as a means to manage and/or develop their property holdings. In doing so, they have collectively invested over £400m of property in 50/50 partnerships with leading private sector regeneration experts such as Igloo Regeneration Ltd. Given the RDAs property holdings represent less than half a per cent of those held by local authorities (£1bn compared with £230bn), the potential impact on the regeneration sector if local authorities embraced this new approach to regeneration could be enormous in terms of leveraging in private sector finance, heralding a new culture of genuine partnership between the public and private sectors and catalysing a paradigm shift in the quantum and quality of physical regeneration in the UK.”

Where From Here?

2008-11-24T11:24:00.000-08:00

"Where do the property markets go from here?" was the topic of discussion at the LAI London Chapter luncheon, November 20, 2008, presented by guest speaker Ed Stansfield, head of property research at Capital Economics, an independent macroeconomics research consultancy based in London.

If it hadn’t been for the good company and excellent food, our Lunch on 20th November would have been a depressing affair. Our President had chosen for our speaker one of the more bearish commentators, and Ed did not disappoint!

His answer to the question set was simple: down -– considerably down. Our commercial property market has fallen an average of 30% and he could see this extending to 40/45% in fairly short order, where it would remain for 2 years or more. Residential will be no better; he pointed out that the earnings/house price ratio still remains high by historical standards and he argued for a further fall of 20% before a floor might be found.

Unfortunately, as well as bringing such a depressing message, Ed was able to convey his views with demonstrable skill and logical support; few would have left unconvinced.

The core of Ed’s rationale lay in his, now universally held, belief that the world, and particularly the UK and US are faced with a deep and extended recession. In response to a question, he suggested that the Euro-zone problems may be less, but he was sceptical of their ability to agree on and organise effective and timely counter-measures, thus making a manageable crisis worse than it need be. In a bid to limit the degree of recession, central bank interest rates could well be brought down close to zero, but Ed argued that this may have only a limited effect. Whilst the banking crisis may have been contained for the present, he thinks that further failures remain more likely than not. Whilst that is the case, the appetite for lending by banks will be very constrained and low central bank lending rates will not transfer to the real world. Further, the prudential barriers to lending will remain high. On the other side of the equation, the appetite of businesses to borrow will be pretty weak. Tumbling profit (?) margins will threaten business viability and discourage new investment. There are bound to be extensive worker lay-offs (perhaps 3.3m unemployed in the UK). Ed therefore painted a gloomy downward economic spiral as a virtual certainty.

This basic scenario had inevitable financial investment consequences. Equity dividends would be extensively threatened, making a mockery of backward-measured dividend yields. In a similar manner, effective economic demand for commercial property will evaporate across the board, if it has not already done so. He argued for falls of around 25% in rental values. Such a view of rents would undermine any view that property yields looked cheap compared to Government bonds of 3%, or perhaps less. Ed argued that this depressing property picture would extend across sectors and geography; there will be no safe niches!

On BBC TV there is a brilliant, but gloomy, current dramatisation of Little Dorritt. Ed would have fitted in well, save that he offered no Amie to make things right. However, he did just manage to squeeze out three positive thoughts. He had kind economic words for Finland andGreece. He doubted if the UK Government’s likely borrowing and spending spree would be inflationary even in the long term; any borrowing would be a tiny proportion of the wealth destroyed. And, when asked how we would repay those debts, he reminded us that, although the reputation of many parts of the City was in tatters, the UK offered wider and still valuable financial skills.

Michael Mallinson, Scribe

Who is going to go bust?

2008-10-10T14:10:00.000-07:00

was the topic of our LAI London Chapter's luncheon presentation (Thursday, October 9, 2008) by Héléne Demay, Head of Rental Information Service at IPD (Investment Property Databank), the world leader in performance analysis for the owners, investors, managers and occupiers of real estate.

Timing is all! If she had given her talk two or three days earlier the answer might have been easy – almost anyone. Fortunately, by our Lunch on 9th October 2008 the British financial situation seemed to have stabilised somewhat and Héléne was able to focus on her original ideas.

Her task within IPD is to identify and track, over time, the financial resilience of around 60,000 commercial tenants in the UK. Her target audience is largely institutional landlords who, in today’s more difficult times, have come to realise that they have a vested interest in understanding the status of their tenants, and that such understanding can be a crucial element of their investment decisions. The core of her work derives from close study and analysis of the product of credit agencies, particularly, in her case, Dun and Bradstreet. This data is supplemented by also looking at IPD data on rent payment history, by study of County Court judgements and other, more local data. The interest lies, of course, not in the snapshot images, but by the patterns that emerge over time.

As with all such endeavours, the quality of product depends upon the quality of inputs. Héléne admitted, for example, that her data would have offered no insight to the fall of Lehmanns. There is inevitable degradation of input where published accounting allows significant ‘off-balance sheet’ activity (the author wonders if the days of this are numbered). Nevertheless, her time series do give valuable insights that can assist landlords by giving early warning of impending trouble, and perhaps the chance to take ameliorating action.

In the current market there are clear signs of distress. For example rent unpaid after 30 days has doubled over the last year as has the level of default. However, Héléne was keen to emphasise that, given the severity of the ‘credit crunch’, default rates for investment grade commercial property were still extremely low.

Some discussion of names took place, but, under the ‘Chatham House’ convention of Lambda Alpha, these have been censored from my notes. Nevertheless two detailed comments might be appropriate. On the positive side, Héléne had noted the positive performance in her regime of retail warehouses. On the negative, there was some discussion of whether we should be watching more closely some semi-governmental and local government tenants.

Discussion also took place about how her data related to and impacted upon valuers. Whilst warnings from her data are clearly relevant to valuers as well as to landlords, there was some concern that, in difficult times such as the present, valuers might be over-defensive, over-cautious.

Ending on a positive note, a note that might have been more jarring a few days ago, Héléne argued that her data did not show the world to be ending next Friday, or even shortly after.

Michael Mallinson

Emerging Real Estate Markets

2008-09-15T11:41:00.000-07:00

At our Lunch on 11^th September 2008 Mark Charlton, Director and Head of Research at Colliers International, gave us a fascinating insight into the course that many property markets follow as local economies mature towards the Western capitalist model. He used his personal experiences in the Balkans, Ukraine, Georgia and Kazakhstan to illustrate his points in a presentation entitled: "Emerging Real Estate Markets -- Obscurity to Maturity; Emergence to Convergence."

We talk of ‘globalisation’, but sophisticated property markets in the terms of long-term investors really only exist in North America, Western Europe and South-East Asia. As other countries seek to emulate the economic success of these areas, they must develop property markets to match. Most, at present, are moving from command (often communist) economies to free markets.

Mark identified a sort of typical evolutionary path. This starts with political instability and inherited low quality (but often highly priced) built stock. Governments kick-start the process by taking initiatives to enhance the investment quality, and thus the price, of their own debt to invest in infrastructure, and, by extension, the debt of international companies they seek to attract. Success in this vastly expands occupier demand and, with limited supply, rents soar to premium levels. Mortgage market principles will also be established. As a facet of this, nuclear families start to break and migration to cities accelerates, raising the demand for housing. This triggers a first response from local developers, often to low standards and, on their back, international developers follow. Over-supply commonly arises, and rents fall. The increasing presence of international companies forces improvements in building standards, and better space can be afforded as local wealth, often in limited hands, makes demands on retail and logistics for example. With such increases in building quality and robust renting arrangements international investors are attracted, albeit at yields higher than advanced economies. From this point on, convergence increases. Increased political and legal stability, greater transparency and increased data gradually reduce perceived business risk.

Not surprisingly, property market convergence runs in parallel with economic convergence, and also with social convergence. In the early phases, growing wealth will be in few hands, but the genesis of a burgeoning ‘middle class’, even if it is not as extensive as in the Western world, is a key component.

This ‘model’ is, in almost all cases, interrupted by over-ambition, and by political setbacks. It may also be retarded by local practices of ‘corruption’. This makes investment early in the cycle suitable only for those willing to accept high risk, but Mark sees the overall direction of progress as generally being strongly driven by local wishes, and eventual acceptance that the Western model will deliver. He gave as an example a 400 hectare site in Belgrade that is slowly emerging from political deadlock as realisation dawns of what must be done if its potential is to be delivered.

Mark emphasised that, whilst his model is robust, each country will have its own quirks. These may be quirks of history, or even quirks of ambition; not all countries wish to mimic the West entirely. Understanding how those quirks might distort the model, and particularly understanding where a country has got to on its journey requires extensive research and good local contacts if risk is to be managed.

As subsequent discussion brought out, the implication of Mark’s paper was that property markets presently off the radar of investors might merit consideration rather earlier. With care, and understanding of his model, rational investment was feasible. There would be risks, not least of liquidity and valuation, but higher returns and risk-spreading techniques are natural bed-fellows.

Michael Mallinson, CBE FRICS (Scribe, London Chapter, LAI)

Healthcare Development and The Challenges Ahead

2008-06-12T15:21:00.000-07:00

We were addressed at our Lunch on 12th June 2008 by Ken Steven, a consultant on healthcare provision. At the heart of his deeply-felt words was a personal anguish that there are tectonic strains within the whole of the healthcare area, but neither politicians nor practitioners seem able or willing to promote an open discussion about the principles under which the challenges should be met.

The causes of the strains are obvious: an aging population with increasing demands, and an ‘industry’ with a high capacity for producing remedies that either generate huge costs or bring radical new opportunities. As an example, many procedures that once required a 10 day hospital stay can now be dealt in a day or little more; he quoted an example of a heart by-pass being performed as day-surgery. These radical changes involve quite different forms of hospital management, and perhaps quite different approaches to hospital real estate. In Ken’s view, the NHS is simply too large and too bureaucratic to be able to keep pace. Despite the best efforts of many of its staff, it is hugely wasteful, and often inefficient. As a consequence, and largely by default private sector patches are and will continue to be added, but within an entirely unconsidered framework.

Underlying this grim picture, Ken sees a curious public attitude that is being betrayed by government ineptitude. The Man-in-the-Street is being told that he is being given choice, but is given no information on which he can make his choice. Perhaps as a consequence, people view the consultants they meet as miracle-workers, until something goes wrong when they sue them. Like all professionals, medical consultants vary in their skills, but there is no means of getting at knowledge of this.

The ability of the NHS to respond to the capacities of the private and charitable sectors is weak, partly by political conviction but also due to bureaucratic inertia. He was also concerned by a probable inability to meet changes in the legal environment of healthcare.

If the NHS faces challenges, so too does the private sector. The organisation of the medical profession does not make it easy to formulate the long-term relationships that high hardware costs necessitate. Consultants, quite naturally, wish to migrate to whatever place offers the latest and best for their clients. Solutions are possible, but they need to be openly thrashed out. The absence of the debate has left the private sector in limbo. As a consequence, much of its management expertise and its finance now comes from overseas.

In response to a question, Ken argued that, whilst a limited number of attempts are being made, it was unlikely that private finance could be found for solutions similar to those for student accommodation. Whilst mechanisms are quite feasible, they require agreement on the ground rules, an agreement that is not even being properly discussed. The PFI (Public Finance Initiative) solution has been, in his view, no more than a deferment of the problems it was supposed to meet. Who is thinking about what will happen when PFI projects mature – and some are now 25% through their life-span?

This sombre view of the management, political and administrative, Ken sharply contrasted with the high skills and unselfish devotion of many practitioners. He left the question in the air – why can’t we formulate the debate?

Michael H. Mallinson CBE FRICS (Scribe, London Chapter, LAI)

Planning for an Irish Chapter, LAI

2008-06-13T15:13:00.000-07:00

Representatives of the leadership of the London Chapter, LAI had a very successful meeting in Belfast, Northern Ireland on Friday, May 30, 2008. Six of twelve new land economics professionals from Northern Ireland were inducted into Lambda Alpha International as members-at-large. Those were who unable to attend the inaugural luncheon will receive their documentation, shortly, either in person or by mail.

All those present, both existing and new members, expressed a strong desire to work toward an all Irish Chapter of LAI with separate branches proposed for Belfast and Dublin. Details are being investigated by the chapter members with the assistance of the LAI headquarters’ leadership.

In preparation for the creation of an Irish Chapter, Denis Myles has agreed to serve as President. Denis (FIRCS Dip, Prop. Inv. MCI ARB MEWI) is Managing Director of Myles Danker, Belfast and thus well known through out Irish business circles and uniquely suited to the task of steering the course for the Irish Chapter to come into being.

Prospective holders of other lead offices who have agreed to serve are: Roland O'Connell (Savills HOK, Dublin) as Vice President, Graeme Johnston (Belfast Harbour Commissioners, Belfast) as Treasurer and Conor McKernan (Douglas Wallace of both Belfast and Dublin) as Hon Secretary. These future incumbents truly are outstanding professionals in their respective fields of endeavor and worthy of the “honorary” distinction as a member of Lambda Alpha International.

The push is now on to recruit more members form both Dublin and Belfast with the objective of securing chapter status in Toronto in October of 2008.

The members of the London Chapter and all Lambda Alpha International take great pride in welcoming our Irish colleagues on board.

Land Economics Weekends: Phoenix and Toronto

2008-05-30T14:08:00.000-07:00

Many members of Lambda Alpha International operate under the mistaken assumption that LEWs are just for BOGs -- that the Spring and Fall Land Economics Weekends (LEWs) are reserved only for the members of the Board of Governors (BOGs) of the organization and the chapters. 'Tisn't so!! LEWs are for all members, the spouses, even guests, professional associates, and FOMs (friends of members) who could benefit from this extraordinary educational experience.

Land Economics Weekends are hosted by a different LAI chapter twice a year, around May/June and September/October. Yes, the LAI BOGs do hold their business meetings on the Friday of a LEW, but after the work comes the play, the learn, the insight, the education about the land economics of the chapter's community. And what a fun-filled education the Phoenix Chapter of LAI provided to the members this past spring 2008. The Phoenix members gave us a truly insider's view of their community and of neighboring Scottsdale; inside the Scottsdale Hanger One (host to the private jet and automotive collection of the rich and famous); inside the Arizona State University's art center and prospective plans for an in-city campus; and inside a wide array of residential, mixed use, waterfront commercial (?? Waterfront?? in PHOENIX, you say???? YES, canalfront developments --- see what you missed learning about Phoenix?) .

And then there was the marvelous meals and speakers at Taliesan West, at sundown -- beautiful! Or at the Stockyards restaurant. And what a pleasure to meet and to talk with those next generation land economics professionals just graduating from ASU's real estate program (LAI's Student Association chapter in Phoenix). For more information, see their website: http://lai-phx.org/

Note that the agenda page has all of the links to the destination websites for further information. And checkout the 89 photographs posted as well -- truly a marvelous collection.

An insider's view: we saw it at the LEW in Los Angeles, with a tour inside The Rand Institute, with lectures by members of the team that managed the LEED processes. We saw an insider's view at the LEW in London (including a dinner and tour of Malahide Castle) and in Dublin and Belfast where we now have the opportunity to welcome a dozen talented professionals as members-at-large from Northern Ireland, where one or two new chapters are in formation as we speak.

Simcoe Chapter (Toronto) will host the Fall 2008 Land Economics Weekend (October 24 - 25). The chapter is arranging Friday tours of the University of Toronto campus, the Ontario Investment & Trace Centre, Yonge-Dundas Square, Queen Street West (a blend of art and real estate) and a presentation at the Historic Distillery District.

Saturday, tours of developments will include: Markham Business Park Corridor, the BAPS Shri Swaminarayan Mandir Hindu Temple, Mississauga City Centre, the St. Lawurence Starch Company Redevelopment and cocktails/dinner at the Gardiner Museum.

Toronto in October promises to bring us new expertise, vistas of prominent international development, and intellectual discourses on contemporary global land economics trends. For more information, see their website: http://lai-simcoe.org

Come see Toronto from inside the Canadian point of view! You'll be changed by the experience. All LAI members are invited and welcome to attend. For signup information, see the Simcoe Chapter website above or http://lai.org

Changing Times and Attitudes at Ann Summers

2008-04-21T17:34:00.000-07:00

At the LAI London Chapter Lunch on 17^th April 2008 Ian Wallis gave us a fascinating insight into the development of a niche retail market: sex-related products. He charted for us the progress in business terms from a purchase in bankruptcy in the 1960s to a trans-UK and increasingly international presence today. In product terms, the progress has been from “men in macintoshes” to “a neighbour of Marks and Spencer’s”. This progress reflects, of course, the acumen of the Company’s owners, but also the transformation in mores during that time, a transformation in which Ann Summers played a significant part.

The business has had three strands. In the early days, it was very dependent upon ‘party retailing’; in a close analogy with Tupperware, the products were sold at female-only parties. Items not sold at parties were then passed to a small number of shops. In the 1990s the shop side was increased, to around 153 today. To achieve this was a considerable battle against entrenched attitudes by most large property owners but, Mr Wallis assured us, this has largely gone now – and no doubt the market troubles today will accelerate this growing ‘enlightenment’. Finally, in recent years, Internet selling has also become, not surprisingly, a major line for the business.

Part of the transformation in attitudes has been delivered by prudent management of product lines. This was given a boost by the purchase in 2001 of the Knickerbox chain. There is also an emphasis on developing well-known and trusted brands. Store layout and size has also been a key ingredient. Stores are now in the region of 1400 – 2000 sq. ft, with the latest, in Cardiff, being 4000 sq. ft. Layout design is intended to ameliorate the ‘embarrassment factor’, which is still a feature for many shoppers, while also preserving a degree of ‘theatre’ in the customer experience.

Some forays into fringe activities, such as vending machines and Ann Summers’ mobile phone ring-tones are being attempted. Franchising is not presently under consideration because there is considerable evidence of ‘cannibalisation’ when new stores are opened. This suggests to the writer that, despite the novelty of the products, demand is rather inelastic, if you will excuse the allusion. Ann Summers also appears to have been able to see off direct competition. Whilst a number of attempts have been made at the frilly underwear part of the range, there is no High Street competition in sex toys. Perhaps this points towards a business tension between creating more socially acceptable products, which might attract competition, and sticking with the less acceptable, which may frighten off competition.

All-in-all, Ann Summers seems to be textbook example of business creation and evolution in a ‘virgin’ area of activity – if you see what I mean. Ian Wallis gave us some very valid and enlivening insights.

Y’r O’b’d’nt Scribe

A Good Country for Old Men

2008-04-15T10:02:00.001-07:00

Outlook for Global Property -- 2008

A Good Country for Old Men
Investment Property Forum/Society of Property Researchers' Event
March 2008

KS: Commmentary by
Karen Sieracki
KASPAR Associates Ltd.
Property Research Consultancy
karen.sieracki@kasparassociates.co.uk
President, London Chapter, Lambda Alpha International

KS: Well, it looks like the UK is the place to be for investment in terms of relative return and better risk profile. However, the skill is getting it right in terms of stock selection. It is here where experience does matter. The UK is now a good country for old men.

What kept people awake at night was the debt situation with the banks and were there any other surprises out there that would undermine the system.

U.S.

The consumer needs to get its balance sheet in order so it will not be driving the US economy forward. Corporate profits are still healthy at around 13% in 2007. This means money to invest in equipment and people, but business are currently in the wait and see mode.

Property yields have finally decided to move out - eg suburban offices at 7.0% (40bps out), CBD prime offices at 5.75% (25 bps out), retail at 7.1% and industrial at 7.25%. Will yields go back to circa 9%, the long term average? No, this is not thought likely.

The long term office vacancy rate is 15% and current vacancy rates in the major cities are getting near to that level now. Office rental growth for 2008 is likely to be in the range of 0% pa to 1% pa, a big difference from 2007 of 12% pa to 20% pa (average to prime range).

The construction cycle has started but the credit/liquidity crunch should stop it. Office and apartments are seen as income plays. Total return for 2008 is forecast to be 0% pa.

KS: Well, the concern here is - - will business help the US economy get better in 2009?? The consumer is burnt out. There is still the issue as to why the US property market did not feel the downdraft as early as the UK. There is much chatter about talking oneself into recession and the market down, but could this be denial? The chat is that 2008 property returns will not be negative and things will bounce back in 2009. Sounds all a bit familiar, so could the US be following the UK in the vain hope that this will happen?

Europe

It was felt that Europe and Asia had decoupled from the US on the economic front. The rise in the cost of debt should see a stop in development.

The UK is expected to see minus 1% pa total return in 2008. Europe total return is expected to be 2% pa for 2008. Yields have moved out in Europe. Office rental growth is expected to be 3.5% pa in 2008 and retail rental growth at 2.4% pa.

Investment deals in Europe had fallen by 30% in 2007 from the previous year.

KS: It is a brave move to feel that Europe and Asia had decoupled from the US. In looking at slowing economic growth and the maturing state of some of Western Europe's economies, immigration could be the saviour.

Also, investment activity could be tight as at the moment, there does not appear to be many forced sellers which would quicken the pace. Europe is a bit like molasses where the market is sticky and there is a lack of impetus.

Asia

Total returns for Asia for 2008 are likely in the order of 12% pa to 13% pa. There is huge economic growth potential in this region which has little real estate to support this activity. This is the important fundamental which underpins the investment activity.

China exports circa 20% to the US, so a slowdown in the US will have an impact, but it will not be too severe. Japan needs to restructure its economy.

There are risks down the line in 2009 and 2010 in the Asian markets as waves of supply complete, particularly in China and Singapore. Asia has less debt, so it not under the same pressures as the West to concentrate minds in this direction. The Asian property markets have low correlations with the UK market regarding property performance.

In looking at investment, the second and third tier cities in China are a focus for growing interest. The demographics for India are compelling.

The initial potential for investment is in the retail and hospitality sectors across Asia. Some Asian markets do have REITS which have been losing value. Could this be an indicator of future falls to come in the direct market?

With an office yield of 6.0% for Shanghai which, along with Hong Kong has twice the volatility of the City of London offices, is this really where one would want to be now? 2008 can be seen as possibly too late to enter these markets now. Leases are short - 2 to 3 years. It was felt that offices were past their peak.

KS: Asia is felt to be the hot spot, but it would appear that now is not the time due to the high level of development and its completion date. One needs to do research and spend the time and resources to understand these markets. The REIT factor could be a good indicator for future pricing in the direct market. So do your homework now, to enable you to be ready when the timing is better.

London Chapter Inaugurates Web-Log

2008-04-04T17:05:00.000-07:00

The London Chapter of LAI is inaugurating a "web-log" or blog as a vehicle to foster greater dialog among our own chapter members and with LAI members around the world.

If a London Chapter member has an opinion piece or article they would like posted to this blog, email it to Mari McKavanaugh at mari.a.mckavanagh@som.com and request the item be added to this blog.

If a member of LAI wishes to opine on a blog entry, please click on the Comment field at the bottom of the individual piece.

Posting to this web log will be monitored and filtered as appropriate. Intrusive use of the site for unauthorized personal advertisement or advancement will not be not welcomed.