We would all have been aware that there is a problem with extensive, sometimes almost overwhelming, shop vacancies in virtually every town in the Country, and with well-known trading names disappearing at an accelerated pace. At our lunch on 27th October we were fortunate to have Andy Godfrey, Public Policy Director, Alliance Boots, to give us his analysis, an analysis from probably the most-represented retailer on the High Street.
Whilst the proximate cause may often lie in the current depressing economic climate, Andy made clear to us that the roots of change go much deeper: the rise of supermarkets, out-of-town retailing and mail and internet shopping being the prime movers. These forces have been at play for two or three decades already and will not go away, with the impact of the internet in particular likely to grow considerably. Internet driven sales have increased from 5% to 9% in the last 10 years and some predict a doubling again within a decade. It is also the case that the very largest top 30 centres have prospered at the expense of the rest of the High Street locations.
Against this rather dark background, Andy suggested that people are rather fond of their local High Street; this was manifested in some local responses during the recent riots. Perhaps they fulfil a social as well as a commercial role. If that is right, there is a need to rethink the detail of that role, and not just in terms of retailing. Hopefully the emerging Report by Mary Portas will address the right issues. The re-thinking needs to take account of changing demographics, in particular more older people (your Scribe regularly shuffles round Woking looking for the spectacle shop) and, sadly, more have-nots. We should build on two factors: first, whilst many goods can be commoditised, and thus sold indirectly, and many, particularly fashion, rely extensive comparison, there remains a huge range of goods that people wish to ‘touch and feel’ before they commit themselves. Secondly, the concept of a ‘shopping experience’ is socially well-established, and that experience does not just include the purchase of goods. In Andy’s view the recipe for success, when times improve, will depend upon an emphasis on advice and service, providing room for individualism in the products and services offered, offering convenience of access and a safe and welcoming environment, and, above all, the fostering of the sense of ‘community’ that the best High Streets provide; these will be the crucial factors in encouraging footfall.
However, a successful High Street in 2020 will be very different from today’s offering and there are great difficulties in getting from here to there. Not the least of these is fragmented ownership. Realistically, this will only be overcome if Local Authorities take a leading role in ‘championing’ the high street, presumably justified by social importance. It will also require changes in Central Government Policies, laws and Regulations.
The vision offered by Andy met, I think, very wide acceptance. The questions really reflected the willingness, and ability, of all the parties concerned to overcome the barriers to delivery of the vision. Andy was quite upbeat about this, not least because there is an underlying commercial logic; not all will succeed, but that logic should give a fair wind. It was that that encouraged your Scribe: we had a hard-headed, but soft-spoken and entertaining, businessman espousing the vision, not a politician or academic.
Michael Mallinson
Friday, October 28, 2011
Monday, September 19, 2011
NAMA – part of the solution, not part of the problem
How do you bail banks out the hole into which one subset of the ‘Masters of the Universe’ had driven them? The Irish Government, faced with a bigger problem as a percentage of GDP than most, chose, rather than a bank-by-bank resolution, to place a large proportion of the problem property loans into a specially formed Agency, NAMA, tasked with managing the resolution of the loans in an orderly manner over 10 years. At our lunch on 15th September 2011 we were fortunate to have Ronnie Hanna (Head of Credit and Risk for the National Asset Management Agency) to tell us how this project was working out.
The size of the task is prodigious, £72 bn of loans, 60% of which concerned Irish property and 32% in the UK, including Northern Ireland, with the balance in USA and Europe. Ronnie made clear to us that the fundamental principle for NAMA was orderly disposal or working out, with no fire sale element. In principle, the scheme is neither a bail-out of borrowers, who will be expected to repay the loan eventually, nor is it a bail-out of the banks as they will hold the losses on ultimate wind-up. This principle is key to the relationship between NAMA and all the parties involved; whilst, in reality, it will not be wholly achievable, the discipline it brings is crucial to the project.
The majority of loans have remained in the legal ownership of the lending bank, but, for each loan, the bank is required to prepare a realistic ‘business plan’ under the eagle eye of NAMA. Once the plan is agreed, NAMA is able to issue a ‘letter of support’ which will help the bank in dealings with third parties. If additional funding is required to oil the resolution, and it cannot be raised elsewhere despite the ‘letter of support, then, provided that it is in line with the business plan, NAMA is able to provide it, on commercial terms. It is a feature of the scheme that the banks, who do much of the work, are left with some of the upside if things go well; whilst, to some, this seems like rewarding failure, Ronnie argued that it is pragmatic to give the banks some incentive.
In some of the questions that followed Ronnie’s talk, there was an undertow of criticism that NAMA was sometimes getting in the way, perhaps an inevitable danger for an intermediary interjected into a previous commercial relationship. Ronnie was vigorous in his defence. Often complaints amount to a criticism of a price being demanded by NAMA, but investors must realise that they are not picking over a corpse; his task is to secure optimum resolution, and his needs will often quite properly not match the particular wishes of some purchaser; so be it! He was confident that the ‘assets’ confided to his care would, in due course, almost all find proper resolution, perhaps sometimes following co-operation with other agencies of government; there may be a small residue of land that will have to revert to, or remain as agricultural land, but that will be trivial when compared with the starting position.
Ronnie was very firm that NAMA was proving to be part of an innovative solution to what had seemed, at the outset, to be an unbearable problem. Your Scribe has always had the prejudice that the Irish were a bit tricky, particularly in loose play around the back of the scrum. Ronnie convinced him that, here, they had found an interesting way of getting the ball away in more profound circumstances.
Michael Mallinson
The size of the task is prodigious, £72 bn of loans, 60% of which concerned Irish property and 32% in the UK, including Northern Ireland, with the balance in USA and Europe. Ronnie made clear to us that the fundamental principle for NAMA was orderly disposal or working out, with no fire sale element. In principle, the scheme is neither a bail-out of borrowers, who will be expected to repay the loan eventually, nor is it a bail-out of the banks as they will hold the losses on ultimate wind-up. This principle is key to the relationship between NAMA and all the parties involved; whilst, in reality, it will not be wholly achievable, the discipline it brings is crucial to the project.
The majority of loans have remained in the legal ownership of the lending bank, but, for each loan, the bank is required to prepare a realistic ‘business plan’ under the eagle eye of NAMA. Once the plan is agreed, NAMA is able to issue a ‘letter of support’ which will help the bank in dealings with third parties. If additional funding is required to oil the resolution, and it cannot be raised elsewhere despite the ‘letter of support, then, provided that it is in line with the business plan, NAMA is able to provide it, on commercial terms. It is a feature of the scheme that the banks, who do much of the work, are left with some of the upside if things go well; whilst, to some, this seems like rewarding failure, Ronnie argued that it is pragmatic to give the banks some incentive.
In some of the questions that followed Ronnie’s talk, there was an undertow of criticism that NAMA was sometimes getting in the way, perhaps an inevitable danger for an intermediary interjected into a previous commercial relationship. Ronnie was vigorous in his defence. Often complaints amount to a criticism of a price being demanded by NAMA, but investors must realise that they are not picking over a corpse; his task is to secure optimum resolution, and his needs will often quite properly not match the particular wishes of some purchaser; so be it! He was confident that the ‘assets’ confided to his care would, in due course, almost all find proper resolution, perhaps sometimes following co-operation with other agencies of government; there may be a small residue of land that will have to revert to, or remain as agricultural land, but that will be trivial when compared with the starting position.
Ronnie was very firm that NAMA was proving to be part of an innovative solution to what had seemed, at the outset, to be an unbearable problem. Your Scribe has always had the prejudice that the Irish were a bit tricky, particularly in loose play around the back of the scrum. Ronnie convinced him that, here, they had found an interesting way of getting the ball away in more profound circumstances.
Michael Mallinson
Monday, May 23, 2011
Do Greener Buildings Really Mean More Value?
Whilst your Scribe can safely be thought to be ‘out of touch’ in most things, he senses a continuing scepticism amongst many, perhaps most building owners about the ‘green’ agenda; it is widely seen as just one more impediment for landlords. At our Lunch on 19th May 2011, George Fowkes, Co-Founder of Low Carbon Workplace, sought to convince an audience that was by no means as sceptical as I have suggested that greenness can be seen in a positive light.
The Government has set ambitious carbon targets: an 80% cut in emissions by 2050. There is no doubt that property, contributing 20% to current emissions, is seen as a soft, as well as a necessary target. Perhaps justifying a negative perspective, potential taxes are in place to bully, and ‘Display Energy Certificates’ will be seen as a tool to shame. However, the real driver for change will lie in energy-pricing and the anxiety of occupiers, who ultimately meet energy charges, to minimise a growing threat to their bottom line.
Whilst BREEAM assessments and debates about ‘embodied carbon’ address important issues, George expressed the view that these are unlikely to be real drivers of value in the market place. He suggested four headings that might be:
1. Access to public transport. If Government continues to squeeze the cost of motoring, which it is likely to do to the bounds of political possibility, less dependence upon it will be attractive to occupiers in attracting staff and customers.
2. Buildings that offer ‘smart passive systems’ – not too much glass, high ceilings, open spaces etc. These will offer tangible advantage to occupiers.
3. Efficient active systems, particularly good zonal controls so that energy use matches closely actual building use, mitigating waste. (Your scribe has just bought a kettle that boasts its ability to boil ‘only the amount of water you need’ – but he still overfills it!)
4. Landlord engagement with occupiers. For example contractual parameters for energy use, with costs and benefits being shared. The equipment of buildings with extensive metering and monitoring systems will be a selling point of value.
Rather than an incidental, George sees energy use and cost as becoming an active, and perhaps disputatious, component of the landlord/tenant relationship. If this is correct, landlords need to develop strong ‘test as you go’ methods, not only in developing and refurbishing buildings, but in their continuing running.
One questioner raised the implicit conflict between building conservation and listing, and energy efficiency. It was George’s view that the latter is now the louder voice, and English Heritage will have bend to meet that reality. Another questioner, whilst accepting George’s argument in high cost/high demand London, wondered whether the value issue will prove so real in the provinces. George refuted this view, arguing that growing energy costs will prove painful wherever they are incurred.
In some cases, reducing energy consumption may have quite high initial costs, but George left us with the view that most buildings present opportunities for short payback with basic and simple stuff - a positive message to end a lucid and entertaining presentation.
Michael Mallinson
The Government has set ambitious carbon targets: an 80% cut in emissions by 2050. There is no doubt that property, contributing 20% to current emissions, is seen as a soft, as well as a necessary target. Perhaps justifying a negative perspective, potential taxes are in place to bully, and ‘Display Energy Certificates’ will be seen as a tool to shame. However, the real driver for change will lie in energy-pricing and the anxiety of occupiers, who ultimately meet energy charges, to minimise a growing threat to their bottom line.
Whilst BREEAM assessments and debates about ‘embodied carbon’ address important issues, George expressed the view that these are unlikely to be real drivers of value in the market place. He suggested four headings that might be:
1. Access to public transport. If Government continues to squeeze the cost of motoring, which it is likely to do to the bounds of political possibility, less dependence upon it will be attractive to occupiers in attracting staff and customers.
2. Buildings that offer ‘smart passive systems’ – not too much glass, high ceilings, open spaces etc. These will offer tangible advantage to occupiers.
3. Efficient active systems, particularly good zonal controls so that energy use matches closely actual building use, mitigating waste. (Your scribe has just bought a kettle that boasts its ability to boil ‘only the amount of water you need’ – but he still overfills it!)
4. Landlord engagement with occupiers. For example contractual parameters for energy use, with costs and benefits being shared. The equipment of buildings with extensive metering and monitoring systems will be a selling point of value.
Rather than an incidental, George sees energy use and cost as becoming an active, and perhaps disputatious, component of the landlord/tenant relationship. If this is correct, landlords need to develop strong ‘test as you go’ methods, not only in developing and refurbishing buildings, but in their continuing running.
One questioner raised the implicit conflict between building conservation and listing, and energy efficiency. It was George’s view that the latter is now the louder voice, and English Heritage will have bend to meet that reality. Another questioner, whilst accepting George’s argument in high cost/high demand London, wondered whether the value issue will prove so real in the provinces. George refuted this view, arguing that growing energy costs will prove painful wherever they are incurred.
In some cases, reducing energy consumption may have quite high initial costs, but George left us with the view that most buildings present opportunities for short payback with basic and simple stuff - a positive message to end a lucid and entertaining presentation.
Michael Mallinson
Wednesday, March 23, 2011
State of the Property Finance Market and Alternative Sources
When addressing our Lunch on 17th March 2011, Wilson Lee, Managing Partner of First Growth Real Estate Capital LLP, was confronting a topic of close interest to all his audience – how and when will the capital markets return to normal?
He started his talk with a resumé of how we got into this pickle in the first place. It might be summarised as a thorough exercise of what I paraphrase as 'due indigence': people failed to think through the inherent risks of domino effects in the structures that were being created, and didn’t build the contracts properly. When the music stopped, financial institutions across the Western World found themselves short of several chairs.
The political and fiscal responses, and uncertainties about what those responses might be, led, perhaps inevitably, to a capital market distorted in many respects. Banks are still in a state of flux. Whilst many US Banks have 'marked to market', that process is, in Wilson’s view, by no means complete in Europe; this implies more pain to come, and more reluctance to lend. In Europe, around £260bn of bonds fall due in 2011/12. Whilst some of these may be extended, there will be a very substantial pool to be re-financed in what will be a highly unfavourable climate. Wilson’s worry is that, as and when interest rates start to rise, lender tolerance will recede. This will lead to increasing defaults, cranking up the pain to the Banks. There are signs of this already as applications to the ECB for emergency loans have exploded.
Against this torrid background, investors crave liquidity and security; if both are not available, prices take a big hit. In property terms, we have moved from a position of the spread between prime and secondary property being too narrow during the bubble years to being too wide today; as an aside, Wilson thought that this might indicate some opportunities.
It was a testament to Wilson’s delivery skills and the value of what he was saying that, up to this point, there had been no suicides amongst members or guests. How will it all be resolved? Wilson was clear that there are more failures to come before the system is purged. There is, however, no shortage of capital in the world – witness, for example, Sovereign Wealth Funds. There is fear, and there is a mismatch between investors’ expectations and the returns that are actually likely to be available to them. Fear should recede if governments take steps to encourage wealth creation, both at the macro-economic level and in local initiatives. Wilson was also optimistic, I think(!), that Institutions will identify the opportunities open to them whilst the Banks occupy the Recovery Ward. In case that made us happy, however, Wilson suggested that we were not yet half way through the trough, if the previous upsets for capitalism were anything to go by.
Michael Mallinson, Scribe
He started his talk with a resumé of how we got into this pickle in the first place. It might be summarised as a thorough exercise of what I paraphrase as 'due indigence': people failed to think through the inherent risks of domino effects in the structures that were being created, and didn’t build the contracts properly. When the music stopped, financial institutions across the Western World found themselves short of several chairs.
The political and fiscal responses, and uncertainties about what those responses might be, led, perhaps inevitably, to a capital market distorted in many respects. Banks are still in a state of flux. Whilst many US Banks have 'marked to market', that process is, in Wilson’s view, by no means complete in Europe; this implies more pain to come, and more reluctance to lend. In Europe, around £260bn of bonds fall due in 2011/12. Whilst some of these may be extended, there will be a very substantial pool to be re-financed in what will be a highly unfavourable climate. Wilson’s worry is that, as and when interest rates start to rise, lender tolerance will recede. This will lead to increasing defaults, cranking up the pain to the Banks. There are signs of this already as applications to the ECB for emergency loans have exploded.
Against this torrid background, investors crave liquidity and security; if both are not available, prices take a big hit. In property terms, we have moved from a position of the spread between prime and secondary property being too narrow during the bubble years to being too wide today; as an aside, Wilson thought that this might indicate some opportunities.
It was a testament to Wilson’s delivery skills and the value of what he was saying that, up to this point, there had been no suicides amongst members or guests. How will it all be resolved? Wilson was clear that there are more failures to come before the system is purged. There is, however, no shortage of capital in the world – witness, for example, Sovereign Wealth Funds. There is fear, and there is a mismatch between investors’ expectations and the returns that are actually likely to be available to them. Fear should recede if governments take steps to encourage wealth creation, both at the macro-economic level and in local initiatives. Wilson was also optimistic, I think(!), that Institutions will identify the opportunities open to them whilst the Banks occupy the Recovery Ward. In case that made us happy, however, Wilson suggested that we were not yet half way through the trough, if the previous upsets for capitalism were anything to go by.
Michael Mallinson, Scribe
Wednesday, January 26, 2011
The Year of Living Dangerously
Our luncheon guest speaker for January 20, 2011 was Walter Boettcher, Colliers International. The year 2010 was better than most had forecast. However, he said there are a number of downside risks for 2011 –
- Inflation - Is it the wrong type? Main headline inflation is being caused by oil, food and commodities as a result of demand from emerging markets, and this is forecast to continue.
- Eurozone Collapse – sovereign defaults and the possibility of a country going bust.
- Currency Wars – ongoing tension with China, the US and the rest of the world.
- Food Risks – risk of reduced production and continued increase in demand from population growth.
- Natural Disasters
There was a big bounceback in values in 2010.
Secondary assets are vulnerable to a potential pricing readjustment, especially if the banks ‘open the floodgates’ of putting distressed properties on the market. For NAMA there was no real focus yet. However, Lloyds and RBS were moving forward as they now have the teams in place.
The HOT sectors were
The concerns over property and inflation were making people question if property was truly a hedge against inflation. Do equities actually provide a better bet?
Asset management in 2011 will be the main factor that will drive property performance.
| Total return forecasts | 2011 | 2012 |
| Colliers: | 7.5% pa | 10.6% pa |
| Derivatives implied return: | 4.5% pa | 2.5% pa |
Respectfully submitted,
Shailendra Shah
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