Originally published August 2017.
Thanks to a successful 40 year career as a property developer and investor, David Lewis has created significant assets, but is better known today for his extraordinary art collection than for his property dealmaking. He sold most of his remaining property assets in 2006 and 2007, thinking that the market was getting toppy, and has not been tempted back in since. In the second of our in-depth interview series he tells Jonathan Davis what he has learnt about the property business over the course of his long career.
David Lewis remembers well the first task he was ever asked to do as a young, still wet behind the ears property professional. Having earned his RICS exams exemption with a mixed degree from the College of Estate Management and the LSE, he was the first employee in a business set up by Barry East, who went on create and build Town & City, one of the most prominent of the postwar property companies. The young economics/estate management graduate’s task was to go down to the recently acquired Chiswick Empire site in west London – which East wanted to develop into ‘decentralised offices’, jargon of the day for ‘out of town’ developments – and clear a group of gypsies from the car park.
This task was not easy, because “then, as now, the police don’t want to get involved unless it has gone beyond a mere civil disturbance”. Although he says “I won’t go into the details of how we did it”, the job of evicting the gypsies was somehow managed and Lewis was on his way. He spent the next three years watching and learning everything he could as his mentor embarked on a frenetic round of dealmaking activity, driven by a fierce but ultimately flawed ambition to make Town & City as big as the giants of the development business, the likes of Harold Samuel, Jack Cotton, Charles Clore and the rest.
So that is how he became a dealmaker, I ask? “I was lucky because although I was only there for three years, I learnt more in those three years than I might have learnt in ten years somewhere else, because I was the first employee and it was a tiny office, and he was doing deals every day of the week – it was literally a deal a minute. I was thrown in at the deep end but when you are with someone like that, you learn fast.”
I was thrown in at the deep end.
Barry East’s core strategy was to find and then finance his deals through a series of sale and leasebacks, principally with the Prudential, then as now (along with Legal & General, the Coal Board pension fund and others) a leading institutional investor in property. The insurer would typically take a yield of 6% and the two partners would split any surplus return – 60% in favour of East’s venture and the balance to the Prudential. The details of every deal were dutifully logged and summarised for the board in a five-part report – a habit (and a business model) that Lewis was to maintain when he set up his own property venture five years later.
The other part of East’s strategy, once he had created Town & City, was to use his stock market listing to issue shares and build the balance sheet by acquiring freeholds. When he started out, there were still very few quoted property companies but once building controls were gradually lifted after the war, investors began to realise how much money the property men were making and it became a fashionable sector that they felt they had to invest in.
Town & City, like many others, began its life as a quoted company by acquiring a shell company, one of many rubber plantation companies that had fallen dormant. “They were turned into property companies overnight. Of course you didn’t worry about circulars and things like that,” says Lewis. “That was much too complicated. Barry’s policy, which I learnt fast, was that he would finance his developments principally by sale and leaseback and he would then also issue shares to buy other property companies.”
“Barry used to issue shares and acquiring freeholds was how the balance sheet was built up. The shares kept on rising because he was doing so many developments. In my time there it was all about the London railway stations. There were lots of leases from London Transport, such as Holborn Viaduct and Waterloo – 99 years and no rent review. It was just scheme after scheme. There was no capital gains tax in those days. Investors loved it. Property was the in thing. It was like IT companies now.”
On fashionable industries
“There’s always an industry which is the one to be in. It’s like the creation of the retail empires, which was done mainly between the wars. The chains like Burtons and Tesco – I knew Jack Cohen. I always remember him telling me: ‘I used to want to take shops, and the people would say, “We only want to lease to multiples”. I said, “If you don’t give me a shop, how can I become a multiple?”’ And he used to laugh.”
The 1950s and early 1960s were, in hindsight, a great boom time for property – relatively easy money, I suggest. “Yes, for property developers it was an easy money era, although you still have to understand that nothing is quite as simple as everybody makes out,” Lewis recalls. “If you had business flair, property development was the business to be in after the Second World War. Demand hugely exceeded supply, because after the war, not only office occupiers but also retailers were desperately short of accommodation. Town centre after town centre had been devastated. It was a time, to put it rather crudely, when as long as you had a telephone and a motor car and you could talk fast to your bank manager, it wasn’t that difficult to make money out of property development. The demand was such that you could more or less pre-let everything. The big agents had schedules of people who needed property and you pre-let.”
How interventionist policies made a difference
Things ceased to be quite such plain sailing after the election of the Labour government in 1964. The Macmillan government had introduced capital gains tax in 1962, and Wilson set up a Land Commission which was originally intended to revisit the 1947 Town and Country Planning Act’s proposals for a land tax and also introduced a notorious system of office development permits – proving in the process, Lewis observes, how little governments really understand about property (a theme that crops up more than once in our conversation).
What became the Land Commission Act of 1967 took three years to emerge and by then it had been “heavily emasculated. It was not the draconian removal of all development value that the Wilson government had planned. But obviously, during the period, it was a huge deterrent. What it did, of course, was restrict development to some extent. Then George Brown comes along with his Office Development Permits. Young people today will probably find it difficult to realise but for any office above 3000 square feet, you needed a permit from Whitehall.”
These two interventionist measures, like so many well-intentioned government initiatives, inevitably had unintended consequences. With supply now so limited, the most obvious was that “every building went up 20% in value overnight, because you couldn’t build anything. You also needed an IDC, an Industrial Development Certificate, to build factories. That is why all these factories were built up in the north and in Scotland, places that had poor communications and transport, and the wrong workforce. That was the only place you could get a certificate to build a factory. To get an Office Development Permit, normally it meant you needed to have a tenant. They wouldn’t give one for speculative development. If you had an occupier lined up, you had a chance to get it.”
By this stage, after three years with Barry East and two with another entrepreneurial company called Maybook Properties, Lewis had set up on his own. As well as his hands-on experience, he knew or was on good terms with other influential property figures of the day. These included Norman Bowie, who had moved from being Deputy Chief Surveyor at the Prudential to become a partner in Jones Lang Wootton, one of the most effective agents of that era, and he met other developers such as Maurice Wohl and Harry Hyams. (Lewis recalls in passing that the reason Hyams took so long to fill his office development at Centre Point was not because he was deliberately trying to grow its value by sitting on it, as many complained at the time, but because he had a rigid policy of only letting buildings to a single tenant. Centre Point was too narrow to appeal to large corporate tenants, and it was not until 1979 that Hyams finally relented and let a chunk of the building to the CBI.)
But the Wilson government did not deter you from going it alone, I say? “No, I set up my own office in 1964, just as Wilson came in [to government]. Everybody I knew said ‘don’t do it. The end of the world has come’. But I took the view that, as I didn’t have any money, nothing minus nothing is nothing, so it didn’t matter. I did have some minor money in the form of a few Town & City shares. But I was young, I was 25 years old, I had a wife and two children, but I had learnt my trade. I knew who to speak to at the Prudential and the Coal Board. And I knew Norman Bowie, who was retained as an adviser to all sorts of institutional funds.”
On property entrepreneurs
“There are loads of guys who have made a great deal of money in property in recent years. Alan Sugar is a very clever man; last time I saw, he was estimated at about £800 million. I don’t think he has any debt. If there is, it is minimal. You would not call him an original professional property man, but he’s a brilliant businessman. The Livingstone Brothers, at London and Regional, which is not public, are also brilliant. The two Israelis, the Zakays, have built up a huge company [the Topland Group].”
Stepping out alone
The first deal that Lewis did on his own was for a parade of shops in Sandhurst, near the military training establishment. Having worked on several shop parade transactions, he knew how to structure a sensible deal. It was funded by a sale and leaseback with the Prudential. He couldn’t buy it himself because selling it on to an institution would create a taxable event. The purchase and the funding had to be simultaneous. He did however have to put down a 10% deposit of £1400, “which I didn’t have so I had to go to the bank the next day and say I hope you will cover this”.
The trick then, he says, just as East had showed him, was to move on and do more leaseholds which, assuming they produced a surplus above the institution’s required yield, would in time produce some value in the form of an uncharged leasehold interest. “You could then go along to the bank and you had some security. With that you could borrow some money and start keeping one or two freeholds. It was just a series of steps.”
The first freehold Lewis ever kept was a parade of shops in East Moseley near Hampton Court. He didn’t have enough money to build anything on the site so granted a building lease to a builder. The builder found Tesco as a tenant and some time later the rest of the shops in the parade came up and he bought them all, funded by a mortgage from Sun Life of Canada, arranged through Norman Bowie. One of the sites in the parade had originally been leased to Woolworths as anchor tenant in 1939 on a 60 year lease at a fixed rent of £480 a year (those were the days). It is one of the few commercial properties he still owns – occupancy having since passed from Woolworths to Carpetright and now (sign of the times) Poundland. The rent is now more than 80 times what Woolworths paid.
Among the later deals that Lewis did was to take on a site in Munster Road in Fulham, which he pre-let to a subsidiary of Courtaulds for a purpose-built fabric factory. After being turned down by Barclays because of Bank of England guidelines, it was funded by Manufacturers Life, again with the help of Bowie. The profit from that deal in turn enabled him to buy the freehold of 85 Gracechurch Street in the City of London from Land Securities. He funded that deal with Eurodollars, not sterling – he thinks the first investor to take that route at the time.
Lewis then began to specialise in upgrading buildings. “Your readers would find it very boring to go through a list of every single building we ever did, because obviously, I did many, many deals. But we did gradually develop an expertise in upgrading existing buildings, which was very rewarding and very interesting. 85 Gracechurch Street was part of it. You take storage areas and you would turn them back into offices, and you would air-condition them and so on. You’d turn caretakers’ flats into offices. £10 a square foot was the going rate.”
Another profitable venture was with the Crown Agents, which Lewis cites as a further example of a well-meant but disastrous public sector attempt to make commercial investments. The heavy losses made by the Agents were eventually exposed in a report that led to the semi-autonomous body being privatised in 1979. “We didn’t give them any problems. We made them money, but they were very naïve and they hadn’t a clue what they were doing at that time,” Lewis says. “They had huge amounts of money and didn’t know what to do with it. So they decided they would become bankers and property developers, under the control of civil servants. They’d lend you 100% of the money. They thought they were being very clever, but in fact they were exploited.”
Moving into quoted companies
The Heath government of 1970-74 was again a boom period for the property business, during which time Lewis and a number of partners created and built up his first quoted property company. It was formed from a shell company called Eastern and General, whose founders had an interest in a royalty stream from a pre-war oil discovery in Bahrain (but who bizarrely failed, in one of life’s great might-have-beens, to find any oil in nearby Kuwait). The shell was eventually renamed Cavendish Land and joined in another furious spate of dealmaking as the property boom went into its final pre-crash frenzy.
The deals they did including acquiring most of the office buildings in Ealing from ‘Black Jack’ Dellal (“a brilliant negotiator and a man of honour”, much maligned, says Lewis), and two office blocks in the City that they bought at 24 hours’ notice from Jimmy Goldsmith (so that he could buy Allied Suppliers, the deal that helped to make his fortune). And then in 1973 Lewis – as a keen student of the property cycle – decided that the market was getting too hot and prudently sold the company for about £40 million to Legal & General, who already had the benefit of some stock options granted at a much lower price.
So Lewis managed to dodge the 1974-75 crisis that finished off so many other companies, I ask? Alas, he says, no. “I always follow the cycles. But although I did that perfectly for the public company, it was not the same on the private side. Of course, the Middle Eastern war and then the crash of ’74 and ’75, pulled up everyone everywhere. We had our private interests and we had significant borrowings with Legal & General and Norwich Union – long-term mortgages, fixed interest rates and only a small amount of bank borrowing.”
“But in those days, even a small amount of bank borrowing could kill you. I rather foolishly had bought St Catherine’s House, Kingsway, which was the headquarters of the census. It was a stupid deal and I didn’t have enough people with grey hair around me to say ‘maybe you shouldn’t do that’. And I bought it for quite a lot of money. It was still a wonderful building. It was let to the government.”
In those days, even a small amount of bank borrowing could kill you.
“But it lost value sharply and in order to fund that, basically I had to unravel the entire thing in 1974-75, because even though the bulk of our money was fixed, the bank element of our money was costing us 15%. Nobody could withstand that.” It was a time when even Land Securities, under Harold Samuel, was refused finance by Lloyds, his bank. Eventually, he too had to raise money on the Eurodollar market just in order to survive.
What lessons did he take from the 1970s experience? “I was always doing lots of things at the same time,” Lewis says now. “I was quite good at juggling but the mid to late 70s were a very, very difficult time indeed. I owed money to the Inland Revenue. I had a very large capital gains tax bill without the resources to pay as a result of the takeover of Cavendish Land. The money got absorbed because everybody took the cash. We managed in the end, but it was a very difficult time. It made me a lot more conservative from then on.”
On Mrs Thatcher
“Back in ’73 and ’74 when the crash was upon us, the prices and incomes freeze that the Conservatives brought in froze rents as well. That’s why the banks were going bust. NatWest were having their accounts qualified. And the pension funds were going berserk because they all had union nominees on their boards. They were finding they couldn’t increase the rents. I was asked by the British Property Federation to go along and meet the Shadow Environment Minister of the Conservatives, to help table a question. Mrs Thatcher was the Shadow Environment Minister. She made contact with me, and over lunch I started explaining to her the implications of a freeze on rents. When I got home that night, my wife asked me what she was like. I said, ‘Oh, she’s the cleverest woman I’ve ever met.’ In ten minutes, she knew more about it than I did. She was so bloody clever. No small talk, no humour. But she had a needle-sharp brain.”
Lessons from metals
It took a few years therefore before Lewis was back in the game, making deals again. His stake in the first venture was bought out by his partner in 1981. Then he started to work on a variety of deals with a close network of Iraqi immigrants. The latter’s Middle Eastern contacts eventually led to them jointly taking control of another London-listed shell company, a gold miner called Hampton Trust, which prospered and was eventually sold to New Zealanders in 1987. Privately meanwhile Lewis had bought a big block near Euston station.
Although the gold leases that Hampton Trust had had been untouched for years, when the gold price soared in the 1980s the North American mining company Newmont bought into them in return for a royalty stream and that business was eventually floated as a separate company, Mount Martin Mining. A sister company of Hampton Trust, which owned nickel rights nearby, had earlier been caught up in the crazy Poseidon stock market bubble. What was the deal with Newmont, I ask? It was “a lot like granting a ground rent for a building. You give them an interest in return for a share. And they pay you money. They opened up the gold mines. The techniques were far more sophisticated than 60 years before, so because the company still owned all this land, they were able to start extracting gold from the mines which had been shut down.”
Did Lewis learn anything from his foray into the metals business, I ask. He did. “When we did the deal with Newmont, we had a few drinks at their small office in London, Holborn somewhere. I was the CEO and was just shaking hands with their CEO, and I said to him, amongst other things, quite innocently, ‘What do you think the gold price is going to do?’ He looked at me as though I was a complete idiot. He was older than me so he was entitled to. And he said, ‘I have no idea. If it goes up, we do very well. If it goes down, we don’t do so well. But…’ he said – and this is why I’m quoting him – ‘what we will do, if the price goes down, we will cut our costs. That’s all I will tell you. If the price goes down, we will cut costs so we can still make a profit. And that’s all I’m interested in. If it goes up, it’s easy. If it goes down, we cut costs.’
“Thirty-something years later, I remember this very well. It’s an interesting story. Because it’s true. Making money is not what you can get, it’s what you pay. If you pay the right price, you’re OK because it means that if things go bad, you can hold.” Exactly, I say, you are never forced to sell. “Yes. These are the cycles. If you pay a silly price, then it’s entirely just who’s the next man who will hopefully buy it off you quickly. If you buy at a sensible price, you can hold and you can withstand the ups and downs of the cycles. So, the Newmont CEO who talked to me as if I was an idiot – in a sense, I suppose I was, because I had no knowledge whatsoever of commodity markets – was right. The price goes down, we cut our costs.” The same, it is clear, applies to property.
After Hampton Trust was sold, there was another tough period during the 1990-91 recession, by which time Lewis was already involved with a third public company, called Molyneux Estates. Its biggest deal was a shopping complex in the centre of Dundee, to which the company later added adjoining properties owned by the two notoriously tight-fisted Thomson brothers, who ran Dundee’s most famous corporate entity, DC Thomson. In 1993 there was a rights issue and in 1995 the company was merged with a company called TBI [for Thomas Bailey Investments]. It has been started by two Welsh bothers, Stan and Peter Thomas, who had sold their pie-making business to Grand Metropolitan for £75m in the late 1980s and were looking for new opportunities to make money.
TBI went on to acquire Cardiff airport and later also Belfast airport when they were privatised – the latter deal once again showing up the naïveté of politicians and civil servants overseeing the process. “It was an example, I don’t mind saying it, of how stupid government officials can be. When they privatised it, the government had forgotten that there’s only one control tower at Belfast and the military airport was next door. They had forgotten, even though it was the time of the Troubles and every helicopter, every troop carrier, everything flew in to Belfast. They had to pay a fee because it was our control tower. I won’t tell you how much they paid, but Belfast was a fantastic investment.”
On leaving ventures
Lewis stayed on the board of TBI as it started to sell its assets until 2001 when, he says, he decided that he had had enough and placed most of his shares. The company was later sold to a Spanish group. This was the third time, I note, that Lewis had dropped out of the public markets after a relatively few number of years. What was the thinking behind that? “I was never building an empire. I enjoyed having private portfolios which were interesting, and I took the view after the crash of the mid 70s that ‘I’ll forgive myself provided I don’t do it again’. I became very conservative. That’s actually good education. Just don’t do it twice! Don’t over-borrow. I didn’t really over-borrow, but the crash of the mid 70s was almost unprecedented, as you will remember. The interest rates were such that even modest borrowings were almost impossible to withstand. I remember going to see Max Rayne at the time and he said, ‘It’s a nightmare. We’re just hanging on like grim death, the skin of our teeth’. Everybody was, because it was a very difficult time.”
I took the view that with public companies, it’s other people’s money.
Lewis also thinks that running public companies imposes more responsibility than private ventures. “It is important to do things in a right and proper way. I took the view that with public companies, it’s other people’s money, even if we had a big chunk of it. So we were always very modest. We ran public companies but we never took salaries, for example. We didn’t have motorcars. We didn’t need it.” His quoted businesses were run from 74-76 Gloucester Place, a property Lewis has owned since the late 1960s. The management fee was a small portion of the rent roll, and little more. Later on, after some well-documented trouble at another quoted company [Great Portland Estates] which exposed how much the management was taking out, Molyneux Estates was badgered by the institutions into paying salaries and a rent – a “crazy” sop to political correctness, in his view, as it doubled the cost to shareholders.
He also took the view that a 20% shareholding was sufficient to retain control. “I was never of the view that I’ve got to have 51%. I would say to friends of mine, there’s no point in having a public company if you don’t use the shares. We would always issue shares, provided that we thought we were buying good value. As long as we had 20%, that’s effective control. But it’s still other people’s money and we were very, very conservative, with a small c, in how we ran them.”
The real skill with public companies, in his view, lies in timing the cycle. “With public companies, I am generally very much of the view that it’s all cyclical. There are cycles, which are inexorable. So, we sold one in ’73, the other in ’87, and dropped out of the the third property company in 2001.” After that he hung on to a number of private interests but also sold most of them in 2006-07. “I decided by the time we got to ’06 that everything was getting so hot that I just didn’t believe any of it. Again, it was just running the cycles. People say that property is the only long-term investment. Well, land is, but most other property is not necessarily.”
Change and repetition: the benefit of hindsight
His point is that things change – take retail for instance. “They always said that retail is the best investment because the bulk of the value is in the land and only a tiny bit in the bricks and mortar, and with offices it is the other way around. But of course, now shops are unattractive, for reasons we know. Amazon’s taken over the world, and it is all online business. So, you don’t want retail property. All you want is warehouses to distribute the goods for the online companies.”
Now shops are unattractive. Amazon’s taken over the world.
He has another example too. “When I was young, we’re talking about the late 60s, I used to buy industrial property. I did a lot of things in Hayes, near the [Heathrow] airport, in particular. In those days they had no car parking, because everybody went in on bikes and then just rode back. So we knocked down half the building and we’d create loading areas, car parks, and even though half the building had gone, the value was still vastly increased.”
“The amusing thing is now, we’re back to bikes. You go for permission for car parks, they won’t give it to you! They want cycle racks. The wheel has turned full circle. When I was young, consent for anything was contingent upon huge amounts of car parking. These days, they won’t allow you to have a car park. You still need room for the big trucks to come in and come out, but the workers are coming by bike, as it used to be.”
The historical data is also interesting, he says. “I told you how Cavendish Land was taken over by Legal & General in 1973. It so happened that two or three years ago, I was emptying some drawers in my desk, and I found by chance the summary of the valuations carried out for Legal & General. Weatherall, Green and Smith were a marvellous institutional firm, who were the retained surveyors for Legal & General and did all the valuations for the purpose of the bid. And there was a summary letter, about four pages of brief descriptions, the address, the square footage, and the value.”
“It just dropped out of this drawer. I had a look at it, compared the values then to the values three or four years ago. And most of the office buildings in real terms were worth, if you were lucky, half what they were in 1973. The only thing that had held its value in real terms was a small industrial portfolio we had in the London area. They’d held their value. The office buildings had not. So even though everybody thinks that office buildings are the greatest investment, you’ve got to do your timing very carefully.”
“The other aspect to remember is that depreciation is not a tax allowed item in this country, and the more sophisticated the building, the greater the depreciation, the greater the need to amortise, and the sooner the buildings become old-fashioned. Obviously, when you’ve got real estate investment trusts, they are basically tax-free. But with traditional holdings, for most normal people and normal companies, be very aware that because there’s no tax relief and the fact that sophisticated buildings depreciate so fast, you should build that into the system. It’s something that people don’t think about.”
Traditional agricultural land is the best investment.
“That’s why traditional agricultural land, where there’s no depreciation because there’s nothing on it, maybe the odd shed, is the best investment. Even with that, you have to be careful because it’s been distorted by European Union subsidies. So, there’s no free lunch, if you like. People say, is property going up, is property going down? I say, ‘Hang on, what property? Where? Over what period?’ There’s no simple answer to that sort of thing.”
On his remaining property interests
“I haven’t got much. In fact, we just kept a couple of buildings. One I’ve just, after ten years, exchanged a contract to sell. Occasionally, through Peter Shasha, who’s one of my sons-in-law, what we call the family interests will just take a percentage of something. But that’s not me getting my hands dirty. The truth is, I don’t. For years now, I’ve been much more interested in the art collections. We made money out of property but the art collections have gone up in parallel over the years, and that’s keeping me much more interested. The last commercial building I bought was in 1995.”
“When you’re talking about the property industry, everything gets more and more sophisticated. You’ve got to be very, very careful. Look at the shopping centres. They date so quickly. And also, I always say, watch America. What America does today, we tend to do five years later. American shopping centres are under severe pressure because of the impact of the internet on retail. Department stores are having a very bad time. They’re pulling out and they’re the anchor in all these things. It’s not a direct comparison because per capita, there are many more shops in America than there are here – many more. But the trend is quite clear.”
“Looking back all these years, what people often don’t realise, though it actually applies to almost any business, is the distinction between creating added value and holding on to it. If you do a development, when I was young, you wanted 50% capital appreciation. If you spent 100, you’d have to get at least 150. A two-thirds mortgage would finance it. These days, I believe, they tend to run on 15-20% capital appreciation. Spend 100, and if it’s worth 120, you’ve done well. In my day, that would’ve been a joke. A two-thirds mortgage was what you would get. You’ve got to refinance it. Well, you needed a 50% appreciation to do that.”
“The point is, if you spend 100, you need to make it worth 150 – and by the way, you can do that in bad times, as well as good times. People always need a building to use. You’ve got to watch the trend and obviously, I’m generalising, but there are always opportunities. Buildings wear out, new industries emerge. When I was young, half the industries now that we talk about – the IT industry for example – didn’t even exist.”
“But here’s the distinction. You make 100 into 150, but when it’s 150, then what do you do? Do you say we’re holding it forever, because it’s a wonderful property and property’s the greatest investment? I’d say careful, careful. That doesn’t necessarily work. Sometimes it might, sometimes it might not. Depends where it is, depends how sophisticated is the building, the office building, the shopping centre. Communications change. New railway stations, new airports can make what was a great location into not such a great location. There’s 101 things to allow for.”
“So the great distinction is between the entrepreneurial profit and the investment profit. Because the one may well have nothing whatsoever to do with the other. If you’re at the beginning of a cycle, then you hold. You make your 100 into 150 and you hold it, because if you get it right, at the end of the usual seven year cycle, the 150 will be worth 200 or 250. If you happen to be late in the cycle, you’ll be pleased to get your 150 back, if not less.” The entrepreneurial profit comes from building or upgrading a building, or buying land and negotiating planning permissions and so forth. “If you get a site which you buy for £10,000 an acre, and you make it worth half a million an acre, because of planning permissions, that’s very nice. But if you are able to find a nice site, do you then just sit on it? Will that half million be worth a million an acre, just by doing nothing? There are times when the answer’s yes, but there are times when the answer’s no, it won’t, because of government policy and other influences.”
On property cycles and buy-to-let
So where are we now in the cycle, I ask? “There are question marks right now,” Lewis says, “on the housing cycle, because we know that in central London for sure, values will come down. We know at the bottom end values are only strong because of government subsidy. What will the property values at the bottom end be worth without Help to Buy, etc? I think we’re in both a short cycle and a long cycle. I think we’re in the beginning of a long cycle now. I think there was a 30 year speculative orgy from the mid 70s to the mid noughties – let’s say ’77 to ’07 – where people ended up borrowing too much, leveraging too much, living at a rate far beyond what they were earning. I think we’re ten years into a thirty year downturn, or a reversion to mean, as they call it.”
I think we’re both in a short cycle and a long cycle.
What does he worry about most? “What I worry about is the political situation after ten years of austerity – which is not austerity at all, of course, it is just that the increase in public spending is a bit less than it might otherwise have been. Austerity is just a word they used to kid people. But clearly, with the scene politically, as we’re seeing in America as well as here, I think you now enter into a phase of throwing money away again. And it’ll end up, the final phase, as an inflationary nightmare. I know one or two fund managers who predict that. I’m sure they’re right. I think it’s probably ten years away, but it’s coming. Because how else are you going to get rid of government debt? There is no other way.”
“Within that long cycle, you can always do things. I’ve always said to people, you can make very good profits in bad times, and you can lose lots of money in good times. Indeed, if you’re talking specifically about property, I would say bad times are much better because all the amateurs disappear. In good times, property is quite easy with which to make money. You don’t need hundreds of employees. You don’t need factories. As I said earlier, you can sit there on a telephone in one room with a friendly bank manager. I’m slightly exaggerating but the point is clear.”
“But now every Tom, Dick and Harry is in on the act. Everybody’s buying houses to let. The whole country. It’s the easiest thing to do. Well, that’s fine, depending on where you are in the cycle. I’d only say that in bad times, I come back to my anecdote about the gold price. It’s all a matter of buying at the right price. In bad times, you can buy things cheaply. And people are not going to sit on the street. They need buildings to live in, to work in, to play in, whatever. It’s a matter of paying the right price, and it’s easier to pay the right price in bad times than it is in good times, if I may say.”
“It takes strong nerves, of course. Warren Buffett says it much better than I can: when the tide goes out, you know who’s standing there with no swimsuit on. You need to be conservatively financed, but in bad times you can make more money. In good times, you’re part of the sardine tin. God forbid somebody should open it. You’ve got to get the next guy to take it – pass the parcel! One of the bad things about all these property booms of course is that it’s affected housing. People should not look upon housing as a way to make money. It’s supposed to be there to live. It’s the only legitimate thing in this country where there’s no capital gains tax, so therefore, disproportionate amounts of money are put into housing. I think in a way, that’s a bit unfortunate. Even Jeremy Corbyn, I suspect but I don’t know, would probably not want to tax profits on houses because there would be a revolution, I think.”
So how do you break that cycle, I ask finally. “Good question. I don’t want to get onto politics because it’s inappropriate but usually, the politicians don’t know what they’re doing. It’s like George Brown with his office development ban. Everybody couldn’t believe their luck when he did that. One of the joint companies I was working with had three unlet office buildings. One in particular was in Potters Bar. It was a building far too sophisticated for Potters Bar and it had been standing empty for a year. Overnight, they let it for 20% more than the highest rent they ever dreamed of because George Brown imposed his office development ban. Governments are subject to the laws of unintended consequences.”
On the property industry today
“The public companies are not basically run anymore by great characters, the great founding entrepreneurs, because it evolves. But there’s still plenty of these guys running private companies, making lots of money. As industries mature, I think it’s the same with everyone. It’ll happen with IT as well. In due course, another 20 years, you’ll find the same thing. And then the next big thing, whatever it will be. I don’t know. Industries evolve and the property industry is no different. But there’s always entrepreneurs lurking around.”
