ARTICLE ORIGINALLY PUBLISHED 22ND SEPTEMBER 2017

I started my real estate career in the early 1980s, so over 30 years ago! I have been involved in many areas of UK real estate during that period, both cosseted in booms and fighting for survival in busts whilst finding my way through the world of real estate agency into investment banking and then finally (perhaps) private equity fund management. I have seen the poor made rich and the rich made poor and I have seen old habits die hard and new initiatives struggle to gain traction as those fearful of change cling to the comfort of the status quo.

So, when I was recently asked by a prospective Moorfield fund investor what significant changes I felt the near future might hold for UK real estate, I took the opportunity to glance back over my somewhat ageing shoulder and indulged myself. The excuse that the past might help understand the future is always a good one to oil the wheels of reminiscing. I intentionally use the word glance because I don’t want to take to the internet or brain-drain friends and colleagues to ensure I have a heavily researched article with everything covered, I simply wanted to know what I remembered most clearly as being structural shifts. You, the reader, will share some of these memories with me but you may also consider unmentioned other events as more impacting. However, this is intended as a brief personal journey and one that can readily be covered on a ‘then and now’ basis:

Then

My first employment was in a partnership with the partners shut away in their offices both revered and feared and very much male. Their voices were those that mattered. Their secretaries were sentries, perched on a near-by desk, on guard and waiting for the shout of instruction whilst trying to open post, type letters and run errands. These men of stature were chauffeured into the office relatively late and then departed early without conscience (or so it seemed) for social engagements – and in between enjoyed exclusive top floor dining rooms where they and their clients could eat and drink with the privacy afforded to those deserving of the in-house silver service. They issued their orders from on high and the worker bees got it done. Being awarded a partnership was the goal and one that carried prestige, wealth and plentiful privileges. As a generalisation: computers were for nerds, lunch was either for wimps or for long boozy afternoons, woman were seen as temporary in tenure, employees’ rights were not an agenda item (they considered you fortunate to be there) and an awareness of the working environment outside of their wood panelled office would not arise for many years. Regulation was an unfamiliar word, unless used to explain how it could be ignored whilst the ‘old boys/school tie/masonic/worshipful’ networks thrived.

Now

Hierarchy in organisations does still exist of course but it’s nothing like the same, either looking up or down the corporate ladder. Flat management structures, employees rights, management committees and protocols and an inviting working environment are very much on the agenda – and can be a minefield to be navigated through. A CSR (Corporate and Social Responsibility) policy is fast becoming a necessity with regulation, risk analysis and operational oversight now very much a part of everyday business life. Technology and social media are ever present, disruptive thinking is encouraged and a collaborative approach to all things corporate and personal is seen as positive and progressive. The equal opportunities that did not exist and the glass ceilings that did ‘back in the day’ are being recognised and tackled (even if too slowly) and any form of actual or perceived advantage as a result of club, past or parental connections are actively avoided!

Then

Real estate in the UK did not exist – at least the words as used today did not. It was simply property (although sometimes ‘commercial’ property just in case the Chartered Surveyor was mistaken for an unqualified estate agent) and it covered retail, office and industrial. Residential was the domain of the housebuilder and hotels were left for the specialist and far from mainstream. The blue chip market participants were principally from the UK, such as the landed estates (aristocratic realms), public and private property companies, large asset occupying/owning corporates, high net worths and the UK institutions (pension and life funds and insurance companies).

Now

Real estate has come to replace property as the descriptive words for the sector and we can credit or blame the 1990s attention of private equity for that. Real estate is also split into traditional and alternative, where traditional encompasses the markets of retail, office and industrial (including the new kid ‘logistics’) and alternative covers most other real estate sectors – that now unashamedly include student accommodation, hotels, leisure, medical, self-storage, build to rent, retirement living and so on. Residential development for sale remains principally with housebuilders but even their home turf is being challenged on a number of fronts. The sector participants remain largely as above but it’s worth noting one departure and two arrivals. Many of the large asset occupying/owning corporates sold their assets through OpCo/PropCo structures in the early/mid 2000s and so reduced their sector owning participation. The arrival of private equity into real estate did not simply change definitions and inclusions but also added huge scale and liquidity to ownership (through on- and off-shore vehicle structures). It is also fair to say that, although possible to find, it was rare for overseas participants to have much impact on UK real estate 30 years ago (ownership or occupation) whereas it is certainly appropriate to conclude that this has materially changed since then with overseas buyers and occupiers becoming significant influencers.

Then

The hero of the occupational markets was the 25 year, full repairing and insuring lease with five yearly upward only rent reviews. If the tenant covenant was strong then the owner effectively had bond income with regular uplifts and any further capital expenditure was a long time away. The landlord was king! Create a weatherproof box and let the tenant sort it out.

Now

Very few tenants will sign leases of a term certain longer than five years i.e. without a tenant break option at around this period. Long initial rent free periods are demanded and some tenants go even further and demand that their rents be capped and/or related to turnover. Most tenants also want material capital contributions to incentivise them to sign, dressed up in one form or another. Only tenants looking to depreciate material fit outs costs will sign longer leases, if deemed by them as appropriate. The landlord is clearly no longer king and, if alert to change, will today try hard to create a consumer facing product that attracts the occupier and at least establishes some form of competitive advantage. There is no doubt in my opinion that real estate is becoming considerably more operational in tenant management and also more onerous in ownership cost. Is this additional cost implicit or explicit in a yield – as it certainly has to be present in a cashflow analysis?

So that’s at least a start on my journey down memory lane. I do have some additional memories that also stand out from over the years and I will try to do them some justice through a mention here, as although they warrant inclusion I would not describe them as having the structural impact on the fundamentals of the real estate sector or on those making their living from it:

• the rise and fall of asset debt levels
• the rise and fall of the developer-trader in the late 1980s
• the diminishing % of the London Stock Exchange represented by the quoted real estate sector
• the creation of the Real Estate Investment Trust (some will view this as more meaningful than I do!)
• the physical and locational impact of the tech bubble – and now that of TMT
• the internet (and social media)
• the long term implications for real estate of the Global Financial Crisis
• QE and its meaning for interest rates and hence real estate yields
• the attempts at ownership division of a single property – whether Property Income Certificates (PINCS), Single Property Ownership Trusts (SPOTS), Single Asset Property Companies (SPACOs) or, today, IPSX.

One day in the near future I suspect I will also add the impact of Brexit to the list. Whether it deserves a greater or lesser comment, as above, only time will tell.