Industry news

Will Private Equity Firms Bet Big on the Post-Brexit Real Estate Market

It was announced earlier this week that Apollo Global Management (“Apollo”) quadrupled its European real estate lending to $3.7bn in 2019 up from circa $1bn the previous year with plans further to expand its lending in 2020. Apollo is not alone in their increased activity in the real estate sector (and more specifically the real estate debt business) with LaSalle Investment Management expecting to invest a further £1bn in UK property this year, on top of their current £12.3bn real estate assets.


This move is part of the wider trend of private equity (“PE”) investment in UK real estate. Research from Knight Frank in their London Report 2020 seems to confirm this, where they state that capital targeting London commercial real estate is likely to increase by 21% to £48.4bn in 2020. But, what has driven this increased investment?


Since the General Election in December established greater political clarity over Brexit there has been an “unlocking of transactions”, according to the Head of European Commercial Real Estate Debt at Apollo, Ben Eppley in City A.M. Whereby investors and developers alike are now more willing to put capital into future real estate projects. The renewed clarity has been reflected in positive results for the UK construction industry, with The Times reporting that the purchasing managers’ index rose to 48.4 in January, which was above analysts’ forecasts.


Wider macroeconomic trends also continue to play a role in the level of PE investment, with cheap debt coupled with low fixed income returns incentivising investment in real estate. Notwithstanding the Bank of England’s recent decision to keep interest rates at 0.75%. This in conjunction with similarly low rates in the US and EU and the large quantitative easing programmes carried out by the Federal Reserve and the European Central Bank has meant that there is a glut of cheap debt on the markets.


The current monetary environment has had a tranquilising effect on the fixed income market, where real returns are, at best, low and at worst negative.  Together, these factors mean that PE firms have already and will continue to look for higher returns, through the real estate market.


The CBRE has predicted that total returns, in the real estate sector, will average 3.1% p.a. from 2020-2024, which is a considerably more attractive return on investment than many alternatives. PE firms, global and UK, will want take advantage of these returns, with Cushman and Wakefield anticipating that non-central business district offices, retail warehouses and shopping centres are likely to see the largest influx of PE capital. 2020 could prove to be an exciting year for real estate and this will only be enhanced by the increasing interest that PE firms are paying to the sector.



Is the UK turning into a nation a shed-keepers?

For a supposed ‘nation of shop-keepers’, the UK real estate market seems alarmingly pre-occupied with sheds of late.

Despite the recent headwinds in the retail market, news this week that @Prologis has acquired a retail park in north London for conversion to an urban logistics facility certainly raised some eyebrows. But the world’s leading supplier of logistics space has a well-earned reputation as one of the market’s most sophisticated investors and shrewdest innovators and, where it leads, others are likely to follow.

“This deal is the starkest sign yet of the contrasting fortunes of the two sectors”, according to analysis from React News

Given the march of e-commerce and Brits’ seemingly insatiable demand for home delivery, a surge in demand for last-mile logistics space is hardly surprising. The same growth in e-commerce, allied with a decline in car ownership in urban locations has also has a similarly unsurprising impact on the fortunes of the out-of-town retail sector. Prologis has been quick to work this trend in its favour by striking a deal precisely at the axis at which retail values are at the trough of a downward trajectory and logistics are heading way back up the curve. On this basis, the re-purposing of ‘analogue’ retail assets into more ‘digital’ logistics assets makes perfect sense and is certainly a trend to watch out for.

However, discrepancies in values will always make these deals challenging and it is unlikely to become a blanket solution across and it is unlikely that the majority of the UK’s retail parks will be converted into logistics parks.

It is more likely that we are moving to a more sophisticated investment model that is beginning to break free from the traditional silos and apply creative thinking and relevant solutions where individual assets are concerned. @IngkaCentres recent acquisition of the King’s Mall in Hammersmith is another example of innovative thinking, which will deliver a major transformation to a mixed-use destination anchored by London’s first @Ikea city store.

With the pace of change in consumer demand at its most rapid ever, the real estate community is often accused of failing to keep pace. These two examples alone show that there are plenty of players, who are adaptable enough  to respond to these changes and to be a catalyst for further positive change. As we head into 2020, the market has arguably never been a more interesting place in which to work.



Here’s a tip if you and a group of friends can’t decide whose turn it is to buy a round: compare your personal Uber ratings, and whoever has the lowest has to head to the bar. Not only does it neatly solve an age-old problem, but it also encourages more courteous behaviour towards – and better ratings from – your next Uber driver. The nicer you are, the less likely you are to foot the bill. Win-win.


The ubiquitous taxi app hit the headlines this week when TfL decided not to award it a licence; an appeal is almost certain, and the likeliest outcome seems to be further concessions from Uber and its continued operation in the capital. But, strange as it may seem to those of us based in major cities, Uber is not the dominant transport issue of the day. And neither is it trains.


Those of us who can bear to follow the election campaign might have been struck by the number of mentions of bus services by the party leaders. Dig a little deeper and the reasons become obvious: buses are far and away the leading method of public transport in the country, outnumbering train journeys 10:1. But services are being cut – not just rural routes, but increasingly major links – as the removal of subsidies makes them unviable.


Faced with a host of their own problems, retailer could be excused for shrugging their shoulders, but that would be foolish. For a widespread and well-served bus network is vital if town centres are going to be viable retail destinations in the years to come. Making it easy for people to get into a town – and home again – is a prerequisite for a successful trading environment, and buses are the best way of doing this.


New bus routes don’t need expensive new infrastructure (as train lines do), and don’t present the problems of congestion and pollution that cars do. We are used to thinking of buses as a technology of the past – they are 200 years old, after all – but for the majority of the UK they are very much of the present, and in any sensible world they should be the transport of the future too. Retailers should be joining local campaigners who are pushing back against the route cuts.


There’s a related issue here, and that’s pedestrianisation. If people can get to towns and cities by public transport, then they don’t need ugly car parks or polluted roads when they get there either. Our town centres could finally be free of the tyranny of the car, opened up for pedestrians and cyclists to use at their leisure. If bricks-and-mortar retail is to have a future, it needs to shape the whole environment – not just the stores – and create destinations where people want to visit and stay.


In August, The Economist included a piece about the pedestrianisation of cities across Europe, and the benefits these initiatives are bringing. What struck me was that the exemplar used was Antwerp, with praise heaped on its pedestrianised city centre with bars and cafes spilling out into the formerly car-clogged streets. Antwerp isn’t a Mediterranean town – it’s a northern European city, exposed to the elements of the North Sea, with the same climate and demographics as much of the UK. If a car-free future can be embraced there, there is no reason it cannot be a success here too.


Andrew Jefford


Investors looking to add value through service as much as space

The emergence of @WeWork as one of the world’s leading real estate brands has had a seismic impact on the sector as a whole.  Although the landlord/tenant relationship was beginning to evolve across all sectors, the arrival of challenger businesses has accelerated this process and changed the status quo for good. Even the most conservative investors have woken up to the concept of space as a service.  As such, real estate owners can no longer simply offer bricks and mortar in exchange for regular rental income – they need to offer a service that is genuinely collaborative, innovative and genuinely dial-shifting in terms of their occupiers’ businesses.

The latest example of this is @ThorEquities recent launch a new life sciences platform, as reported via @PropertyEU.  This move will see the investor move away from pure real estate investment and become an incubator of nascent life sciences businesses.  Having just acquired a $150m life sciences centre in New Jersey comprising laboratory space, research & development facilities and specialist life sciences equipment, Thor will also invest in start-ups and existing businesses as a way of diversifying its interest above and beyond real estate.

“We are pleased to announce the launch of Thor Sciences as well as the acquisition of The Center of Excellence,” Thor Equities Chairman and CEO Joseph Sitt said in a release. “We have been an early advocate for the sector, having previously acquired assets in Berkeley and Boston, and are now ready to advance our global platform.”


This is a clearly a forward-thinking business model and it will be interesting to see if it gains traction elsewhere.  Could we see shopping centre owners investing in fledgeling retail businesses or office landlords off-setting rental income in favour of an equity stake in new ventures?


Boris Johnson: what are his key pledges for the real estate industry?

And so, after two months of debates and speculation, Boris Johnson decisively won the Conservative leadership contest this week, making him the UK’s Prime Minister. Without a doubt, the first and most complex item on Boris’ agenda will be dealing with Brexit. As he delivered his first speech as PM on the steps of Downing Street, he vowed that the country will leave EU on 31 October “no ifs, no buts” – declaring that “the buck stops here”. Of course, the EU’s chief negotiator swiftly dismissed his plans, deeming the proposal presented to MPs “unacceptable”, while Irish Taoiseach Leo Varadkar said Boris’ comments were “not in the real world” and that a new Brexit deal was “not going to happen”.


The run-up to Brexit is already having a tremendous impact on the real estate market with figures from Lambert Smith Hampton showing that UK property investment in H1 2019 was down 30 per cent compared to last year amid increased Brexit uncertainty. The big question of course is: what will Boris as PM mean for the industry?


According to Steven Norris, Soho Estates Chairman and former UK Transport Minister, he will bring “certainty to an industry that sorely lacks it”, which in turn will release built-up energy for the commercial property sector. Furthermore, Norris believes that a Boris-led government will benefit the commercial real estate industry by implementing “business-friendly policies” to increase the UK’s attractiveness in the global market, by investing and infrastructure and reducing tax rates, for example. The latter would especially benefit the under-pressure retail industry – The British Retail Consortium reacted to Boris’ appointment as PM by urging him to “rethink the high street strategy” and claiming that business rates “pose an unsustainable burden on shops and jobs”.


Not everyone is positive about the prospects of Boris in No. 10, however, with some foreseeing potential ‘chaos’ in the event of a no-deal Brexit. One analyst said that a crash out of EU would negatively impact London’s office market, which has already seen a slow-down of foreign investment, while the industrial and logistics sectors would be hurt by potential trade barriers. The British Property Federation stressed the need for the UK to “remain open, with the right conditions for investment and trade”.


As for the residential market, Boris has promised stamp duty reforms in a bid to reinvigorate the housing market and help first-time buyers get onto the housing ladder, but according to Lucian Cook, head of residential research at Savills, the improvements would likely only result in a moderate and short-lived boost in activity and price growth.


The true implications of Boris’ appointment– for the property sector and beyond – are, for now, unclear. One thing is certain: BoJo means Brexit, and his Cabinet of Brexiteers have a busy time ahead if they are to deliver on their proposed deadline.


What if the best property investment was PBSA?

Nothing to do with anxiety disorders, PBSA – more commonly known as Purpose Built Student Accommodation  – is basically the new student halls of today. And despite Brexit and fears of other political uncertainties, global investors are continuing to invest in PBSA in the UK. Why? Mostly because it offers stable income with strong year-on-year rental growth prospects. Especially when you consider that the more mature asset categories, such as offices, commercial assets or properties no longer are. @PuiGuanM from @estatesgazette even pinpointed earlier this week that the student accommodation market is shedding its alternative class label to become [an attractive?] market on its own. Here are a few reasons that may explain why:


à While students tend to prolong their studies in economic downturns – they prefer to wait for the job market to improve – which helps the student housing market gets stronger.


à Also creating stronger demand for student housing is the international education strategy proposed by the government which aims to boost overseas student numbers by 30% to 600,000 per year by 2030.


à  Given that student accommodation to this date remains largely under-supplied at a national level, more projects – and opportunities to invest – will be set into motion within the next couple of years.


But generating the optimal level of returns is not necessary as easy as building then renting an asset. More than any other categories of consumers, students have growing expectations – and their mental health is one of them – that need constant management and could lead to significant investments. It is then no surprise to see that a whole category of them are looking to rent higher quality student accommodation. And the good thing is that studies now indicate that price may not be a determining factor with, in many cases, students being eager to pay a higher rent in exchange for better living standards. A dynamism that is worth looking into.



Occupying the centre ground



Remember the Kirkcaldy shopping centre that was being auctioned off for £1? While this might be most notable as an excellent piece of marketing by the auctioneers – the eventual sale price was £310,000 – those with keener memories will recall that many of those parties interested in bidding saw it as a residential development opportunity.


The Postings – struggling in a changing consumer environment and losing £200,000 a year – came to mind this week after a couple of corporate announcements were made to the press. On Monday, shopping centre owner intu revealed plans to replace car parks and a House of Fraser store with 1,000 homes at its Lakeside scheme in Thurrock, Essex; this was followed on Thursday by Patrizia marketing The Walnuts in Orpington as a residential redevelopment play.


While intu’s plans are larger-scale, what happens at The Walnuts could in time be more significant. Fronting onto Orpington High Street, and woven into the fabric of surrounding buildings, what happens here could become a model for town centres across the country. Orpington’s town centre vacancy rate is below the national average at around 6.5%, but residential conversion is still an attractive option; if it can work somewhere where town centre remains relatively strong, it can surely work in places that have seen shops decimated in recent times.


For intu, it’s a similar story but with some crucial differences. With voids rising and falling valuations putting pressure on loan covenants, intu has seen an opportunity to diversify its portfolio and create some assets that will either generate a better return, or create value and provide some useful capital to work with. Without knowing the full ins-and-outs of the decision, it seems likely that new homes will be more useful than surplus car parking.


At a time when many (most?) of the UK towns are over-shopped, and many local authorities are struggling to hit housebuilding targets, conversion of retail space into homes – returning to their historic use in older communities – makes a lot of sense. And as both current investors and private equity spy some opportunities, we can expect there to be more of this sort of thing.


This is not to say it will be easy. Retail locations will have to consolidate and coalesce around a new, smaller commercial centres, and there will surely be missteps on the way. The solution is unlikely to be widescale permitted development rights for shops-to-resi, following the problems that have been seen with similar policies for redundant office space. But the local authorities that manage this process best have a genuine opportunity to kill two birds with one stone.


There remains a need for physical retail space – both in and out of town – but the requirements are less than they used to be. The internet and other changing dynamics have seen to that. But if high streets can be sensibly re-sized and helped through this shift, they may yet thrive once more.


Andrew Jefford, Account Director, Innesco 



These words were the response of real estate journalist David Hatcher, tweeted out on Wednesday, to the news that three shopping centres owned by Oaktree Capital had breached their loan-to-value covenants.


The Kingsgate Shopping Centre in Dunfermline, The Rushes in Loughborough and The Vancouver Centre in King’s Lynn have between them lost £19 million in value – down 18% in the past 18 months – and as a result the LTV on the assets has risen to 78%, against a covenant of 75%. At the time of Paperclip going to press, no resolution had yet been found.


This wasn’t the first such breach this cycle – New Frontier Properties and RDI REIT have both battled with similar issues in recent months – but David was right to point to the start of something. Each week brings news of yet another CVA (Arcadia) or portfolio downsizing (M&S), and these will only see valuations fall further, especially for secondary assets. We can expect many more LTV covenant breaches in the coming months, and losses that have up until now been on paper are about to be crystallised.


Make no mistake: this will be a painful process, but it is a necessary one. It is also long overdue. Remarkably, given the extent of the downturn, some of the pain of the financial crisis was deferred. Newly-nationalised banks, faced with distressed loans wherever they looked, often chose to ‘extend and pretend’ – that is, roll over the debt and hope that valuations would in time rise again. To be fair most valuations did indeed return, but the attitude of hoping-over-expectation has never really gone away.


There can be no such wilful blindness this time, and the economic gravity is surely now inescapable, especially for secondary assets such as those owned by Oaktree Capital. And with valuations in other sectors such as offices, industrial and residential continuing to hold up, lenders will be that much more inclined to grasp the nettle as and when loans default and retail assets come under their control.


This might sound a touch bleak, but the situation demands honesty rather than crossing of fingers. But long-term there will be considerable upside. Accepting the reality of a situation, even if that means deeper falls and greater losses in the short term, means that any recovery can start that much sooner. When the bottom of the market has been found, we can once again consider growth.


Realistic valuations of retail space will enable landlords to accept more realistic rents rather than hold on for a higher-paying tenant that never quite arrives. Lower rents might just be the difference between a shop being a viable business or not, and if so this should feed through to greater occupancy rates. For towns that have been blighted by voids, simply having occupied properties – even at rock bottom rents – will be transformational.


For what it’s worth, it seems that larger, prime shopping centres and major city centres retain a relevance and value to retailers that has seen rents and values remain much more stable. But for older, secondary space it’s far from clear what the prospects are. And if the future isn’t in retail, alternative uses will need to be embraced.


Nobody knows whether the UK is truly ‘overshopped’, or whether substantially lower rents will help make high street shops viable again, but the sooner we find out the better. Because once we know how big a problem we’re dealing with, the quicker we can get working on a solution.


Sustainability firmly on the menu across industries

In the world outside property – what some might call the real world – Greta Thunberg, a sixteen-year-old environmental activist from Sweden, was this week celebrated on the cover of TIME Magazine, who named her one of ten Next Generation Leaders. This comes after the same magazine named her one of the most influential people of 2019, and a nomination for the Nobel Peace Prize. Sustainability is, without a doubt, as relevant as ever. Our industry is, of course, not isolated from this – and, in particular, this week, sustainability has been a central theme.


In a bid to help diminish food waste, all major British supermarkets have pledged to adopt a series of actions that will contribute to the UN’s goal of halving food waste by 2030. The food retail sector has previously been criticised for not doing enough to stop food waste, which amounts to 10.2 million tonnes in the UK every year. Tesco, Sainsbury’s and Waitrose are all amongst the retailers that have signed the pledge.


Reports also surfaced this week that Pret a Manger is in advanced talks to buy rival Eat, with alleged plans to turn the competitor’s 94 stores into vegetarian outlets – joining the existing four ‘Veggie Pret’ outlets in the UK. Pret currently owns some 400 stores, and the move would mean that a significant part of the company’s business would be completely meat-free. Also on this bandwagon is Greggs, which this week announced that it expects “materially higher” annual sales and profits as its newly launched vegan sausage roll was ‘flying off the shelves’. Overall sales rose by 15 per cent in the first quarter, proving once again that consumers’ appetite for vegan is by all means on the rise. With the meat industry responsible for significant portions of total greenhouse gas emissions, this is good news not only for health-conscious consumers, but for our planet’s natural world.


Finally, Farfetch, the online luxury retailer, this week announced a new initiative as part of its sustainability strategy ‘Positively Farfetch’. In a pilot project, customers will be able to resell unwanted designer handbags in return for Farfetch credit, which can then be used to shop for new items on the site. The news comes amid the online platform recording a 39 per cent increase in revenues in the first quarter of the year. The company’s chief executive said that it was well-positioned to continue gaining share of the growing online personal luxury goods market.


Sustainability is now arguably a KPI for large corporations, and they provide strong benefits for the companies themselves in the form of good PR and CSR. We live in a world where the effects of climate change are becoming more and more strikingly evident – and yet there are naysayers that claim climate change is a myth. It is important that the retail industry, which is worth over £20 trillion globally, fights the cause of planet earth and does all it can to oppose the effects of climate change and conserve resources. After all, as the saying goes: no one can do everything, but everyone can do something.


“MAPIC Food served us some ‘food for thought’ this week” 


#MAPICFood started and came to end this week for a second consecutive year and as we returned home from Italy, we realised once again that food and beverage is not only here to stay when it comes to property and retail, but it will only grow stronger as we see more new food & beverage concepts emerging.

As a result of its growth, the #F&Bsector has attracted increasing investment from funds and private equity. In Milan this week, Vincent Mourre, CEO and co-founder, Whitespace Partners, pointed to €17bn in acquisitions during this and last year, including #CocaCola for #CostaCoffee, #Permira for Hana Group and Restaurant Group for #Wagamama among the major deals.

#Darkkitchens are the next big industry disruptor around the world and it couldn’t remain untouched at #MAPICFood. The trend was discussed in a conference session featuring key players from the industry such as #Deliveroo, #UberEats, #Glovo, #Amrest and #OracleF&B. Europe could host as many as 5,000 dark kitchens, servicing 200,000 restaurant brands, within five years according to Stephane Ficaja, General Manager Northern and Southern Europe at @UberEats. He recognised that dark kitchens “is a massive opportunity” and it’s not surprising considering apps now account for 39% of delivery visits – a rise of 14% year-on-year – and the takeaway industry has grown to be worth £4.9bn – according to consumer research firm NPD, as #BBC reported a few weeks ago.

At the same time casual dining restaurants are closing down and their place takes a new wave of food halls that have become the hottest place to eat. Market Hall will open its fourth venue at Canary Wharf’s Crossrail Place in 2020, following its announcement earlier this spring about the opening of the UK’s largest food hall in the former BHS in #London’s #OxfordStreet in the summer. Market Halls’ success and rapid expansion is hard evidence of consumers’ desire to still go out and share experiences.

Whilst the increase of online shopping is making waves in the high street, F&B concepts is a great opportunity for landlords to rethink their leasing strategies and ensure their assets respond to the consumer’s need to have access to a good selection of food offer when visiting retail environments. At the end of the day, choice is king!