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Barclays says JVs are the way forward for developers

Some of Europe’s most influential property chiefs will meet today to discuss ways the industry can improve its reputation and secure its future.

At a lunch hosted by the British Property Federation and consultants Real Service, the heads of Segro, Lend Lease, Development Securities will be joined by senior bankers from Barclays and Deutsche Bank.

Liz Peace, chief executive of the BPF, said: “The market has changed, maybe for good meaning that developers can no longer carry the sole burden of funding themselves. A bigger part will have to be played by the banks and public sector if we want things to happen. But if the industry wants to avoid needless regulation and red-tape from both the EU and local governments, it needs to demonstrate how responsible it now is. Major strides have been made, particularly through recession, but the real test will be maintaining partnerships and treating tenants fairly once we see the upturn.”

Dennis Watson, MD, Property & Project Finance, Barclays Corporate said:

“There’s a colossal amount of property debt outstanding across the board but Barclays remains under-weight in both relative and absolute terms. This means we aren’t suffering the indigestion that others are in terms of having to spend time dealing with the management of distressed property assets.

“The vast amount of distressed real estate is leading to a continuation of what’s been quite a prolonged period of constipation. At a time when interest rates are low and debt is continuing to be serviced there is little incentive for banks to dispose of the stock quickly, particularly if they’re going to crystallise a loss. There’s a stalemate in the market where we are not seeing much transactional activity and of course this is what we need for the whole industry to thrive – whether you’re talking about agents and surveyors, lawyers or indeed banks who all thrive from fee earning opportunities.

“We’ve seen banks engaging with their own clients to help manage the stock – be that by way of fee arrangements or, on some occasions, by taking the JV approach. It is a model that has been replicated and will continue to find favour because whilst the value of some assets have recovered considerably, many positions remain under water and will continue to need to be nursed through.

“What we’re seeing is a recalibration. Turn the clock back three years there wasn’t the premium attached to prime like there should arguably have been. The yields had become very compressed across all asset classes and currently we’re seeing a natural recalibration across primary, secondary and tertiary property. Having seen a healthy level of relative yield differentiation return, I don’t expect it to disappear in a hurry but there is a huge amount of cash chasing a very limited amount of product.

“Reputation makes a big difference – it is a case of what goes around, comes around. You can future-proof the sustainability of your customer base by being honourable and transparent in how you deal with people. Some owners have shown a tendency to be more collaborative with occupiers in these times and during the last period of the cycle, up to the end of 200, it was very easy to lose sight of some of the fundamentals. Over the last three years we’ve seen the wheat sorted from the chaff on both the investor and developer side and consequently those who did not lose sight of the fundamentals are much more likely to be in a position to move forward and capitalise on the current market. Typically, they will be the ones that have strong relationships with customers and banks, they have acted responsibly and are now, as a result, well placed. “

Ian Coull, chief executive of Segro, said:

“The most basic aspect of any relationship is communication and with the success of various initiatives around rents and service charges, the benefits of working with customers are extensive. Although Britain is now inching towards recovery, we are still lagging behind Europe and whether you look at France, Germany, Poland or the UK, tenant demand remains an issue. Given the current development pipeline however, with the right management this can be a great opportunity for many to build up their profits without further acquisitions or development.

“Of course there is only so much we as landlords can do to drive new demand, but the industry emerging from this recession is far improved from the 1990s. We are more responsible and more responsive. Whether that means ensuring essential targets on carbon emissions are being worked towards or ensuring the confidence of our customers, the listed property sector is well placed to build its own recovery off the back of economic revival, with the continued confidence of politicians and our investors.”

Julian Barwick, executive director, Development Securities Plc, said:

“Unlike the pyramids, commercial property quickly erodes and as it wears out occupiers are obliged to seek out new space. Tides of demand go in and out and at this point in cycle some parts of the industry - such as secondary shopping locations - are under stress

“There is always more that can be done to improve the industry's public perception but all things need to be taken in context. If you compare the growth in average earnings of the FTSE100 CEOs with the growth in City and West End rents, you'll see that rents have actually shrunk in real terms while salaries growth has been exponential! Perhaps we should be seeking salary cuts for CEOs before we look for cuts in rents!

“The serious point here is that being in the right space, with the right level of service provision, is so important to a business whilst rent as a percentage of turnover is relatively small. The key thing for us is to provide good value for money which means providing space that's more productive than the competition's.”

Tony Brown, chief executive of Lend Lease's investment and asset management business in the UK and Europe, said:

“Property has always been based around the fundamental of investing in real estate and in the occupier demand and returns it generates.  We focus heavily on ensuring we have the specialist skills to maximise returns in the areas we manage and that is as  true today than ever before. Some investors perhaps got carried away with rising prices and forgot about the fundamentals, but it’s safe to say that many a lesson has been learned over the last two years.

“We’ve already seen signs of stabilisation in the supply and demand balance, but this has tended to be for the better quality assets. There’s a huge polarization between A-grade properties like Bluewater and secondary locations. Occupiers are carefully selecting the good ones over the poorer ones and the investment market now reflects this where as it has not always done so.

“We’re seeing nothing like the number of insolvencies we saw a year ago. As a landlord, you have to respond to how tenants are acting and ultimately those with quality assets will be able to drive a much harder bargain. Even if we lose one or two units to administrations, demand for the best assets will remain.

“The key thing to keeping tenants happy is understanding their business. We have a unique insight and that’s drawn through collecting all their sales data and building up their trust. This means that if a tenant is doing poorly, we can help and if they are performing well, we all benefit. Understanding their business allows us to help them and getting a feel for their turnover and the issues they have is critical. If you have a reputation for being a partner you get a much better response from existing tenants and new customers.

“In this market, partnership is very important. it’s mostly about understanding how the retailer makes money and about putting a lot of resource into building up the trust. Fundamentally, improving service is about the emotion of partnership, not simply about the mechanics of collecting rent or fixing the doors.

“I don’t think they’ll be a flood of property sell-offs by the banks as it’s not in anyone’s interest. They will be a steady supply which will be a positive thing for all concerned, as there remains a lot of investor appetite.

“The challenge we have is to provide the banks with the kind of asset management skills they will need, whether that’s through surveyors being sent into banks or professional service or property management providing expert services. They are new owners and need to realise they need specialized skills and people on the ground to get the most from their assets.”

For more information please contact Andrew Teacher,Head of Media on 0207 802 0364 or ateacher@bpf.org.uk