By Jim Pickard
The arrival of real estate investment trusts (Reit) in the UK has prompted the biggest shake-up in the commercial property market for years. But Michael Marx, co-managing director of Development Securities, is non-plussed. “It hasn’t changed anything for us,” he comments. “What has changed? Nothing has changed.”
As you may have already guessed, DevSecs is not going to convert into a Reit – this year or ever. Instead, it will continue with its highly-specified model of “pure development”.
Under the UK Reit regime, the new vehicles cannot receive less than 75 per cent of their income from rents, which will limit the resources they put into development. That means that companies such as DevSecs, Helical Bar and St Modwen will not become Reits.
But will they survive for long? In many established markets, such as Australia and the US, Reits have come to dominate the listed real estate sector.
Life will continue pretty much as before, claims Mr Marx, buying derelict or under-used sites and transforming them into modern commercial space. He denies that buying sites will become more difficult with the weight of money from new Reits, saying “competition can’t be any more acute thanit is. Things are manic”.
Instead, the new vehicles could be a positive thing as they could increase the number of possible buyers for DevSecs’ completed buildings, he argues. “They could be funders or buyers for our developments.”
The art of a good developer is to time the property cycle and “derisk” – by selling off equity to investors – before the top of the market. This is a trick that some of the big Reits are now also very much aware of.
For example, Hammerson took an early profit on its redevelopment of the London Stock Exchange by selling off a large equity stake.
At present, the stock market is putting no obvious premium on UK Reits as opposed to other types of property company. If anything, many of the Reits have been trading at discounts to their net asset value (NAV).
By contrast, some non-Reits, including Quintain and St Modwen, have been at big premiums in recent months. For now, that seems to suggest that various niches will remain in the listed property world alongside the Reits.
“There is more than enough space in public markets for bona fide risk-taking property companies which can find long-term development and redevelopment situations,” says Tony Edgeley, a managing director of Jones Lang LaSalle Corporate Finance
“So my personal view remains that there is still a place for the St Modwens of this world. It is not necessarily about money or product but about skills.”
It is not only the “pure developers” which will not turn themselves into Reits. There are several other categories of listed property companies which will not do so, for example those which are already tax-efficient, including Mapeley. Also excluded are the numerous Aim-listed companies, those which own large property holdings overseas and several “co-investing property fund managers” who run funds which – in most cases – are already based offshore.
Martin Barber is chief executive of Capital & Regional, which has been a hugely successful pioneer of the latter model. The group has several funds; The Mall, The Junction and X-Leisure.
The business makes its money not only from owning property but from management fees from its institutional co-investors in the funds and – when times are good – big performance fees.
“I think there will be a niche, I think we are becoming ever more recognised as a co-investing fund manager, rather than an old-fashioned property company,” says Mr Barber, who has no plans to turn C&R into a Reit.
His refusal to convert is partly because the funds are already based offshore but also because, if a shopping centre landlord provides car parking or an open market, the building is classified as “owner-occupied” and therefore not eligible.
“Our shareholders have said; ‘we like it that you are tax-efficient but we also like the track record and that you are able to continue to make money for us, we don’t care what you call yourselves,’” says Mr Barber. “One of our largest shareholders is the Fidelity Reit fund – even though we are not a Reit.”
Some experts had predicted that many fund managers would convert their existing funds into Reits – or, at least, launch new Reits instead of offshore Jersey property unit trusts, currently the favoured form of such investments.
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