Finding rhymes in real estate’s history of crises

It’s an unseasonably mild early February. In the world of sport, Arsenal are sitting proudly aloft the Premier League ahead of the bigspenders from Manchester, England have just lost their opening Six Nations clash at Twickenham and Novak Djokovic reigned supreme at the recent Australian Open tennis tournament. In popular culture, the Arctic Monkeys are nominated for several BritAwards and Alan Sugar is firing people left, right and centre on our TV screens.

As for the economy, the Bank of England has raised interest rates again, inflation exceeds the 2% target and the UK is battling a recession. In real estate, the cost of capital is thwarting investment volumes, average yields have been moving out, lenders are fidgeting and funds fear mass redemption, resulting in signs of distressed sales with cash-rich bargain-hunters circling.

This is not some glib review of the past couple of weeks’ events. Rather, it is a snapshot of what we faced on these shores precisely 15 years ago. And it was 15 years ago that this wide-eyed boy in his late-20s decided to leave the safety of a job he loved at one of the UK’s largest investment and development companies to go solo, and my company, EPF Investments, was born.

The circumstances outlined above might seem to paint an illogical set of conditions in which to set up an investment vehicle in the leisure and retail space. Indeed, I recall walking to our first offices in Mayfair in the very first week of the business and being terrified at the sight of swathes of people queuing around the block to get their cash out of the doomed Northern Rock, before it was nationalised the following week.

But I believed that those circumstances in early 2008 were going to spit out opportunity, and I believe the same applies today for those who stick to the fundamentals of property investment and asset management.

Spotting opportunity

By mid to late 2007 the market had reached the pinnacle of reckless spending, with lenders and hugely leveraged investors running roughshod, often with 100%-plus loan-to-cost transactions, and assumptions that values simply had to go up over time, rates would remain lowish, big tenants could not fail and the arbitrage between cost of debt and running yields was a safe bet before a guaranteed flip at some point in the next year or two.

This had come back to bite them, so back then our strategy was clear: identify undervalued properties in strong, affluent market towns and cities that people had a reason to get off their backsides and visit; avoid anything remotely over-rented; add value through asset management and development; do not overly concern yourself with the strength of covenant of a tenant but more with their operating ability (hence more than half of our portfolio today still comprises independent operators for which CVA is an alien acronym); and stick to the golden rule that two of the most influential figures in my career (my former boss at Kier Property, Dick Simkin, and my father, David) taught me – engage meaningfully with tenants, because they are your partners and lifeblood.

I had it all figured out. We would buy early and apply asset management expertise to add value and then raise finance. But as it turned out, having raised more than £50m of equity to identify such opportunities, we spent our first year or so buying absolutely nothing. Every headline, every piece of economic research, every trip to the shops, pointed to disaster. Remember, this was the era of the “too big to fail” deaths.

I remember sheepishly telling my investors this at an early board meeting, expecting to be exposed for my lack of experience of any major downturns. But they were seasoned pros. Each of them was delighted not to have invested yet and stuck with the strategy.

We began to find our feet and really understand our market, and today we are very proud of our portfolio, our relationships with our tenants and our fantastic network of colleagues and contacts.

Cost of capital

Where are we now? The cost of capital today is creating enormous problems for those who require debt or those with borrowing,which, despite excellent properties or asset management initiatives, look under pressure. We spent the past couple of years buying fewer assets because of those same signs that were seen back in the early 2000s – weight of cash chasing stock was inflating prices, although it should be noted that LTV covenants are substantially lower than pre-2008.

But this year again points to opportunities for cash and low-leverage buyers, especially those who identify properties to which they can add value through asset management. We are readying ourselves to buy and sticking to the very same strategies we have maintained since our inception.

As Mark Twain once said, although history may not repeat itself precisely, it does often rhyme. But this time let’s hope that Arsenal can still be top of the table come May.

Adam Coffer is the founder of EPF Investments