Introduction to Markets

MSc Real Estate, MSc Real Estate Investment

Tony Key, Professor Real Estate Economics

Room 5087, Bunhill Row [email protected] m: 07801 213371 The world of real estate (or property if you like)

http://visibleearth.nasa.gov/view_rec.php?id=1438 The industrial economics of property

• Generally − who will you be working for and with − what they do and what they worry about • The world of property − what is “real estate” − the size of the industry • Owners and investors − the sources of money − investment vehicles • Service providers − agents − banks − legal & others Cass careers fair …. you lucky people

Accuracy Financial Conduct Authority Mazars Allsop Fitch Ratings* McGraw Hill Financial AON Freight Investor Services Macquarie Aviva* Generali Mercer AXA Mitsubishi UFJ Securities Bloomberg Glencore Montagu Evans Bloomberg Institute Grisons Peak LLP Munich Re BNP Pariabas‐ Real Estate Hymans Robertson Noble Cambridge Associates ICAP Nomura Capco IHS Economics & Country Risk PwC Real Estate Inside Careers RWE npower J.P. Morgan Asset Management CBRE JLL Scor Cushman & Wakefield Lambert Smith Hampton SunGard* Deloitte Real Estate Stock Exchange Group Towers Watson DTZ LPC Consulting Trafigura Eni ManagementSolutions Tricon Energy Euromoney Institutional Investor Markit T.K.Maxx EY Marr Procurement UniCredit FactSet Marsh Veson Nautical

http://www.willis.com/Client_Solutions/Industries/Real_Estate/ http://www.property.nhs.uk/ http://www.tesco‐careers.com/home/you/property‐acquisition 1.1 The world’s biggest industry?

• Real estate definition: “land and structures attached to it” − amounts around 50% of total world wealth (so they say) • In the UK (similar figures for other developed economies) − annual GDP = £1,500 billion − value of residential £4,500 bn, commercial & industrial buildings £800 bn

o 70% of the total stock of physical capital assets

o 2 x total market capitalisation of UK FTSE • 12-15% of annual GDP is construction & property, 3-5% commercial − 50% of total annual investment (25% each resi & commercial) • Commercial property 5% total assets of insurance & pension funds, 10% bank lending, 40% of lending to non-financial companies • Property companies 2% market cap of FTSE, 15% Australian SE

see IPF Size & Structure of UK Market, BPF Property Data Report in Moodle

Sources: ONS UK National Accounts, Bank of England, FTSE 1.2 Property and politics (all you will get of this stuff)

• The rule of private property begins with property in land, which is its basis. Karl Marx

• And that this Civil Propriety is the Curse, is manifest thus, Those that Buy and Sell Land, and are landlords, have got it either by Oppression, or Murder, or Theft . Winstanley et al, 1649

• Landowners, like all other men, love to reap where they never sowed, and demand a rent even for the natural product of the land. Adam Smith

• You cannot have a free society without private property. Milton Friedman

• If you take a walk through the countryside, from Indonesia to Peru, and you walk by field after field, in each field a different dog is going to bark at you. Even dogs know what private property is all about. The only one who does not know it is the government. Hernando de Soto 1.3 How much land have we got?

• UK: 70% of all land agricultural, only 8% “urbanised” (any kind of structure) – London 81% urban, South East 14%, Scotland 6% • England: 4.3% land gardens, 2.2% roads, 1.1% residential, 0.7% other buildings • globally less than 5% of total “usable” land is built up Inland Revenue Rateable Values, 1.4 What is commercial property? England & Wales

Rental # Props 000 Value £m

• All types of property have to be Offices 296 11,034 Shops 500 10,775 Warehouses & stores 205 7,184 managed / valued Factories, mills & workshops 242 5,735 Pubs & wine bars 65 1,652 Local authority schools & colleges 25 1,325 Electricity companies - 1,077 Garages & petrol stations 46 1,068 Other properties 39 1,054 • Property investments range across Hotels etc. 41 1,029 Other utilities 6 1,027 Medical facilities 28 980 farms, forests, residential, prisons, Other commercial 25 855 Restaurants & cafes 34 847 hospitals, pubs … Telecommunications - 604 Water companies - 525 Community centres & halls 35 458 Car parks 49 457 Quarries, mines etc. 6 437 Other industrial 4 403 Other leisure 29 395 • But large investment portfolios are Universities 1 375 Police stations & courts 3 331 mostly shops, offices, sheds … Private schools & colleges 3 284 Cinemas, theatres etc. 3 264 Sports grounds, golf courses etc 11 240 – retail, office, industrial account Local government offices 3 233 Other educational, training and cultural 11 219 Libraries and museums 5 208 for 66% of total rental value Railways - 188 Holiday sites 7 178 Docks - 138 – and those types account for 95% Sports centres & stadia 1 126 British Gas - Transco - 81 Advertising rights 40 66 of value of UK investment Markets 2 54 Bus stations, moorings etc. 2 27 portfolios Cemeteries and crematoria 3 26 Hostels & homes 2 22 1.5 Sector weights in investment portfolios

• Most of the course deals with South Korea Belgium “investment property” – Sweden Denmark buildings leased to tenants, Norway Czech owned by large-scale Italy Spain professional investors Japan Ireland France Hungary Germany • Globally investment property is Austria Australia mostly retail and office, but New Zealand GLOBAL AVG Poland with large exposure to Canada USA residential in come countries, Finland Switzerland plus small exposures to “other” UK Portugal alternative sectors – hotels, South Africa leisure, student housing, Netherlands0% 20% 40% 60% 80% 100% health care, agricultural, forests etc etc Office Retail Residential Industrial Other

Source: Investment Property Databank 1.6 Where is “investible” property? US $ billion

8,000 EPRA formula estimates property values as a function of GDP and GDP per capita. 7,000 Suggests a global total of “investment grade” property 6,000 around $27 trillion (cf global equity markets around $64 trillion). Property actually owned by investors (as against 5,000 owner occupied) usually estimated at $12-15 trillion. 4,000 Property values are largest in bigger and richer countries. So the value of property in big poorer countries like 3,000 Russia, Turkey, Indonesia, India is less than smaller rich countries like Italy. USA + Japan = 34% of global total, 2,000 top 20 = 82% of global total. 1,000

0 UK Iran Italy UAE DRC India Chile Israel Qatar Brazil Spain China Korea Japan Congo France Russia Turkey Ireland Kuwait Poland Mexico Taiwan Greece Nigeria Austria Finland Norway Canada Sweden Belgium Portugal Thailand Malaysia Australia Denmark Germany Colombia Argentina Indonesia Singapore Venezuela Czech Rep Hong Kong Hong Switzerland Netherlands South Africa South Saudi Arabia New Zealand United States

Source: European Public Real Estate Association method from World Bank Data, 2014 1.7 … the growth of “emergent” markets

160,000 G6 growth at 2% pa 70%

140,000 60% BRICs growth at 7% pa 120,000 50% BRICS % Total 100,000 40% 80,000 30% 60,000 20% 40,000 BRICS as % total

20,000 10%

total value of property stock $bn total value of property 0 0% 2010 2015 2020 2025 2030 2035 2040 2045 2050

BRICS: Brazil, Russia, India, China. G6: US, Japan, Germany, UK, France, Italy Based on Goldman Sachs’ projection of total GDP, commercial property stock total value based on 0.40 x GDP plus adjustment for GDP per cap from EPRA formula. 1.8 Summary: the world of property

• The world’s largest store of wealth • A major element of the economy • Agriculture the dominant land use, <5% built up • Residential the largest built up land use • Retail, office + industrial the largest investment markets • Global total of “investable” property app $14 tn • Currently 70-80% of global property value in developed economies, falling to 30-40% by 2050 2.1 The real estate industry: owners & occupiers

OWNERS (HOUSEHOLDS) SERVICE SUPPLIERS Property Professional OWNER D (Surveyors) – broking, OCCUPIERS I valuation, management etc R Households E Banking & Finance – C mortgages, property lending, Companies T financial structuring etc Government P INVESTMENT INTERMEDIARIES R Legal – lease contracts, UK 70% I Planned Savings (Insurance & Pension Funds) transactions, documentation, housing owner- V fund structures etc. occupied. A Collective Investment Vehicles (Open & Closed T Ended Property Funds) Consultants – rating agencies, Germany 41%, E Hungary 92%. management, economic, I Listed Property Companies, Private Property planning etc UK app 50% N Companies commercial V E owner-occupied, S USA roughly T GOVERNMENT 25%, Europe O 70% R Planning Controls S Tax Regulation LAND & BUILDINGS (OCCUPIERS) Economic Development & Infrastructure

note: boxes are not to scale 2.2 Owner-occupiers

• Property has a double role − households part consumption good, part investment − companies part factor of production, part asset on balance sheet

• Residential owner occupation − not taken as part of real estate economics / investment − housing economics mainly concerned with prices & tenure choice − housing finance mainly concerned with supply & cost of mortgages

• Company owner-occupation − about the only choice for companies with highly specialist buildings because there is only 1 “user”, high risk & unpopular with investors − companies in standard shops, offices, sheds have option of renting 2.2 Owner-occupiers – who & what

• Property critical to the operation of businesses − usually the second biggest operating cost after labour − and the biggest asset value on the balance sheet

• Big companies employ specialist “corporate real estate (CRE)” managers − match property strategy to business strategy

o how much space, where, what type

o where / when to buy property, or to rent

o how to finance owner-occupied property − design & manage for an efficient use of space

o control costs, maximise utilisation of space

o improve business productivity − manage the use of space: facilities management

o the basics of heating, cleaning, security etc etc − see www.cbre.co.uk/uk-en/services/global_corporate_services, www.ipd.com/performance-and-risk-analysis/real-estate-occupying/ 2.2 Corporate occupiers – big issues

• Often seen as under-managed, under-researched − though much improved over last 20 years

• Owning vs renting: the big choice − why own: full control of space, collateral for borrowing, gain in value − but if return on property < return on business owning dilutes profitability − owner-occupied space tends to be used less efficiently − should stick to core business & leave property to specialists

• A global shift toward renting by companies & governments − “sell” property into a subsidiary company & lease back − sale & leaseback: sell property to investor & lease back − out-sourcing: sell property to investor who supplies facilities mgt etc − joint venture: sell property into j/v with investor vehicle & lease but retain some ownership & control 2.3 Direct investors: private individuals

• Traditionally many thousands of small private landlords − but low value assets, outside “professional” market, low market impact

• New wave of private investors since late 1990s − High Net Worth Investors (HNWI), family offices drawn to property − often through tax-exempt self-managed pension plans (UK SIPPS) − syndicates of smaller investors buying commercial in “clubs” − 5% of total UK investment market, maybe 30% USA?

• Issue: should private investors buy directly ? − can’t buy many buildings: EU average investment property costs €12m − individual buildings have very high specific risk − lack of professional advice & management − most direct private investors have high risk in next downturn − so they should be in property funds or REITs instead? 2.4 Direct investors: the institutional investors

• Planned savings through institutions − insurance funds, pension funds, recently sovereign wealth funds − in-house fund managers decide an allocation to property • Insurance Life Funds (but not “General Insurance” accident, fire etc) − premium incomes with payments on death on average far into future − very big funds, long life & steady income of property good match for fund liabilities − biggest funds tend to have 10%+ property weights − in UK the traditional ballast of the investment market • Pension Funds – UK utilities, local authorities, biggest corporates − outside UK from huge “national” schemes to small company schemes − property a good match for high income liabilities of mature schemes − immature schemes take on more risky / higher return equity investments − big funds again 10%+ weights, small funds have “private investor” problem 2.4 Institutional direct investors

• Larger life insurance funds: property matches long liabilities − UK: Prudential, L&G, Aviva, Standard Life, Scottish Widows | Europe: Allianz, Generali, Axa | USA: MetLife, TIAA-CREF | China: Ping An • The biggest state & corporate pension funds − UK: Telecoms (Hermes), Coal Board (LaSalle), Local authorities (Strathclyde, Kent, Manchester), Corporates (Mars, Unilever, BP) − Europe: Alecta, AP Fonden, ATP, PGGM, ABP, KLM, Pirelli − USA: CalPers, NYSters, Alaska, Florida, University Endowments, Family Offices, General Electric • Sovereign wealth funds − Singapore, Quatar, Kuwait, Dubai, Norway, Abu Dhabi, China .... − see Prequin Sovereign Wealth Funds in Moodle • Global total of perhaps? 200 “majors” with $20bn+ portfolios 2.4 Insurance & pension fund property allocations

• Insurance & pension fund weights determined by: − government capital adequacy regulation: to ensure assets can meet liabilities − portfolio modelling: blending assets to meet return / risk targets − advised by specialist investment consultants / actuaries (Russell-Mellon, Townsend, Towers Watson, Cambridge Consultants, Aon Hewitt)

• Traditional forms of property exposure − biggest funds: managed by in-house property team

o enough property to justify cost, develop expertise

o Prudential, Legal General, Aviva, Hermes, Standard Life, Axa − medium funds: hire an external manager to run “separate account”

o create mandate to run portfolio with varying “discretion”

o invite tenders to select a fund manager − small pension funds

o not enough property to create diversified portfolio

o invest through pooled funds, in UK Property Unit Trusts (see later) 2.4 UK insurance & pension funds direct investment

Institutional weights heavily Property as % Total Assets influenced by past performance 30% against other assets – which Life Insurance tends to drive allocation models. 25% Strong property returns up to Pension Funds 1980, plus restrictions on 20% institutional investment outside UK, pushed property weight to 20%. 15% Weak property returns 1980- 2000 plus switch of money 10% overseas pulled property weight back to sub-5%. After 2000 5% better property returns stabilised weights. The recent decline in direct weights reflects a shift 0% into indirect investments, which 1960 1970 1980 1990 2000 2010 may account for 40-50% of total Source: Office for National Statistics institutional property. 2.4 Institutional fund weights in property

Source: UBS, Pension Funds only Source: IPD, large investors

The importance of property to insurance and pension funds varies a lot across countries – from as low as 2% (Japan) up to more than 40% (Switzerland) of total assets. Within countries, weights also vary a lot with the size of fund: many small funds have no property at all; a small number of the largest funds will often have target property weights of 10-15%. IPD’s “Asset Allocation Survey” in Moodle gives material on how large investors approach allocations to real estate. 2.4 Insurance & pension fund issues #I

• Generally falling interest in property through 1980s, 1990s − period of unusually high returns on equities, bonds − property image damaged by global crash of early 1990s, Asian crisis late 1990s • Surge in interest from 2000-2008 − flow of money out of equities following “dot.com” crash of 2001 − low interest rates mean low returns on bonds, cheap debt finance for property − global rise in property values driven by (unsustainable) falls in property yield − general rise in target weights, large flows in property funds, globalisation • 2007-2009 global financial crisis & “flight to safety” − deep equity & property market crashes − protracted (on-going) property debt repayment crises − investment retreats to prime, fully let properties & safest markets (USA, UK, Fr, DE) • 2010-?? on-going recovery − another boom as risky markets recovery, interest in emergent markets 2.4 Insurance & pension fund issues #II

• A major shift to “indirect” investment − ie buy participation in “pooled” vehicles instead of direct property

• For big established property investors (insurance, pension funds) − a way of dividing risk of very big assets (eg Bluewater Park) − impossible to create expertise in all markets in-house − access specialist skills through focussed funds − especially ability to work in overseas markets − use in-house expertise to set up funds and earn fees

• For smaller & newer pension investors − indirect vehicles take investment in smaller sums & diversify risk − large flow of money into Property Unit Trusts, Limited Partnerships − perhaps in future also into listed property REITs 2.5 Indirect investment: vehicles and funds #I

• Direct – buy & manage buildings in-house only for the very big because • Real estate is “lumpy” − a single commercial building costs around €12 million − individual buildings are very risky and do not track “property” returns − a large portfolio – 30 buildings, €360 million – needed to diversify risk • Real estate demands highly specialist skills − in acquisition, financing, development, management … − very costly unless spread across a large portfolio • Real estate is illiquid − typical selling time measured in months − may be impossible to sell in market downturns − small investors cannot tie up large amounts of cash • See IPF Guide to Commercial Property in Moodle 2.5 Indirect investment: vehicles and funds II

• Medium-size investors – £300m + in property – may use Separate Accounts − a single-investor dedicated account managed by specialist fund manager

o in UK mostly large corporates (Mars, Diageo) and local authorities • Indirect investment for small investors, big investors who need specialist managers, more liquidity − collective or pooled investment schemes with <10 up to 1,000s of investors • Unlisted funds: open-ended and closed-ended funds − run by all kinds of fund managers: global financial conglomerates to small boutiques − tailored to a wide range of return-risk targets from very safe to very risky • Listed companies: Real Estate Investment Trusts, RE operating companies − REOCs: listed companies which develops / invests in real estate − REITs: as above but exempt from Corporation & Capital Gains taxes 2.5 Indirect investments: unlisted open ended vehicles

• UK Property Unit Trusts, German Open Ended Funds, US Commingled Funds − no fixed capital base, varies with investor demand

o a fund manager sells units to investors

o and must buy back (redeem) units if investors wish to sell − size of fund varies with buying / selling of units − price at which managers buy / sell units based on valuations

o with “bid-offer” spread to cover manager’s trading costs

o ie units sold above valuation, bought at less than valuation − or may also be traded between investors in a “secondary market” • The problems − manager has to hold reserves in cash / other liquid assets to ensure ability to redeem units on demand, or may delay redemptions if fund has run out of cash − a risk that run of redemptions will result in forced sale of properties 2.5 Unlisted closed-ended vehicles

• UK Limited Partnerships, US Opportunity Funds ... − run by a “General Partner” with unlimited liability − investors are up to 20 “Limited Partners” with no management role − managers have no obligation to buy-back participations

• Raise a fixed amount of capital shared between investors − funds usually run for a fixed life 5-10 years − while operating value of participations at NAV − at end of life fund winds up & returns capital to investors − or may be rolled-over with consent of investors − General Partners not obliged to redeem before end of life − may be trading of participations in a secondary market

• Problems − lack of liquidity, high start-up / wind-up costs & manager fees − problems if funds wind-up in a market dip 2.5 Indirect funds & the globalisation of property investment

• Traditionally markets dominated by domestic investors − international investment only by biggest players, in booms − often with bad results, buying at the wrong time, wrong properties − the main barriers lack of expertise, individuality of markets • The opening up of property since mid-1990s − growth of global property agents & investment intermediaries − better information, more standardisation − overseas markets offer wider choice + diversification benefits − weight of money into property after 2001 equities crash − creation of new pooled vehicles (most closed end funds) • The upshot − spread of investment: Southern Europe, Eastern Europe, Asia − more than half investment deals in Europe now cross-border − rapid narrowing of price / yield differences between countries 2.5 The global property capital market

www.rcanalytics.com/ 2.5 The growth of unlisted real estate funds ...

• INREV European total 2015 total 468 funds, gross assets of €290 bn 2.5 Issues for unlisted vehicles

• Transparency, standardisation, governance − investor concerns over high manager fees, conflicts of interest − lack of good performance measurement & benchmarks • Market destabilisation − many fixed-life funds winding up 2009-2014 − potential negative impact if coincides with market dip • Evolution − new wave of “funds of funds” to buy bundles of vehicles − a wave of mergers & concentration among managers − potential source of conversions to new listed companies • Trade bodies − at INREV www.inrev.org (Europe), www.anrev.org (Asia) − Association of Real Estate Funds www.aref.org (UK) 2.5 Global real estate fund managers 2014 (€ million) ...

Total RE Company Assets Europe Asia Pacific North America South America The Blackstone Group 78,591 17,094 3,504 57,553 440 Brookfield Asset Management 78,331 3,016 6,190 66,704 2,421 CBRE Global Investors 64,713 34,862 5,665 24,186 0 UBS Global Asset Management 47,761 23,869 7,354 16,538 0 AXA Real Estate 47,751 47,355 307 89 0 TIAA-CREF 44,668 2,551 64 42,052 0 Deutsche Asset & Wealth Management 40,800 12,700 3,600 24,500 0 Pramerica Real Estate Investors 40,456 6,624 5,221 25,699 2,912 Invesco Real Estate 40,454 5,300 3,535 31,619 0 JPMorgan Asset Management 38,711 5,671 808 32,232 0 AEW Global 38,000 18,000 1,500 18,500 0 Credit Suisse 37,662 34,842 706 935 1,179 LaSalle Investment Management 34,884 16,565 4,893 13,426 0 Cornerstone Real Estate Advisers LLC 31,057 1,480 36 29,542 0 Aviva Investors 28,402 27,417 986 0 0 Union Investment Real Estate GmbH 28,081 25,718 607 1,423 333 Tishman Speyer 26,633 4,067 3,029 18,448 1,089 Starwood Capital Group 24,868 5,352 143 19,127 245 Morgan Stanley Real Estate Investing 24,828 5,266 6,489 13,001 73 Clarion Partners 21,769 0 0 21,697 73 M&G Real Estate 21,566 19,328 1,002 1,236 0 Heitman 21,163 3,734 789 16,640 0 Aberdeen Asset Management 20,804 20,018 624 161 0

Source: INREV / ANREV, full lists in Moodle 2.6 Indirect investment: listed property companies

• A critical distinction: taxable PropCo (REOC) or tax exempt REIT? • Non-REIT, REOC, property company − pays Corporation Tax on operating profits, Capital Gains tax on profits from sales − shareholders also pay income tax on dividends − “double tax” disadvantage vs tax-exempt institutions, or private investors − assets appreciate & create very large Cap Gains liability against assets − so companies use high debt (Tax Shield) & trade at discount to NAV − also pushed to take on high development risk in upswings to perform • So overall − taxable property companies have a poor track record − highly risky & prone to bankruptcy in downturns − vulnerable to take-over or break-up when at big discounts to NAV 2.6 Indirect investment: REITs

• Orginally USA (1960s), Australia, Netherlands, Canada (early 1990s)

• Major wave of added REIT countries since 2000: − Japan, UK, France, S Kore, Malaysia, Singapore …

• REITs: no Corporation Tax, Capital Gains Tax subject to restrictions typically: − restricted to property business: 75% of income / assets from rental property − high dividend payout of profits: 90%-100% distribution of net profit as dividends − widely spread ownership: at least 5 shareholders holding 50% − sometimes restrictions on development, borrowing

• Why − liquid, tax transparent “property” investment for small investors − more efficient & flexible property capital markets 2.6 The top property companies (the numbers are a bit out of date)

Global UK Mkt Cap € m Mkt Cap €m Mitsubishi Estate JP 24,253 Land Securities * 14,199 Westfield Group * AU 22,980 * 11,523 Simon Propert y Group * US 18,849 Liberty International * 6,523 Mitsui Fudosan JP 18,415 * 6,493 Sun Hung Kai Props HK 16,737 Slough Estates * 5,174 Sumitomo Realt y & Dev JP 14,357 3,180 Land Securities * UK 14,199 Brixton * 1,945 Vornado Realty Trust * US 13,515 * 1,810 Prologis * US 12,388 Quintain Estates 1,727 General Growth Props * US 11,573 Capital & Re gional Pro ps 1,594

see www.nariet.com, wwe.reita.org for (lots) more on REITs

Source: www.epra.com 2.7 Private property companies

• Property companies not listed on Stock Exchange • A wide variety of forms: − property vehicle for property entrepreneurs, families & backers

o Chelsfield, Delancy, Prestbury, Heron, Evans Randall, Reubens, Candies − property channel for large private equity firms

o Terra Firma, KKK, Fortis, Songbird • Big portfolios & strong growth since 2000 − Canary Wharf, Punch Taverns, Arcadia, Terra Firma − in line with general growth in private equity, structured finance − also driven by large discount to NAV on listed property companies • Issues − “hot” money, may not stick with property in downturns − potential source of conversions to REITs 2.8 the UK invested market – owners / vehicles

Source: PF Size & Structure of the Property Market, 2013 2.9 Summary: property owners & investors

• Owner-occupiers: property both consumption & investment − corporate occupiers: tenure choice, cost control & efficiency − major trend to outsourcing of company property functions

• Direct property investment − private individuals: large number, small market share, opaque − institutions: insurance, pension, sovereign wealth funds

• Indirect property investment − via fund managers, banks − open ended funds − closed ended funds − property companies: REOCS and REITS 3.1 Service providers: “chartered surveyors”

• Surveyors, real estate brokers, property consultants − 10,000 in UK, from local to global conglomerates − US global firms – C&W, CBRE, JLLS, Colliers – formed post 1990 − Euro global firms: DTZ, Knight Frank, Savills, BNP Paribas

• General Practice: property professional services − broking: letting & investment agency − valuation: statutory, bank lending, corporate accounts, rating − management: day to day management of buildings

• Information & consulting − corporate, financial, planning, market research & forecasting

• Big firms with associated fund management businesses − JLL-LaSalle, CW-Atlantic, DTZ-Curzon, CBRE-CBREI, Savills-Cordea Savills 3.2 issues for surveying firms

• Globalisation & consolidation − a wave of cross-border mergers around 2000 − fierce competition for global dominant positions − further rounds of consolidation in future?

• Staffing & standardisation − major problems finding professionals in new markets − & using consistent analysis & valuation methods across countries

• Encroachment by non-property businesses − management consultants on professional services − investment banks etc on fund management & financing − potentially internet businesses on broking 3.3 The top property services firms

UK Turnover Global Turnover £m £m

Savills 399 CBRE 4,110 Jones Lang LaSalle 325 Jones Lang LaSalle 2,477 CBRE 247 Cushman & Wakefield 1,575 Knight Frank 200 Colliers International 1,330 Deloitte Real Estate 130 DTZ 1,046 GVA 120 Savills 806 Cushman & Wakefield 110 BNP Paribas Real Estate 560 Strutt & Parker 84 Knight Frank 423 Capita Symonds 78

Colliers International 67

more in Global Surveyors in Moodle Source: Property Week 3.4 Banks

• Property a natural base for bank loans − borrowers: large capital sums, long life assets, development cash − lenders: secure income to cover interest, low volatility in capital values to cover repayment, easy to claim assets on default • Underwriting on property loans – senior debt − Loan to Value Ratio (LTV): set so building value covers loan amount even in a market downturn (up to 85%) − Debt Service Coverage Ratio (DSCR): set so property income covers repayment of debt (typically 1.25) − Lenders Margin & Fees: interest charged over LIBOR − all three set to reflect lenders assessment of risk − and also varied strength of competition between lenders • Plus more complex mezzanine debt, structured finance 3.5 The biggest UK bank lenders …

Barclays Bank Citigroup

HSBC Bank of America

Lloyds Banking Group Colony Capital

RBS Deutsche Bank

Deka Bank Fortress

Deutsche Bank Morgan Stanley

Deutsche Pfandbriefbank Wells Fargo

Helaba

Bank of China

Source: Savills 3.7 Issues for banks

• Global credit crunch and lending losses − crisis part of a series of disasters in bank lending to property: US Savings & Loans 1980s, Scandinavia & Japan early 1990s, Asian late 1990s ….. − triggered by US sub-prime residential, a global crisis in commercial lending − IMF global bank losses / write downs on property of $817 bn 2007-2010 • Regulation − new Basel III capital regulation for banks − higher risk rating for commercial property may dampen lending • Competition − entry of new lenders: insurance companies, debt funds • Commercial Mortgage Backed Securities (CMBS) boom & bust − banks sell bonds secured by mortgage interest & capital repayments − ... but collapse in MBS markets the trigger for current property slump − new controls in global & national bank regulation 3.10 Other intermediaries

• Lawyers: − ubiquitous: at low level, contracts for every letting & sale − higher level: financial & corporate structuring on sale & leasebacks, investment vehicles etc • Accountants & management consultants − Deloitte, Ernst & Young, PWC, IBM − ubiquitous: tax accountants, especially on international funds − management consultants: on corporate estates, investment portfolios, financing • Research & forecasting (a few examples) − Investment Property Databank IPD-MSCI: return indices & benchmarking − Property Market Analysis: market analysis & forecasts − Experian Business Strategies: forecasts & credit rating − CoStar / Property Portfolio Research: market information, forecasts − Real Capital Analytics: investment deals, capital flows 3.11 The Government: tax

• Property as target for taxation − property pays standard taxes: VAT, income, capital gains − plus additional property specific taxes because:

o hard to hide, owners easy to identify

o property rental income is “unearned” income

o natural base for local taxes & local government finance • Forms of property tax − local tax on property rents or values (in UK “the Rates”) − planning gains / development profits (UK S106 or CIL) − tax on transactions (UK Stamp Duty 4%, 0-9% other countries) • Implications of property taxes − many decisions & structures driven by tax minimisation − especially international investment 3.12 The Government: planning

• Property rarely a “free market” • Any land use / development impacts on neighbours / area − “externalities”: social costs benefits of private decisions − pollution, traffic generation, appearance … − zoning & development controls needed to reconcile conflicts • Strategic development over long horizons − government provides physical & social capital − has to “steer” development to make optimum use of that investment − long term development beyond private sector horizons − Government has to create long term plans − and to underwrite some of the risk • Planning interventions through zoning, development control, subsidies • Economic development: regional policy, urban regeneration Professional & accrediting bodies

• The Royal Institution of Chartered Surveyors − the only internationally recognised property qualification − http://www.rics.org/uk/join/student/ • Investment Property Forum - UK property investment business − www.ipf.org.uk − free membership for MSc REI students • Society of Property Researchers − http://www.sprweb.com/ − free membership • further Financial qualifications – if you work in fund management etc − Chartered Financial Analyst, global standard http://www.cfainstitute.org/ − Investment Management Certificate, UK version http://www.uksip.org/