Shah on Property: Office Opportunists Need Chutzpah – and Access to Cash

Private Investors Enjoy Advantages Over PLCs When it Comes to Pouncing on Distress

By Oliver Shah

React News

April 24, 2024

Recent stories about opportunists planning to target the beaten-up office market – the latest being former Green REIT boss Pat Gunne and private equity firm Aermont – put me in mind of a conversation I had with a couple of brokers in New York last year.

The market there entered the bottom-feeding phase before ours. Activity was led by entrepreneurs such as Igdal Namdar, who made billions out of the retail slump and bought heavily discounted old offices at 529 Fifth Avenue, 830 Third Avenue and 345 Seventh Avenue.

These brokers were trying to persuade me that sentiment was turning – that some offices had been oversold in the general collapse of confidence. They pointed out that while pluckier people at investment institutions might want to start hunting for bargains, in practice it was almost always entrepreneurs who first turned chutzpah into action. This was mostly a matter of having the personal licence to take risk.

“Families and private investors are all about making money,” one said. “It’s really hard to get kicked out of your family. But it’s really easy to lose your [corporate] job.”

Opportunistic phase

Judging by the wave of headlines, the opportunistic phase is now underway in the UK. As well as Gunne’s 3RE and Aermont, former Lone Star executive Angus Dodd and former M7 chairman Richard Croft are limbering up to buy and reposition distressed assets. Croft’s new vehicle, Martley Capital, has made a contrarian bet on a stake in Regional REIT, whose name (and share-price performance) would be enough to bring most investors out in hives.

The MSCI Rest of UK Offices index fell by more than 17% last year. But Croft reckons the opportunity, which he compares to buying industrial stock in 2008/9, is “fucking enormous”. “You’ve got a perfect storm of reducing supply and increasing demand, and investors not paying attention to the occupier market,” he says. “The way we use offices is going to change – everybody understands that. But the idea that we’re not going to use them is just nonsense. It’s as likely that we’re going to see a substantial rise in coworking.”

To the point about being empowered to take risk, these are all savvy individuals, unconstrained by big-company structures.

Crucially, they also have access to capital.

The heads of REITs often express frustration at the fact that it is hardest to raise money on the public market at precisely the times when the mood surrounding commercial real estate is darkest – and the scale of potential opportunity is greatest. Discounts to net asset value make rights issues challenging.

I am stealing a line from veteran Stifel analyst Alan Carter here – who in turn attributes it to longstanding Nick Leslau associate Mike Brown – but there are two golden PLC rules. Rule one: don’t ever do a deeply discounted rights issue. Rule two: don’t forget rule one.

“Averages have never been so dangerous”

I spoke to Landsec chief executive Mark Allan at an event hosted by the law firm BCLP last month. Referring to the office market, Allan said that “averages have never been so dangerous” – meaning it is easy to apply sentiment in blanket fashion. The implication was that as well as super-prime stock that will be resilient to the working-from-home trend and EPC-related issues, there will be pockets of oversold opportunity further down the quality chain.

Like other REITs, Landsec – which is trading on a discount of more than 20% – is not particularly well placed to take advantage of this. So Allan and team have been looking at raising private capital in a new fund that would sit alongside the PLC. Landsec would act as manager of this third-party money and might inject office, retail or build-to-rent residential schemes into the fund.

This could be a creative solution to the access-to-capital point. Whether the public market would stomach a truly counterintuitive strategy that flew in the face of consensus is another question. As things stand, when it comes to pouncing on distress in the aftermath of a downturn, private investors enjoy distinct edges over their PLC peers.

To read the original React News story please click here.