LaSalle Investment Management has about £1.5bn to put into property. This is on top of the £8.5bn it currently manages. We talked to James Boyd-Phillips, the head of LaSalle Retail, about what might end up in his shopping basket.
James Boyd-Phillips believes in attention to detail even if it means racking up mileage – and sometimes cutting into your free time. “How can you judge whether or not to buy a shopping centre in Rochdale if you only go to see it on a cold and dreary weekday?” he asks.
“You’ve got to go on a Saturday morning when it’s busy, when everyone else is not working and enjoy it and see how they spend their time. I’m not saying I do it every weekend but I must admit that wherever I go, I do tend to pop in to the local shopping area and have a bit of a look round. Certainly when I’m on holiday or abroad, I always want to see what the local shopping attractions are. I just love going around looking at new shops. ”
I just love going around looking at new shops
Not everyone in the retail property business shares his enthusiasm. He is puzzled by this as he sees engaging with the business of retailing as essential to effective property investment into the sector.
His relationship with retailing began when he joined the shop agent, Edward Erdman, in 1992.
From there he joined Homebase before moving across to its parent company, Sainsbury’s. After a five-year stint with the supermarket giant, his career went on to encompass Grantchester and LXB, before he was poached by Capital & Regional where he eventually took on the role of Investment Director at the Junction.
This brings the story up to 2008 when, having completed approaching 20 years in the retail property business, he decided he wanted to step away and do a Masters degree at Cambridge University. What did his friends in the business say?
“I suppose in a way, they always knew I liked to read the academic books, you know the harder books. And the masters gave me the chance to do that.”
“The biggest thing I got from the course was the ability to take a huge amount of information and condense it down into the salient points – in just 24 hours. When you come back into the working world and everyone’s throwing information at you, having that ability is very useful.”
Having completed his MPhil in Real Estate Finance, he joined LaSalle Investment Management in 2010 as an Assistant Fund Manager and immediately felt at home.“I would say it’s very friendly, it’s very much a family. I’d only been here about three months when I went to a directors conference in Los Angeles. I was in a meeting with probably 30-40 other directors and the global CFO walked all the way round the table and said ‘Hi, I’m Kim, you must be new as I haven’t seen you before’ and I thought ‘That’s not bad is it?’
Last April, he was made Head of Retail with a sizeable team and money to spend.
“As a house we have got around £1.5bn to put into property at the moment which bearing in mind that we currently manage about £8.5bn of UK assets half of which is in retail, represents a potentially huge influx of capital.”
LaSalle was one of the first investment houses to come back into the market when the recession was still in full swing and has benefited particularly from a focus on retail parks.
“We were one of two or three funds that came back into the market early. We spotted that retail had been mispriced during the downturn in particular out-of-town retailing warehousing. I think it’s one of the most liquid assets: it’s certainly easier to sell a retail park than it is a shopping centre because you’ve got fewer leases and less non-recoverable costs. And generally, it’s a fairly simple construction so you don’t tend to have much obsolescence anyway, so it’s quite easy to price and quite easy to trade.
“So we came back in and bought about half a dozen or so assets, like Eastgate in Bristol, Silverlink in Newcastle plus parks in Yeovil and Harlow. They all had pretty unprecedented yields of between 7 and 10%.”
The strategy was backed by more than gut instinct. LaSalle produced a research paper called ‘When to catch the knife’ which looked at property sectors on a ‘mean-reverting basis’ where you analyse trading at the bottom and top of the market and see how that compares to the historic IPD data. This made a statistical case for taking a plunge on investment but LaSalle’s fund clients still had to be persuaded.
“Convincing clients, particularly when we’ve got a couple of pension funds that are banks was quite interesting. It was a bit before my time in terms of getting the money over the line but we provided a good case and the rest is history. The assets purchased then have generally delivered returns of 30-40%.”
As the economy recovers and optimism creeps back into the market, there is a good deal more confidence in the investment sector. However, Boyd-Phillips points out that this transitional phase of the market can be one of the most hazardous times to buy.
“Because something looks cheap, it doesn’t make it a bargain. Take the example of shopping centres. They need an inordinate amount of effort to keep that income flow going and what I say to the team - this has been my mantra from the beginning – ‘This is not a property you’re dealing with, it’s a business’.
“If you’re buying a secondary shopping centre it’s a cash business. It’s all about the operating income from the scheme. Valuations are almost irrelevant because you need to maintain and improve that operating income.
There’s no point in looking at rental tones on these schemes in the short term. You look at the cash contribution a letting can make and if that suits your cash strategy, you proceed.
“These are not assets to buy on a high yield and tuck away. They need intensive management and expertise. Short-term it’s probably going to be very unpleasant. If you’re buying from a distressed vendor the chances are they haven’t had the money to spend on maintaining the mall, refurbishing, improving signage etc, so there’s going to be a lot to do.”
He emphasises that income is what LaSalle’s clients want. “They don’t want lumpy valuations, but at the same time if you can maintain the income then you’ve got a far better asset in the medium term.
“We’ve been very fortunate that where there’s been a lack of any other institutional interest and being cash purchasers, we’ve been able to pick up some good assets on the right basis i.e. deduct vacant units etc. and buy it on a pure net operating income basis. If you can maintain the income, everything else should fall into place.”
Inevitably, the conversation turns to the effect of the internet on retailing but Boyd-Phillips takes an uncomplicated approach to it.
“How does it affect us as property folk? Well it’s simple really, we have to embrace the operators’ requirements, and we’ve got to be flexible. We’ve got to be flexible in terms of lease; we’ve got to the flexible in terms of size of units. Flexible, affordable and accessible.
“With click-and-collect, accessibility is going to be key. If you’re in competition with an out-of-town location which has 24/7 access, you’ve got to have a strategy. If you’re got a shopping centre where you’ve got a decked car park, you’ve got to keep it open longer and look at ways of making it cheaper so it can compete.”
However, he feels that the perceived threat of the internet masks the simple truth that as a country we are over-shopped.
“There are just too many shops. There are too many parochial owners and local authorities who will say it’s the fault of out-of-town, it’s the supermarket’s fault, or it’s the internet’s fault. It’s like retailers use the excuse of the weather.
“We blame it on something else when actually you just need to say that there are too many shops. In any other market you would demolish them or try to do something in them. Ultimately, you have to create an experience – something that people want and can’t get on the internet.
He is positive about 2014 but believes investors will have to roll up their sleeves if they are going to be successful. He does feel concerned that the weight of money for UK real estate is front running the prices of many assets, particularly retail.
“Be bold. Don’t feel worried about doing something different. Retailing has to be refreshed. Try pop-ups, put market traders into shops. Take the rent that you get and be glad you’re not paying the rates. Help your occupiers.
“You have to give ideas a chance – and always keep your eye on the income and competition.”