“This is the first election for decades where all of the main parties are talking so much about housing, about planning and about infrastructure,” says Melanie Leech, chief executive of the British Property Federation (BPF), UK real estate’s biggest lobby group, as she addresses the head honchos of the UK’s biggest property companies.
Around the table are the bosses of Segro (SGRO), Land Securities (LAND), British Land (BLND), Grainger (GRI) and NewRiver (NRR), as well as the head of Legal & General’s (LGEN) real assets business. They assembled to unveil the BPF’s election manifesto, a shopping list of policies and strategies about which it and its members have been in “increasingly detailed” conversations with both the Conservatives and Labour in the run-up to the general election, expected at some point this year.
The stakes are high. Real estate investment trust (Reit) share prices and property values have plunged over the past 18 months at rates not seen since the last financial crash, but the BPF panel believes the election presents an opportunity. According to YouGov, housing ranks behind only the economy as voters’ most important issue, and the group says the right policies could drive investment in large-scale real estate projects that regenerate communities, deliver infrastructure and create homes. Left unsaid is that the projects could also mean high returns for Reits and their shareholders – assuming their asset values and share prices recover as rates stabilise.
‘Build our future’
The manifesto calls for reform and better resourcing of the planning system; targets for 30,000 new build-to-rent homes and 145,000 new affordable homes per year; lower business rates; tax incentives for energy efficient and retrofitted buildings; the ability for building owners to feed renewable energy created on their property back into the grid; and several other things the BPF believes will “build our future”.
These are not just airy wishes. Mark Allan, Land Securities’ chief executive and president of the BPF, makes it clear the group means business. “We’ve had, and continue to have, constructive and increasingly detailed engagement from both the government [… and] also from Labour as they’re going through developing their manifestos,” he says.
Those efforts appear to have influenced Labour’s stance. Leader Keir Starmer said he backs “builders, not blockers” and would allow greenbelt development, arguing some protected land is in reality not green but derelict industrial space or disused car parks. His words seem to have won the approval of the industry, with a recent Knight Frank survey of the UK’s volume housebuilders revealing that over 70 per cent would prefer a Labour government due to the perception of its pro-building attitude.
The greenbelt land argument is also a point echoed by Segro chief executive David Sleath at the roundtable. He claims that much of this land should not be classified as being part of the greenbelt, and that the warehouses the Reit wants to build on parts of that land should be seen as “vital pieces of national infrastructure” because of their role in the logistics of online shopping.
Despite the alignment between the BPF and Labour on greenbelt development, Allan insists the BPF is “apolitical”. Having reached out to the Conservatives and Labour, he says both use similarly encouraging rhetoric regarding investment and real estate development. Grainger chief executive Helen Gordon agrees, stating that she has not seen such levels of engagement from leaders of all political stripes for many years. Those could be just warm words, but it is inarguable that both parties are talking more about property development than they have in many previous elections.
Two become one
Of course, rather than depending on the government to spur investment, some listed Reits are taking action themselves. The past few years have seen many mergers and takeovers across the Reit space as some combine forces and others are taken private. Reits’ discounts to net asset value have encouraged this activity, and it may now be set to go up a gear. Blackstone president Jonathan Gray told the Financial Times last month that “the wheels of merger and acquisition activity” are moving again as interest rates stabilise.
As Shore Capital’s real estate analyst Andrew Saunders wrote on real estate news website BE News last month, “investors’ growing frustration with the deeply-discounted stock market valuations of many externally-managed Reits has begun to force a much-needed consolidation in the sector”.
In short, if some of the Reits at the roundtable want to improve their prospects, mergers are not necessarily off the table – even for the biggest players. Industry observers have long suggested a merger between Landsec and British Land is possible, but the companies themselves have made no signals this might happen. Lower down the market cap scale, a source close to NewRiver said the Reit “had a go” at acquiring Ediston Property Investment Company last year before Realty Income (US:O) eventually snapped it up.
When asked about merger activity during the roundtable, Gordon says that “there is a critical mass in terms of size to make Reits globally investable, but that’s not necessarily the only area that we can draw capital”. Instead, she wants to see “something like a UK Isa [a tax wrapper focused solely on UK investments, thought to be under consideration by the government] that encourages people to actually invest for their pension in UK infrastructure and real estate”.
Landsec’s Allan agrees, and says investors with even three-year time horizons are not helpful for Reits such as Landsec, which need “patient capital” because they develop large flagship schemes over years or sometimes decades. This commitment to long-term “urban regeneration” and government partnership’s role in that aim is another part of the BPF manifesto.
Of course, not all Reits focus on long-term development or require patient capital. Student accommodation Reit Unite (UTG) and self-storage Reit Big Yellow (BYG), which can generate a return on investment much more quickly, were not at the roundtable (Unite is a BPF member; Big Yellow is not). Last year, the pair raked in over £400mn combined, the UK’s two largest Reit raises in a year of little to no activity, from investors hungry for the pair’s track record of quick and high returns. Both have a pipeline of projects on which they intend to spend the money.
Put another way, the BPF’s priorities are not necessarily those of the whole industry. The large Reits do not represent the entire industry either: data shared with the IC demonstrates how the body overlooks one asset class with the potential for good returns (see boxout below).
To understand what the BPF’s priorities are and what long-term regeneration development funded by patient capital looks like, consider Landsec’s 24-acre Mayfield development in Manchester. It dates back to 2016, when the developers’ joint venture – involving Landsec, Manchester City Council, Transport for Greater Manchester and LCR Property – first formed. The plan is for over 2.3mn square feet (sq ft) of office space, 1,500 homes, over 200,000 sq ft of retail and leisure, a 650-bed hotel and 13 acres of “public realm” including a new park. Some buildings are coming out of the ground, but the full project is far from completion. The Reit wants investors prepared to sit with it for the long haul.
The Mayfield development also shows how the BPF and its members’ priorities have shifted. Where the focus was once almost entirely on commercial property, residential real estate is now a big part of its manifesto, hence the demands for BTR and affordable housing targets. Returns have dwindled for offices post-Covid and retail assets given changes to the world of work and the rise of online shopping. At the same time, a surge in residential rental demand and lack of stock has fuelled the fastest rental growth on record.
Allan still sees commercial property as central to the BPF’s business but does admit the greater focus on residential development in the manifesto is “a reflection of how the commercial property sector has evolved”. Gordon agrees, saying that where once the group concentrated mostly on offices and retail as the key players and warehouses as the “poor relation”, there is now a breadth and depth of asset classes in the sector.
Indeed, in our recent analysis of the portfolio weightings of the 35 largest Reits, student accommodation, self-storage and healthcare carried much more heft than they would have done a decade ago. And while the BPF does not represent all of those asset classes, its demands to the government still carry more weight than they once did because its diversity has increased. There are early signs those demands are being listened to by both main political parties, but there are no guarantees about what the next government will do once in power.
