Growing up with the market
The Investment Property Forum has grown from being a small organisation serving the needs of real estate investment agents, to one that has become heavily involved with a number of high-profile issues, such as the campaign for a UK Real Estate Investment Trust and the industry’s defence of upward-only rent reviews. This development is a reflection, not just of its growing ambition, but the increasing importance and sophistication of the UK real estate market.
IPF chairman Andy Martin, a partner in commercial agents Strutt & Parker, says: “We have developed very quickly as an organisation, particularly over the past couple of years as the property investment market has developed and become interesting. The IPF has grown astronomically over the past three to five years both in terms of members and in terms of recognition – which has fundamentally changed what we are about.”
The IPF was founded in 1988 as a body primarily for commercial real estate agents, but has since grown to include investment bankers, lawyers, property company directors, researchers and accountants. It has a mission to “improve the awareness, understanding and efficiency of property as an investment for members and others in the wider business community”. It has done this through research, regular lectures and workshops as well as an advanced education diploma for real estate professionals.
In the past few years, the IPF has brought this vision to bear on REITs, rent reviews, and also bringing the real estate investment business closer to other investment markets – strengthening links with actuaries and independent financial advisers. During this time, the weakness of global stock markets since 2000 has pushed many investors into seeking alternatives, with real estate often top of the list.
“The REIT process was a turning point for the IPF,” says Martin. “We combined with the British Property Federation and the Royal Institute of Chartered Surveyors to lobby government and persuade them of the benefits of bringing in a tax-transparent securitised vehicle for property investment. We were also fortunate to have CSFB director John Gellatly, as an IPF board member, prepared to spend time researching the issue.”
Last year’s chairman, CSFB head of European real estate Ian Marcus , said the issue was an opportunity for the IPF to “punch above its weight”. Gellatly, a former real estate equities analyst, produced an 80-page briefing paper in September 2003, which was submitted to the UK Treasury on behalf of the BPF, IPF and RICS.
The paper, entitled Improving the Efficiency and Flexibility of the UK Real Estate Market contained evidence gathered from the UK and a number of markets worldwide to show that a REIT-style vehicle was both necessary and advantageous, not just for the UK real estate industry, but for the country as a whole. The paper and subsequent campaign, which has seen senior IPF members part of the industry’s debate with the UK Treasury over the issue, has greatly increased the IPF’s profile to the extent that the government will now ask for its opinion when consulting on real estate matters.
“To be true to our membership is now our main challenge,” says Martin. “We are a debating and educational body, not a lobbying organisation, although there is a fine line between producing an erudite paper for a debate and lobbying – if that paper comes to a conclusion and makes recommendations.”
The IPF has recently travelled this route with its response to the Office of the Deputy Prime Minister’s consultation paper on upward-only rent reviews (UORR). The UK government is considering whether to legislate against UORRs, which have been one of the major factors in attracting investment in UK real estate as they give security of income. However, many occupiers are opposed to them and say they restrict competitive ability and make it harder for businesses to alter their occupation in line with their needs, especially in a downturn.
The response paper argues that, while occupiers do cite UORRs as a grievance, there are other things which concern them far more, particularly flexibility and the ability to assign leases. “The main thing we are concerned with is avoiding over-regulation,” says Martin. “Leases in the UK have become shorter and more flexible over the past 10 years through market forces. Upward only rent reviews suit some tenants, so banning them is not the solution. We have also talked to all the parties involved in a deal, not just occupiers – developers, investors and banks.
But what if the research came to the conclusion that banning UORRs was the solution, however much the real estate developers and owners disliked it? “Our base is a research base and if our research shows that our intuitive thinking and that of our members was wrong we would have to publish it,” says Martin.
The research programme, with a £750,000 (€1m) budget, is something the IPF is very proud of. Executive director Amanda Keane says: “The programme gives us a depth we’ve never had before. We had a very good response from the funding institutions which has put us in a position where we can produce very high level research which can be used in discussions with the UK government and Treasury, but also to expand the understanding of some major issues.” (See p50 for more on the research programme.)
One of the most significant changes to the UK real estate investment market over the past four years has been the emergence of private investors into the direct market – not just the immensely wealthy buying landmark buildings, but individuals investing £10,000-100,000 in syndicated schemes and as little as £3,000 in listed offshore funds. A challenge for the IPF, and the industry as a whole, will be to ensure these investors are educated and protected.
Martin says: “Lots of private investors are getting into real estate. If something goes wrong, such as losses to investors in heavily geared vehicles for example, there could be government pressure to regulate. We need to anticipate that.
“That will be one of the major challenges over the next few years – dealing with exit routes for investors in property if things start to falter – there may come a crunch. It’s not an issue at the moment, but we would like to see more liquidity in the market – that’s why we want to see a REIT as it would address a lot of the liquidity issues. A lot of people have taken advantage of the arbitrage between property yields and interest rates in the UK and done very well out if it. However, the success of that strategy depends on being to be able to get out when you want at the price say you can. “
In an effort to ensure investors are well-informed of the risks and rewards, the IPF has been keen to build bridges with Independent Financial Advisers, who plan investments for millions of UK citizens. The IPF, along with the BPF and RICS, has produced a handbook; Understanding Commercial Property Investment: a guide for Financial Advisers. “It’s good to have a responsible document floating around which anybody can get hold of,” says Martin. “There will be more advice available too. We’ve been offering courses for IFAs to enable them to understand what’s been happening in the marketplace. As there are various technical requirements regarding authorised products we want people dealing with them to understand. Often the real estate implications of investments do not come into their training at the moment.
The IPF has also been involved in a study to look at the potential untapped demand for investment in UK real estate. The survey found that a small shift in the weightings of private investors and small institutions could bring £35bn of interest in UK real estate.
“W also have REITs, on the way for the UK and we have a challenge in how we respond to them. There will need to be more research and education needed to help the market and investors understand them and how best to use them. If a European REIT market develops it could move here because of the liquidity of London market. Derivatives are another area which could become very exciting, but there is an enormous amount of education needed.”
“For the first time, sustainability and corporate social responsibility are becoming issues for the real estate investment industry,” says Keane. “We need to make sure our members are prepared for what will hit them. Government intervention across the board is something we need to be aware of, and looking ahead to spot issues which might maker a difference to out members.”
One example that could have an impact across Europe is the EU’s energy management directive, which all EU members will have to implement. Any new or refurbished building of 1,000m2 or larger will be required to have certain minimum standards in place with regard to energy management. In addition, an energy performance certificate will need to be produced when a building is built, sold or let. “Now this might just be another piece of paper to deal with,” says Martin. “But it could affect rent reviews and valuations and become a major issue.”
Europe is another issue the IPF needs to address. Not just EU directives, but the question of how it develops its role in a real estate market that (like all European markets) is becoming part of an increasingly integrated pan-European market. More and more IPF members work for companies which are pan-European, or invest on the continent, or are considering doing so.
“We estimate that about a third of the membership, possibly more, has some sort of interest in real estate outside the UK. There are investment bankers whose business is pan-European, institutions and fund managers who invest overseas and lawyers who structure offshore deals and who are part of pan-European firms or networks,” says Martin. The IPF has also had membership applications from as far away as Australia and South-east Asia.
Keane says: “We are producing more and more lectures looking at European issues - for example, we have one coming up on the logistics market - and have added an international module to the Advanced Educational Programme in response to a need for a wider and deeper understanding of markets across the world. We have also commissioned research to look at leases structures across Europe. I think that a lot of our research, even if carried out primarily for UK-based members, if of relevance to a wider audience. Issues such as liquidity affect all markets.”
Nonetheless, the IPF is not ready to transform itself further, into a pan-European organisation. “We are not going to start looking at European branches but we recognise there are a number of good organisations within Europe, such as INREV, EPRA and ULI, which will be strong working partners in the future, giving us access to European markets,” says Martin. “We continue to have a strong working relationship with IPD, which now has indices for most of Europe and is working on a pan-European index. We think we can cover Europe through these relationships.”
The IPF’s membership now numbers 1,600 with demand still strong. However, it is not planning to continue growing at the pace it has done in recent years. “We think about 2,000 would be a good number,” says Martin. “Any more and we could lose focus or be spread to thinly when covering members interests. Also, this is an organisation for senior people in the industry, so we need to keep it slightly aspirational!”