The likes of Grosvenor, Cadogan and Portman can help inspire the longevity of modern property investment projects
The pursuit of short-term profit has never featured in the investment profile of the family-held ‘great estates’ such as Grosvenor, Cadogan and Portman, which own significant parts of prime central London. Since the estates were first laid out in the 18th and 19th centuries, the desire to preserve and if possible enhance the family’s assets for the next generation has always been the overriding ethos in determining how the estates have been held and managed.
Historically, this stewardship produced a model of freehold ownership generating income from ground rents and consents and piecemeal sale of long-leaseholds (and very occasionally freeholds) when capital was needed, for example, to pay inheritance tax. A very long-term view could always see the terms of those long-leaseholds expiring and the properties either returning to the estate or the leases being re-granted in return for a further capital receipt.
While an element of overall control was preserved for the freehold, this model did not allow for any dynamic management of the estates or the capital to invest in them. It was more about retaining them as best you could rather than improving them to any significant degree. As a result the quality of some of the estates such as the Bedford Estate and parts of the Grosvenor Estate declined from their former grandeur.
The emerging leasehold enfranchisement legislation that culminated in the 1993 Leasehold Reform Act forced the estates to re-think their strategy. The effect of the legislation was that as an estate you could no longer count on recycling long leases once residential tenants forced you to sell their freeholds or grant extensions to their existing leases.
However, coupled with the availability of trust structures to avoid the crippling effect of death duties each time the estate moved to the next generation and with reliefs to defer capital gains tax liability, these forced sales resulted in the estates amassing significant capital reserves that they had little choice but to reinvest.
Stewardship precluded the estates from investing this capital for the short-term. Instead it was used to buy in gaps in the estate, spend on the public realm and other improvements and manage tenant mix as part of a long-term strategy to improve the amenity and value of the estates.
Arguably, enfranchisement has given the estates the resources’ to properly improve what is to be passed down to the next generation. This approach was key to Howard de Walden being able to transform Marylebone High Street into the vibrant mixed use quarter that it is today and to Cadogan turning Sloane Street into a world class luxury retail destination.
The estates have not developed their model in isolation and have certainly learned lessons from the property industry in terms of active management of their portfolios. Key elements of the shopping centre model, for example, can be applied to estates’ retail holdings, where having anchor tenants on preferential rents or choosing a mix of tenants by sector rather than financial resources is paramount to maintain a competitive and desirable product overall. Similarly, the industry has learned lessons from the estates and increasingly it is the industry that is following the estates’ example in terms of place-making and investment view.
Modern property companies need to deliver returns to their investors that are geared to their investors’ appetite to risk and the sector in which they are investing. Until the private rented sector takes off as an investment class, house-builders are going to take a very short-term view – they can only really build to sell and move on to the next project. Likewise, if your investors are prepared to balance high risk with perceived potential high returns you will not be able to hold a disproportionately large investment in a long-term strategy in a single location.
However, combining the necessary unity of ownership and longer-term view of the estate model works well for REITs, where tax treatment rewards investing and holding over developing and trading, and larger property companies and pension funds, where long-term sustained growth is more important that short-term gains. It also only suits certain locations (such as prime central London) where having all of your eggs in one basket is not a high-risk strategy.
Where it has been deployed it has been to great success. From the creation of ‘new estates’ in the West End by Soho Estates and Shaftesbury to the mixed use strategies employed by REITs like British Land and Land Securities at their estates at Regent’s Place and Victoria respectively, maximum investment returns can only have been achieved by owning the whole and investing in it for the long term.
There is some irony in the success that listed property company Capco has made of its ownership of Covent Garden. Formerly part of the Bedford Estate it was sold in the early 20th century and declined into a decaying tourist trap as it passed through various hands. Capco acquired its interest relatively recently and over the last few years has turned it into an internationally renowned high quality quarter within London and a very healthy asset on its balance sheet.
This has been achieved through precisely the same approach to place making and investment that many of the estates have adopted in strategically buying up properties surrounding its interests, investing in the overall environment and carefully managing branding and the type of occupiers that are encouraged onto the estate. One can only wonder if, had enfranchisement legislation come in a hundred years earlier, whether the then Duke of Bedford would have had the resources to keep hold of it and transform it in the same way as his modern property company successor.
Jason Tann is head of commercial real estate at Pemberton Greenish LLP