How did you get started in real estate investment – was it a calling, something you knew from the beginning you wanted to do or a slower burn?
I came into Real Estate lending about 21 years ago, and loved it straight away as it’s all encompassing and there are so many different challenges to face. I also love how many sectors and sub-sectors there are and the fact that it is very nuanced. I also like the fact that we are investing in real assets and affecting people’s lives, for example we do a lot of development, and so we’re affecting people’s working lives, home lives, studying lives – you name it, we get involved in it. From that perspective, creating real assets and changing the way people work and live has been a fascinating part of the journey.
Can you give us a quick sketch of the major turns in your 20-year plus career?
I started my career in 1989 in banking and from about the mid-90’s onwards I was in asset finance of some description, so started off funding a lot of construction and construction equipment and then moved up into corporate banking, funding MBOs and corporate acquisitions. From the turn of the millennium onwards it has been real estate. I was with Bank of Scotland corporate, then Clydesdale Bank – National Australia Bank through the global financial crisis (GFC) and out the other side. Then for the last 10 years I’ve been at Cheyne.
What do you think have been the major changes you’ve seen over the last 20 years?
One of the major changes has been that funding real estate up to, through and after the GFC was completely different. Pre-GFC it was dominated by the banking market and then post-GFC you saw the rise of the alternative lenders, and I guess we were one of the pioneers. I’ve been here 10 years and our assets under management on the real estate side have grown hugely in that time. So that is certainly one of the big changes. The rise of ESG and what I call the morality of capital, I think that’s changed also. ‘What are you doing with the money, where are you investing, who are you investing with’ has really come to the fore. The Wall Street approach of ‘greed is good’ no longer prevails. Achieving a strong risk adjusted return and being good custodians of our Investors capital is always a driving force, but not at all costs and that has to be positive.
The other major change that I’ve seen is the move from Real Estate being a long-term income asset to a more dynamic, operational asset class. If you think about the rise of hotel, student and build-to-rent, logistics – moving away from the traditional asset classes of long-term offices or long-term retail that’s been a massive change. There’s been an enormous move away from those long leases. That’s become a smaller and smaller part of the real estate market and the operational understanding of real estate has been a fundamental change over that time.
What does your current position as Head of UK Investment at Cheyne Capital entail – what are you responsible for?
The whole UK business which is a debt and equity business. The main bulk of work is building up the UK business. So, setting the strategy and vision. I get involved a little bit on the capital raising but it’s not a big part of what I do. My job is really to drive the investment side in the UK and Ireland. So that would be everything from recruiting the talent, managing them and deciding where we put our capital and how we move up and down the risk / return curve. I’m also the first line of defence in terms of what does good look like for us in terms of assets, LTVs and returns. And I am a sounding board for our investment team in terms of any nuances or questions they’ve got on the investments they’re looking at. It’s all encompassing. Strategy, risk and management probably are the three areas that encapsulate it.
The debt space has had a good last couple of years in the UK – becoming a much more established part of the investment financing spectrum. Why has this happened especially since there is no shortage of other types of liquidity – why is debt having a moment?
I think debt is having a moment because of the amount of volatility we’ve been facing into – the Euro crisis, the Scottish referendum, Brexit, Covid… In 2022, we have Ukraine and Russia, interest rates, inflation and recession. All that volatility. Debt is a great way to play volatility because of the amount of margin for error you can build into this business. You’ve got the ability to lower your risk and not every capital has that sort of ability. We can turn our risk / pricing up or down and I think with the kind of volatility we’ve seen in today’s market; I don’t think there’s any better place to put your money than real estate debt. The margin for error is pretty large.
What do you make of the retail sector right now?
The problem with retail is that there is probably no level of sensitivity that you can put in that looks ridiculous. We’ve seen significant value destruction on one of the best assets in the country managed by one of the best-in-class asset managers. Knowing that the same could happen to almost any asset makes it an asset class we find it very difficult to invest in. I can’t really accurately predict the value destruction that could happen there, hence we will steer clear.
Where do you think the extra space in retail that could be repurposed is going to go because it isn’t easy to change the space?
It obviously depends on the location and there’s different types of retail – city centre, out of town retail etc. – it really depends. A lot of it can be moved to logistics or industrial. What you’re seeing is a morphing of retail from bricks and mortar to online and that will continue. Another problem we have in retail is that the assets have been under-invested in for a generation. The 1980’s shopping centre still looks like an ‘80’s shopping centre, and eventually it becomes a vortex because the local community doesn’t want to go there because it looks terrible, the asset owner says I can’t invest any money because the value is going down. As a result, it can become a race to the bottom.
The office sector is another sector that seems to be facing almost existential changes. What’s your view here?
The office is going through significant change but ultimately, we will need offices. We will just need fewer of them due to the flexible working dynamic. On the plus side, the London office market is very good in terms of transparency so, as an investor, you can look at it and say what does demand look like, what does supply look like and what do rents look like and at least build a relatively accurate picture of direction of travel. What I’m hearing from investors is you just have to be better at what you do, and I think this change in offices will drive innovation. And there will be better and better examples of what a good office looks like as this will encourage some of the workforce to come back to the office and ultimately enhance the culture, coherence and productivity which most businesses would love to see. It’s a market I can still invest in and from a debt perspective we will just take a lower risk approach.
What other sectors does Cheyne like right now?
I still believe in the residential story and, whilst the recent events will put a dent in values, as a long-term investment thesis, I still believe the story is strong. Again, from the debt perspective, we get good visibility on the London rental market and ultimately, it’s a demographic-led asset class. The exam question is ‘is London going to be an attractive city for people to live and work’ and my answer having been a Londoner for 51 years is yes, because I think London looks better every day. I was brought up in Ladbroke Grove and 50 years ago it was not what it is now, is it an incredible place to live. And I think areas of deprivation are getting smaller and smaller, the transport network is amazing, and we have a leisure market (be it food, entertainment etc) that few cities in the world can match. We still have areas that are challenges but I’m proud of being a Londoner and I think it’s a city that will keep evolving and will keep getting better and better. I see the demographic numbers for London improving over the medium to long term due to those factors above. A central view I have had for quite some time is, go long on houses in London because we’re not building any more of them.
What’s your view on infrastructure investment – some commentators are saying this is the next big investment play?
I don’t disagree. The political willpower for power and fuel independence coupled with the ESG and climate change agenda – this is a sector that will have more and more capital thrown at it. The sector’s going through some changes, some positive and some negative. Government subsidies have largely been withdrawn but the costs of solar as an example are coming down. I’m excited about it from the perspective of power independence, and I am sure it is a sector that we will take a closer look at over time.
What about risk appetite – opportunistic has been in vogue lately, do you see a swing back to core and core plus?
I think in the short term – yes. I think it’s going to be a risk-off time because we are going through what I would characterise as a bit of paradigm shift in terms of values. Don’t forget there’s a large amount of the investment community that has never seen interest rate movements like what we’ve seen of late and actually getting used to that and understanding what that means is going to take some time to digest. I think a lot of people will put their pens down and see where the dust settles until early or mid-2023. And what happens with that perspective is it will shift back to core, and core fundamentals. Does it make sense, can I sensitise all of the inputs and still make a reasonable return? I think there will also be a lot of what I call ‘shadow boxing’ in terms of buyers and sellers trying to price discover where asset values should start trading at. I think there’s going to be an element of that over the next six to 12 months as well.
What expectations do you have for the new Prime Minister Liz Truss in terms of impact on real estate?
It’s very difficult for me to answer honestly because I do feel we crack on in spite of what politics throws at us. I know it’s a horrible thing to say, but if my industry and livelihood and investment thesis really lives and dies on what Liz Truss has to say, then I’m in lots of trouble. What we need is someone who understands the economy, who understands how to stimulate growth in a rational and well thought-through way.
I think what will happen is that the Government will start to stimulate areas that have lagged behind. They will put money into some of these towns to re-invigorate them, and it has to be infrastructure-led. One of the big plays in the UK over the next 10 years will be HS2, and that will drive a big dynamic change for the rest of the country, and wean the country off its over-reliance on London. I think Birmingham has a really good prognosis going forward, HS2 will make a massive difference there. You only have to see the likes of Goldman Sachs, HSBC, Deutsche Bank moving some of their offices up to Birmingham to see that this is already starting to have an impact. Real estate will react to this, and I can see a lot of investment into the regions over the next 10-years as a result of this. All of this will be positive for UK from a political perspective as those areas of the country that I think have felt a little left behind start to benefit from this change.
Are you optimistic or pessimistic that we are going to weather the cost-of-living crisis?
I’m an eternal optimist, so I will always say that we’ll come through. Ultimately, we have a very vibrant economy. We have very low rates of unemployment and I think the cost-of-living crisis is a timed phenomenon. I think there will be a time when it starts to unwind. The sharp rise in interest rates that we have seen of late is a concern, but I have great belief that we will adjust, and I always say that 12 months is a long time in real estate, so let’s see where we are then. As an example of this, this time last year we were still talking about Covid, fast forward six months and we’re talking about Ukraine & Russia, fast forward another six months and it’s interest rates, inflation and recession. It’s incredibly dynamic and I don’t think we’ll be talking so much about a power crisis post-Christmas. It will more than likely be recession, capital value reductions and interest rate spikes, but let’s see.
One of the strategies that we think has a strong thesis is our Impact Fund at Cheyne. The lack of provision of truly affordable housing in the UK is to be honest a national disgrace, and is an area that Private Capital is beginning to help address. If it is done with the right intentions and done properly, this will be a shining example of the Investment and Private Capital worlds coming together to make a real impact on people’s lives. I can see this area becoming a larger part of our strategy as when you take Investors around these projects and they can see what their capital is actually doing and the impact it is making, the thesis comes to life and becomes compelling. This circles back to my theory around the ‘morality of capital’ and how this will be one of the big themes in the next 10-20 years.
Is there any call that you’re reasonably confident you can make on the next 18 months?
One thing I am very interested in is asset values. I think in the short-term values will come down, that’s a runaway train that’s already happened and happening, and will continue to happen as interest rates go up – I think they are talking about a 75bps hike this time, so that will happen. Real Estate will be nuanced, some asset classes will weather the storm better than others. I can see for example some of the rental led living sectors (Student, BTR & Co-Living) picking up good levels of rental inflation as the interest rate moves make buying less attractive which will keep asset values stronger than other sectors.
And for you personally, what does that timeframe hold in store for you?
I’m always excited by the challenge. This kind of time is incredibly challenging, trying to navigate your way through this both with your new book and with your existing book – but this is why you’re in it, for the intellectual challenge. You feel the weight of responsibility, because ultimately, we are looking after billions of pounds of investors’ capital whether it’s insurance or pension funds – and you should feel that weight. I’m paid to worry and, while I am an optimist, understanding downside scenarios, and what that looks like in 6 months, a year, 2 years, 5 years’ time is what I am paid to do. But also paid to take an educational approach to investment and putting capital into the right places, with the right people and the right rate of return. And if you can’t enjoy that type of challenge in the situation, we find ourselves in, then you’re in the wrong place.