How To Leave A Global Giant And Build An Investment Firm For The New Era
You are head of the UK for one of the world’s two biggest real estate investors, with almost unlimited firepower at your disposal, a huge portfolio to asset manage and a development portfolio to die for. There are not many people that would leave that situation.
But Martin Jepson did.
“I’d spent basically my entire life in the corporate sector, so it was nice to come out of that and have a bit more freedom and a bit more of a chance to express myself,” he said. “I wanted to test myself.”
Jepson was UK president and chief operating officer at Brookfield Property Partners, overseeing a portfolio of 4M SF of offices in London, including developments. He had ramped up Brookfield’s exposure to London, moving to the company from Hammerson and then buying his old shop’s London portfolio for £500M in 2012, a deal which came to be seen as an absolute steal.
But in 2017 he left to “pursue other opportunities”, and was absent from the spotlight until 2019, when the announcement came that he had teamed up with former Grafton Advisers partner Chris Cope to form Ergo Real Estate, a new investor and developer focusing on value-add and opportunistic deals. In the two-year hiatus, the pair had been busy securing £150M of equity from UK pension fund NFU Mutual, and working out what the independent property company of the next decade should invest in.
Ahead of his appearance at Bisnow’s London Investment Agenda event 25 February, Jepson told Bisnow how the company is constructing a portfolio amid retail losing its status as the go-to sector for institutions, where it sees value and what it is like setting up on your own after life at a series of big firms.
Jepson and Cope agreed to team up in mid-2017, and soon after began discussions with NFU Mutual, which ultimately led to the creation of their joint venture, which is officially called Aver Property and will have a portfolio with a total value of around £250M.
NFU has more than £1.5B in core and core-plus real estate assets, and Jepson said it was looking to diversify to different parts of the risk spectrum. In 2018 it backed a build-to-rent development programme being undertaken by Moda Living and Apache Capital, and also teamed up with Jepson and Cope to buy value-add and opportunistic investments.
“They wanted to look at alternative risk profiles as part of their portfolio management approach,” Jepson said.
The joint venture can invest in any kind of asset in the UK, with a few restrictions: lot sizes of £10M to £50M, and a loose 20% to 30% ceiling on the proportion of the portfolio to be held in retail.
So far it has invested £150M across four deals, including a retail purchase. It paid £29M for the 78K SF 2 Brindleyplace office in Birmingham; £40M for two retail parks, in Aintree and Southampton; £12M for two smaller offices in Birmingham; and forward funded two logistics centres totalling 200K SF in Bicester and Markham Vale for £47M.
Jepson said the portfolio it creates will be diversified in terms of sectors, but also the kind of risk it is taking on. Some of the assets provide good yield, some offer the potential to be repositioned, while some, like the logistics schemes, offer the risks and rewards associated with speculative development.
“For a relatively small fund we’ve got a good spread of sectors, geographies and risk,” he said.
That includes retail, which many investors are shying from of late.
“Retail is the sector on the naughty corner at the moment, because it has the risk attached to it, but everything is cyclical and there will be a point when it comes back again,” Jepson said.
He said the firm is not buying retail just because it is cheap, but is targeting assets in the sector that are high yielding but where the income is resilient. In the two retail parks it purchased, the yields were 7%, the average length of the leases was 10 years and rents were well below the average in nearby assets.
“We’ve got good retailers trading well, so we think those values and rents are defensible,” Jepson said. “If one of the retailers does want to leave, we think other discounters or retailers would be keen to come in because our rents are £10 per SF and everywhere else is £25 per SF.”
At 2 Brindleyplace, the current tenant is Lloyds Banking Group, which has two years remaining on a lease where it pays less than £25 per SF. Jepson said the company would either sign a new lease, or the building could be improved and refurbished and re-let at a higher rent. The other buildings in Birmingham are leased at rents of around £15 per SF, which Jepson anticipated could be improved to £20 per SF.
“That is 30% growth: in a low-growth environment like this, where else can you find that?” he said.
“When we set out, we knew we wanted to invest in London and the South East and the UK’s big six regional cities. In London it is very hard to make the returns work at the moment, but outside of that, rents haven’t ever gone much above £35 per SF, so it has been very hard to justify new development, and not much has been built. You can buy buildings with good bones at rents of £20 per SF, and you don’t have to hit £40 per SF to make a good return.”
Jepson said that although he is best known as a central London office specialist, his skills were applicable in a new, diversified business.
“Property fundamentals are the same everywhere, and you never forget that,” he said. “I’ve enjoyed the exercise of working out which sectors we were going to invest in, and I’m enjoying the mental challenge of running a very different business and looking at new markets.
“I’d had one or two opportunities to leave bigger firms and go out [on] my own before, and it is something that I’d always wanted to do, but the time had never quite been right. Some people are happy to sit in the same place, but I enjoy a challenge.”
Jepson said starting a new business has come with challenges big and small. Having worked for big firms for most of his career, the minutiae of running his own business had been head-spinning, he said. Then there is the matter of securing capital, which takes time and patience.
“Chris and I both have good track records, which is essential, you can’t just walk out of a company and expect people to give you money,” he said.
“But it also comes down to trust. The relationship took a long time to build with NFU because you are out there in the market with their reputation, but a partner has none of the internal controls that they have on their own staff.”
Starting your own investment firm is always a leap of faith: especially when you are leaving the comfort blanket of a global giant; and even more so when there is so little certainty about what makes a good investment.