Hammerson’s takeover bid for Intu drew criticism from the moment it was announced, and Hammerson eventually bowed to shareholder pressure and dropped the deal. At the same time it rejected a takeover bid from larger European rival Klépierre — a penny for the thoughts of both management teams on their feelings about that not going through. As for Intu, it was jilted twice in a year: a consortium of Brookfield, Peel and Olayan eventually dropped a bid at a lower level. Next year will be tough for large listed retail landlords.
The shenanigans in the listed sector played out against the background of a dire year for retailers, with insolvencies spiking and hundreds of stores closed as company voluntary arrangements became a weekly occurrence. Department stores will need to be converted and high streets repurposed away from retail use. The year ended with profit warnings from listed retailers, calling November one of the toughest months on record, and valuers started seriously marking down portfolios. Next year seems likely to offer little respite.
The gloom on the high street was exacerbated by government regulation limiting the amount punters could spend on fixed-odds gambling terminals in betting shops, which will severely hit the profits of these stores. That is good for the issue of problem gambling, but terrible for landlords, with predictions that thousands of the 9,000 U.K. stores could close.
A company still backing its strategy in retail is European firm Unibail Rodamco, which this year completed its $16B takeover of Westfield, seeing it enter the U.K. for the first time. Only time will tell if its belief that dominant super-regional malls will outperform the wider retail turmoil proves to be correct.
Brookfield had a year of near misses when it came to U.K. takeovers in 2018. It was one of several private equity firms that tried and failed to take private IWG, the world’s largest flexible office operator. Starwood, Terra Firma and TDG also had a crack, but none could ultimately meet the value the company put on itself.
If you thought last year that coworking and flexible offices were a bubble that would soon burst, 2018 did not prove you correct. The sector accounted for about the same proportion of London leasing in 2018 as it had in 2017, at around 15%. Almost every major landlord announced plans to set up its own flexible office concept, following British Land’s lead, and CBRE also became the first broker to get in on the game as operator rather than broker. And then of course there is WeWork, where a recent investment round saw the company’s theoretical value rise to $42B, making it the fourth-most-valuable startup in the world.
While the acolytes preach the gospel of the open, agile, tech-enabled workplace, workers continue to rebel. Last year it was Apple workers, and this year an academic study from Harvard showed that open offices reduce communication among workers rather than increase it.
This seemed to be the year that workplace wellness firmly established a foothold in office real estate. The debate continues about how to measure the tangible benefits of wellness, but the most forward-thinking buildings are being built with it as a central principle, and it is filtering down to smaller buildings and companies, too.
London’s office leasing market is now well and truly dominated by the tech sector, which accounted for about a third of all leases in the first three quarters. In spite of political volatility, big tech companies like Facebook are still taking huge chunks of space in the capital.
While PropTech has continued to attract capital and interest, 2018 seemed a year of transition in terms of how U.K. real estate adopts technology and changes the way it operates. Studies from PwC and KPMG alike showed that while real estate companies know they have to change the way they run their businesses, they haven’t got a clue about how to do this in practice. Adoption and adaptation will be slow and painful, it seems.
The President’s Club wasn’t a real estate-only event. But the high proportion of attendees from the sector meant that property’s conduct was put into the spotlight after allegations of harassment at the charity’s black-tie dinner. Mipim in particular was under the microscope, with firms telling workers to be on their best behaviour out of fear of being stung by undercover reporters.
That was the question that dominated capital markets. Some sectors like retail are clearly already sliding, while offices held their value and logistics saw their incredible bull run continue. Capital continues to target the U.K. and London, and real estate fundamentals appear robust, but the counterargument is that an external shock from Brexit could make the sector struggle.
Logistics has had such an incredible bull run in the past few years that in 2018, something that was once unthinkable happened: Segro overtook Landsec as the U.K.’s largest listed REIT as the prospects for industrial and urban logistics are looking far rosier than those for retail and London offices. The two have traded the top spot between them since.
Capital controls turned the tap of Chinese investment off, but Hong Kong-based investors still poured money into the U.K., including standout deals like the £1B purchase of UBS’ Broadgate HQ. But they were joined this year by Korean investors, who switched their attention from Continental Europe to the U.K., including the £1.2B purchase of Goldman Sachs’ London HQ. Could next year be the year of the Japanese investor? They probably won’t make such eye-catching acquisitions, but Japanese money is beginning to filter into the U.K.
2018 felt like a year in which the industry stopped asking when the rented residential sector would become established, and it actually happened. It is still not quite mainstream, with questions remain about its planning status and the potential for rental growth, but global investors like Oxford Properties and CPPIB made big investments, operators like Cortland came over from the U.S. to join peers like Greystar, and lending became far more plentiful.
The world’s largest property investor got new blood all round: Blackstone head of real estate Jon Gray stepped up to become chief operating officer and president, with Kathleen McCarthy and Ken Caplan taking over as real estate co-heads. James Seppala took over as head of Europe at the young age of 38.
In the U.K., John Burns stepped down as Derwent London chief executive, leaving behind an unprecedented run of success, and the Crown Estate now needs to fill the shoes of the woman who completed the modernisation of the company, with Alison Nimmo announcing her departure as chief exec.
The shambles of delays and cost overruns surrounding Crossrail won’t have a big impact straight away for real estate: The line will still open and prices for areas around stations have already factored in the new, improved connectivity. But the cost overrun means the Treasury will be even more keen to ensure that London, rather than central government, pays for the majority of Crossrail 2, making that scheme much harder to build.
In the background to every single one of the above entries lurked Brexit. We are still not really any nearer knowing what type of Brexit we will have, in spite of the fact that it is now only three months away. Leasing volumes and capital values held up very well in spite of any nervousness, but as the year progressed, anecdotal evidence was of decisions in both spheres being deferred. It is impossible to say whether we will get the shock predicted by the Bank of England or realise one of the more benign forecasts until politicians work out what is going on. Until then, real estate, like every area of business, continues to wait and see.