US REIT founder flourishes back in the UK

Copyright:David Lawson - Property Week May 1998 
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The outlook for property investment companies is grim, according to whispers running around the industry. An onslaught of US real estate investment trusts will wipe out even the biggest UK names over the next few years.  Why, then, is Martin Barber so chirpy? As chairman of Capital & Regional, he could be among the first up against the wall. Perhaps it is because he  has  more inside information than most doomsters. He actually runs a REIT.

  A renown survivor of several property crashes, he bemused competitors in the Eighties by trecking deep into the American Mid-west with a few partners and buying  a 1m sq ft chunk of recession-blasted industrial space. He strayed  even further into la-la land by later taking 15 blocks of near-empty flats. 'The local mayor asked us because we were the only people   investing in the area,' he says. But they  made a fortune when the space was swiftly re-let.  'We were probably the only UK company to make money in the US,' he says.

   Five years ago he floated the lot as a  $200m REIT. 'We couldn't sell because of capital gains tax demands. But I had been looking at REITs and persuaded my partner to go down that path .' C&R still owns 5% of CentrePoint Properties Trust,  which has grown to be worth around  $1bn today. The stake  brought C&R 1m pounds of pre-tax profit last year.

 Barber stayed on as chairman in a personal capacity because 'they thought an English outsider would be good for corporate governance'. He crosses the Atlantic regularly to plan and  co-ordinate strategy.  This also gives him an insight into the possibility of dollars moving in the other direction. 'It will have a massive  impact on the UK,' he says. But he doubts this will spark a property  apocalypse.

   'Some investment companies will wither on the vine because they cannot compete with REITs that have an edge in their tax privileges,' says Barber. But the best  UK companies will survive.  In fact, these are little different from REITs. Fears of widespread disruption  are misplaced because we have not fully understood the secret of the invaders. This lies not in  tax advantages but their efficiency.

  'The UK property plc  is not over-burdened with taxes,' says Barber, who  is bemused by our  obsession with securitisation and tax breaks.  The sector does face a big disadvantage competing with US groups, however. Raising capital is far more expensive over here because of two City conventions. Institutional shareholders have for years resisted moves to remove the right to big discounts on new share issues. The Stock Exchange also persists in demanding extensive paperwork and verification controls, ramping up costs through advisor fees.

  'We are the only country in the world where companies face these  demands,' he says. 'It gives REITs a big advantage in being able to raise capital more cheaply and quickly.  A year ago we  decided to raise $100m for CentrePoint. It took one phone call at noon to Lehmans and the money was there by 5pm.' When C&R made a recent cash call it had to issue shares 14% below market price and paid out 2m pounds in fees.

  It is not only US REITs but European trusts that will put increasing pressure on UK companies unless these problems are tackled, he warns. Sheer weight of money from individual investors flourishing in buoyant economies  will see more competition for property.  Barber quotes one fund manger he had just met in the US who said the trustees demanded an increase in property weighting from 5% to 7%. 'That gave him $2bn more to spend. He was at a loss about where to spend it'

  US opportunities are fading  as the property market softens. REITs which have grown by consolidation are also running out of rivals to absorb. Hungry eyes are already being run over UK blue-chip companies, which would be split and sold off. The only defence they can offer is to show shareholders they can provide value better than a REIT, says Barber.

  That will take some doing. Efficiency is the US byword, as is concentration on particular sectors. 'If I have learned one thing about running a REIT it is focus,' he says. That is a key reason why C&R has shifted to concentrate 90% of its 438m pound portfolio in shopping centres.

  It also happens to be where  he sees REITs making a major play. 'They are not following the old pattern of seeking trophy assets. They value things differently. They want cashflow from sectors like hotels, healthcare and retailing. Americans understand shopping centres and how to manage them far better than in the UK,' he says.

   So why not turn C&R into a REIT? Contrary to recent Press reports, Barber has no such plans. 'I said I might consider it if we had problems raising money, but we don't. And we are  as entrepreneurial as any REIT,' he says. That's not to say one or two other big names will not see a bout of withering  on their vine very soon. Watch this space.