In the 30 years since the foundation of Rockspring, the world of property has evolved at a remarkable pace. Looking back to 1984, it’s amazing how parochial the industry was, compared with the global machine it is now. Over three decades, a number of defining factors have completely changed the way property is viewed and utilised as an asset class, enabling it to take a leading role on the global investment stage.
Deregulation
Financial deregulation in 1986 radically changed the operating landscape. Overnight, the cosy gentlemen’s club of the City of London was swept away as the cartel of fixed commissions was dismantled in favour of “dual capacity” firms that could sell shares and bonds and trade them as principals. This attracted substantial new sources of international capital, cementing London’s place at the centre of global capital markets. The City became more transparent, professional and competitive.
At this point, many institutions woke up to the fact that fund management services offered by brokers were anything but free, let alone aligned. They began inviting specialist fund managers to pitch for discretionary mandates on the basis of specialist expertise and competitive fees based on value, not commission. While this new business boomed, where domestic gilts and equities led, international investing and real estate followed.
Limited partnerships
Rockspring changed the face of real estate investment when it saw the potential of limited partnerships in the early 1990s. Their predecessors, property unit trusts, were created in the UK in the 1960s as tax-transparent vehicles for domestic pension funds. Soon after the UK joined the EEC, some PUTs widened their remit, as international diversification advanced to include funds specialising in continental European real estate. Investors viewed these unitised funds as a convenient way to spread risk by investing domestically or internationally, using managers with expertise and a track record that could be underwritten. But UK PUTs could invest only on behalf of UK pension funds, limiting scale and liquidity.
Rockspring identified the solution while working alongside investment professionals who ran venture capital and development capital limited partnerships. Although they had been around for decades in the UK for this purpose, we found they possessed the unitising characteristics of PUTs while enjoying as many, if not more, tax advantages.
Furthermore, there was no reason why many classes of investor from almost any institutionally developed country couldn’t co-mingle their investments.
Successfully launched in 1992, our TransEuropean Property limited partnership was, we think, the first such fund specialising in Europe-wide real estate. More than 20 years later, we are launching TransEuropean VI.
The debt revolution
As competition intensified in the newly deregulated UK, borrowing costs began to fall significantly. At the same time, historically persistent inflation was gradually squeezed out of the economy. For the first time in the modern era, the use of debt became a viable self-financing real estate strategy in the UK. This was, literally, revolutionary; it enhanced equity returns and, for international investors, could offer a very cost-effective natural currency hedge and an efficient tax shelter too.
But, as we have been rudely reminded since the demise of Lehman Brothers, the use of debt can also greatly amplify negative returns. Some may remember that, in 1989, a US investor called JMB Realty acquired Randsworth Trust in the UK for a seemingly astronomical $800m, including refinanced debt. But that did for JMB what Canary Wharf did to Olympia & York in 1992. Hubris precedes a fall.
The euro arrives
It was the arrival of the euro in 1999 that supercharged the astonishing growth and current scale of intra-European and international investment. Suddenly, the headache of dealing with multiple European currencies was eased, costs were significantly reduced and investment at scale was at last attainable.
Today, the volume of pan-European transaction activity is huge; and the region has again become a significant magnet to massive sources of global capital seeking embedded value and a framework of fair treatment under the rule of law.
Measurability: maturity
Finally, no overview of the advances in institutional real estate investing over the past 30 years would be complete without mentioning IPD.
For the first time, we had a reliable measure of property performance in the UK and, subsequently, around Europe and beyond. That property performance could be benchmarked reliably in the context of other investment options meant it was fully integrated into the process of asset allocation for institutional investors globally.
After a long journey, this last piece of the investment jigsaw has most surely enabled commercial property to come of age on the global stage.
Richard Plummer is chairman of Rockspring
