6 minute read
PROPERTY
Post-pandemic property is all about the middle classes
Middle-class middle-of-the-road hospitality and residential schemes will be the big property stories of 2021 and 2022, according to one of the world’s leading investors. It could mean a radical change in the flow of work coming your way. David Thame reports.
Keith Breslauer is restless. He is always restless. The fast-talking
US-born Senior Partner of Patron Capital is perpetually looking for new angles. That’s his job.
Patron Capital, which he founded in 1999, is one of the big beasts of UK private equity, and has proved to be a seriously clever investor. Careful analysis and some well-educated hunches have propelled the Patron team to the position where it has capital of £3.8 billion invested in property and the businesses that operate it. Until now Keith’s analysis has been on the money, which makes his latest strategic plans worth listening to. Earlier this year, Patron completed another £844 million fundraising – so where will this war chest get spent?
The answer is that Keith is taking a close look at the office, residential and hospitality sectors, with the aim of booting-out projects that rely on international or high-end users. He has a theory about what comes next.
Rather than a relentless focus on the international travel markets and overseas apartment buyers, Keith predicts a return to property that depends on the homegrown middle class.
‘We haven’t been sitting on our hands through this crisis. In the last six weeks we bought three office buildings, four residential projects and invested in various companies,’ he says.
Their recent buyers have been informed by some new, post-pandemic thinking.
Keith points to research by Capital Economics, which predicts a consumer boom in the second half of 2021. The surge in spending might represent a one-off correction after 18 months, when consumers have had no choice but to stay at home. Or it may herald a more substantial change in the way consumers think and operate. This crux is the starting point for Patron’s investment strategy.
In these confused circumstances, the middle of the road feels like a good place to be, Keith says.
‘In times of stress, think about the midmarket, think about what the average person does. The middle class market is a nice place to be,’ he says.
Employment risks are low, disposable income relatively stable and, combined, make anything the middle classes favour feel like a safe bet.
And it’s not a global middle class Keith is targeting, it is the British resident middle class. Rather than build highend residential schemes for off-plan purchases from Chinese or Hong Kong investors, Keith prefers to build for domestic owner/occupiers.
‘So much high-end residential is just a place for Chinese people to store their wealth. We’re not doing that, we’re doing office and residential and logistics developments based on what British
Keith Breslauer, Patron Capital
middle class people do and want,’ he explains.
In practice, this means avoiding extremes. Take the hospitality sector as an example. when Patron Capital’s finance helped refashion the Mercure hotel brand, a mid-market business offering in a crowded sector.
‘We’ve invested in more than 15,000 hotel rooms,’ Keith tells us. ‘We like the hospitality sector. The trouble is that it is very tricky to estimate when it will come out of the current crisis. The experts suggest 2023-2027, which is a very wide time range because business travel, local travel, conference hotels and so on will all recover at different speeds. So look at the experience in the US, and we can see that mid-market domestic travel has done well even during the pandemic because you don’t need to use planes to get there.’
Does this translate to the UK? Yes, Keith says. ‘Hospitality is not dead,’ he insists, and Patron will be buying into mid-market hotels that appeal to middle class domestic users.
Mercure Luxembourg
image: abaca press/jeff bauche
As it happens, Patron will not be alone in heading in that direction.
The return of global travel and the recovery of the hotel real estate sector will be slow and patchy, but travel company Tui gave an insight into who might be at the vanguard, certainly in the UK — over 50s, first in line to get vaccines.
Tui, the UK-based packaged holiday and travel company, said in January that it had seen a spike in reservations from people over 50 years old. This group, due for early coronavirus vaccinations, made up more than half of all bookings the company had received since the end of last year. Analysis concludes that the vaccine roll-out will free this group to take staycations. With savings levels high, they can afford to travel.
Keith is applying the same middle class preference to a wide range of property investments and stepping away from schemes that depend on up-scale or international users.
In December last year, Patron Capital and First Base began the planning process on a £190m mixed-use scheme in Milton Keynes. The MK Gateway project, designed by architects Rogers Stirk Harbour, will include 185,000 sq ft of office space, with coworking, R&D space and 285 build-to-rent flats, set around a public square. The green scheme on the site of the city’s former council offices is exactly the kind of middle class themed, domestic-demand-led project Patron wants to back.
Keith thinks he’s making a safe bet, but acknowledges there are risks.
‘Of course there are risks. If the virus – or a variant virus – re-emerges and the vaccines don’t work, that would be a disaster, because it’s not clear the banks can hold on much longer,’ he says.
‘The second risk is that the tech market goes bust. Perhaps a big disaster that causes unforeseen problems for Facebook or Google on their stock market valuations. That could destroy tech stocks, and that would affect all those technology, media and telecoms tenants who would not be able to expand into new offices.’
Not only would the office market take a hit in this scenario, but so would residential, hospitality and leisure, as the tidal wave of disaster touched consumer demand.
‘The third option is that governments make a mistake on taxation,’ says Keith, warning that taxing the middle classes too heavily and too soon will choke off the demand he’s counting on to revive the economy in the second half of 2021.
‘It’s a remote risk,’ says Keith, but not one he is prepared to ignore.
For now, Patron Capital is banking on the middle class to keep property afloat. If Keith is right, and other investors share his analysis, it will shape property industry and interiors/fit-out work flows for years to come.w WHAT PATRON CAPITAL DOES NOT WANT Sometimes you can learn more from what investors avoid than you can from what they buy.
Patron Capital’s Keith Breslauer provides a fascinating insight into the way serious money views some currently-favoured development options. Some they regard as a little too safe. Some as a little too risky.
Build-to-rent is not favoured: it makes steady but not sufficiently exceptional returns.
‘Build-to-rent ticks all the boxes, it is exciting, it is the best institutional investment class. But we don’t get involved because there is cheaper money than ours doing that, although we might have some BTR as part of mixed use schemes,’ says Keith.
Purpose-built student housing is also off the desk. Entry prices to this market have gone up, and yields (the income generated) have gone down. Keith’s complaint is that too much high-end luxury student accommodation has been built, which is expensive and depends on an international student population that might not come back.
The difficulty is that building for a domestic British student population, which will come back eventually, does not generally produce enough demand for the large single schemes, which are easiest (and most costeffective) to build and then operate.w
