When Great Portland Estates announced Neil Thompson’s departure in December last year, its press statement had, instead of the typically anodyne tone that listed firms usually adopt, a bit of punch.
“We were unable to find a role within the group that matched his career aspirations,” GPE’s chairman stated, leaving one of the capital’s most respected development experts just 18 days to work over the rest of the year, including the Christmas period.
Whatever may have gone before at GPE there is no doubt that Thompson (pictured) now has a job that would meet almost any property professional’s career aspirations. Appointed in March as chief executive of Brookfield’s office business in London as a replacement for Martin Jepson and having got his feet under the desk in June, he is now charge of one of the City’s largest office portfolios. In addition, in working for the second-biggest owner of property in the world, he has almost unrivalled access to capital.
With his first 100 days under his belt, Thompson has a clear vision of how the Brookfield business in London should expand. At present, apart from Brookfield’s 50% holding in the Canary Wharf estate, which is run by Sir George Iacobescu, all the company’s London assets are clustered eight minutes’ walk away from each other around Liverpool Street station, EC2. They are also all large, trophy office assets – the sector with which Brookfield is famously associated.
That is going to change. Expect Brookfield to branch further out geographically in London alongside key infrastructure, to veer more into mixed-use and retail development and to get its hands dirty with smaller projects instead of just waiting around for the next 1m sq ft tower development opportunity to come along.
“We are in a distinct geographical location at present and we need to diversify the portfolio and look at other areas of London, including the West End, South Bank and King’s Cross,” he said, speaking at EG’s Finance & Investment Summit at the British Museum earlier this month.
“We are opportunity-led and we will look at opportunities in the City when they arise but we will not be limited to it because we already have a significant portfolio there. We will also look at growth areas such as Shoreditch, where we already have made investments but we think there is still significant growth to come.”
It is increasingly rare that developments are orientated purely towards one sector. The evolution of communities and the general concept of placemaking means that having a mix of uses is increasingly important. Brookfield’s ability to adapt to this has been seen in part through the 310 apartments it is developing alongside Amazon’s new London headquarters at Principal Place, EC2. Thompson is eager to undertake some retail-orientated developments that the company has also been known for the other side of the Atlantic.
“Yes, as a company we are office-based but we also have significant expertise in retail as well and we will not be put off if opportunities have significant asset management or development elements that have retail or residential angles. We won’t be shy and say it needs to be office-led. We have the right expertise in-house and we want to leverage that, scale up and take advantage when the right thing comes forward.”
The scale of Brookfield’s development capabilities is typified by its 940,000 sq ft 100 Bishopsgate, EC2, project, which is due to complete at the end of next year. The building, which has secured lettings to Royal Bank of Canada, Jefferies and Freshfields, will be worth more than £1bn when completed, but finding another such opportunity is not something Thompson is expecting imminently.
“We won’t be able to do a 100 Bishopsgate very often and we have to look throughout London at opportunities that will resonate with the market. We have the opportunity to upscale quickly if something of magnitude comes along in terms of balance sheet and capital relationships but we don’t need those deals all the time in order to move the needle. We can be looking at smaller assets that still provide good returns for the Brookfield balance sheet.”
The fact that Brookfield expects to be looking at somewhat smaller projects than it has done in the past does not mean, though, that Thompson expects to take a more conservative approach in general.
“Given the returns that our investors expect from us, which are into the double digits, we need to be investing in heavy development or significant asset management opportunities. We are not a buyer of long-dated passive income that we will sit on forever. Over the course of the next few years, if you buy at 4% the chances are your return will be 4%, so we will take risks. And I think that a lot of investors are concerned about risk, which helps because one man’s risk is another man’s opportunity.”
One reason that many developers have been taking a risk-off approach is Brexit. Brookfield’s portfolio, given its City concentration, is arguably as exposed as any other investor’s is, but Thompson said that it had been less affected than some initially expected.
“The period immediately after the vote there was an occupational slowdown as everyone was sitting on their hands and concerned with the thought that rents might fall off a cliff. The first half of 2017 has been good occupationally, on a par with the 10-year average. There is no doubt that deals are taking longer as some businesses are concerned but as a result of the concern from developers too, the supply pipeline is drying up quite quickly,” he said.
“The currency devaluation has brought in significant overseas investment, particularly from Asia, that is still getting a premium in London yields on a global basis compared with markets like Hong Kong. I am slightly concerned though, that, with short-income secondary assets that require significant capex, we haven’t seen yield adjustment and I think that’s where there might be problems if rents decline and rent-frees move out.”
As well as working with Amazon at the tail end of its Principal Place move Thompson was also central to Facebook’s forthcoming move to Rathbone Place, W1, when he was at GPE. The demands of tech giants will be an increasingly important lesson for developers to learn in London as the economy diversifies away from finance, and Thompson said the industry would have to work hard to keep up with them.
“Often businesses such as these don’t know exactly what they want because they are growing at such a rapid rate, which creates an interesting dynamic. They are investing a huge amount in their own technology and what we are developing needs to keep pace with them, otherwise buildings will be obsolete. Occupiers such as Amazon are very security-conscious and want to understand how their buildings operate. Things like the amount of cooling they require has gone up exponentially over the past few years and I don’t see that changing,” he said.
As a result it is anticipated that Brookfield will work more closely with major occupiers from an earlier part of their relocation process as time goes on.
“With those occupiers, as the pipeline decreases, I think we will be building to order in a more bespoke way, finding sites with them and getting planning. It is better for them and it decreases risk for us.
“We don’t have a serviced office business and I’ve been reluctant to do a lot of work with such businesses as I feel that we ought to be making that money as a developer. But going forward I see most occupiers taking 80% on a standard lease, 10% flexible space on one- to five-year leases and 10% ‘super flex’, which they can hand back in one to three months for specific projects or pitches. If occupiers know the different costs, they are broadly prepared to pay for the flexibility.”
Brookfield has dominated the City development market since the financial crisis and while its collection of trophies in the Square Mile is likely to be the running theme of its portfolio for some time to come, under Thompson it now has a new, bolder ambition and the expertise to satisfy with the world’s most ambitious occupiers.
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