Gerald Kaye interview: the property cycle is not over yet

This interview first appeared in the Property Chronicle in September 2017. You can read other Property Chronicle content for free by following this link.

Gerald Kaye is a 20-year veteran at Helical plc (formerly Helical Bar) and has been CEO since July 2016. His office overlooks Hanover Square, which today still looks like a bombsite, thanks to the ongoing Crossrail construction work. Were it not for the construction site, however, he could look directly across the square at the Knight Frank office where he started work in the property business some 40 years ago.

What drew him to a career in property, I start by asking?  “I suppose I got into the property business because I was brought up in lovely countryside and my mother’s cousin was a land agent. I thought it sounded like a good way of life.  I ended up at Reading University doing what was then called the Estate Management course, now called Land Management. I soon realised however that if I wanted to be a land agent, it might not be as well remunerated as if I went into the commercial side. So I stayed doing commercial and that is how I ended up working in Hanover Square for Knight Frank. It was Knight, Frank and Rutley then. I was on their graduate scheme and worked there for four and a half years”.

His big break came when he he did some work for John and Peter Beckwith, who were clients of the firm and on their way to becoming among the most successful property developers of their generation. They asked him to join their company, London and Edinburgh Trust. It went public in November 1983 and Kaye joined in March 1984. He was 26 and, he says,I think they thought I knew rather more than I did”.

What was he hired to do? “I don’t know what my title was. I’m not sure I necessarily had one. But I joined and basically started doing a number of developments, mainly office developments in London and the South East. It was a case of you sunk or you swam”. He obviously did okay? “Yes. They gave me a great opportunity and gave me a lot of responsibility. I don’t know what they saw in me, but it was a wonderful experience and I learnt a lot”.

The 1980s was a great time to be in property. “Margaret Thatcher had begun to get the economy back into shape by 1984 and Big Bang was about to happen in the City. It was a period of strong growth in the property market. There was a lot of new development and a lot of demand in the City from the new banks that were being created, all wanting new, big trading floors and that sort of thing”.

I ask for the names of some projects that he worked on. “The first big building we did was 51 Eastcheap, which was about 80,000 square feet. We let it just before we finished it to Clyde and Co, the lawyers, for about £45 a square foot. They moved out twenty-five years later and I’m not sure the rent had changed at all in that time! The area has changed and the buildings around it have also changed. So it doesn’t look great now. It’s looking rather forlorn. I think somebody’s about to do something to it. It needs to be refurbished”.

His next big scheme was called Nightingale House, which was just off Berkeley Square at the top end of Curzon Street. The Beckwiths “maxed out the site” because the previous building wasn’t using the space properly. “They’ve now got consent to knock it down and build an even bigger residential building there. Whether they’ll do that or refurbish it as offices, I don’t know. The top end of the residential market is quieter now”.

What did Kaye learn from the Beckwiths? “Well, they were very entrepreneurial. I certainly learnt a lot.  One of my fellow directors there was a man called Chris Hoddell. He was an agent, had his own firm of agents called Hoddell Stotesbury. I learnt a huge amount from him. I always say I learnt more about property from him than I did from anybody else. He was very clever on how he financed the deals that we did. They were mainly financed with the institutions. It enabled you to do a larger development programme than if you used your balance sheet alone”.

As so often in the property business, timing the cycle proved to play an important part in the Beckwiths’ success. In April 1990, “by luck or more likely good judgment”, says Kaye, London and Edinburgh Trust was sold very close to the top of the market to a Swedish pension fund. What were the signs that the cycle was coming to an end?  “It got to the stage where we couldn’t buy any sites, which we’d been able to do relatively easily before. I just couldn’t make the numbers work.  It was in the very early days of using computers to do development appraisals. We had a man who had this very clunky programme which could automate the numbers, where previously we did it manually. I remember he came in one day and said it’s not surprising you can’t buy anything because everybody else’s programme has set the profit [target] to 0%!”.

“We were running on a 15% profit target. Because the market was growing so quickly, all these other people thought that the rents would grow so much that they’d still make a profit. Of course, that always leads to disaster. The banks lent far too much money and there was huge oversupply. Then there was the recession. ’91-’92 was very, very tough. A lot of property companies went bust”.

“We were fairly highly levered, but others were in worse shape. The banking was done slightly differently then. You’d have a syndicate of banks who would lend on a particular property deal. So far more banks were involved. What would then happen is you’d have a bank from somewhere around the world who would want their share of the financing back and they’d collapse the whole structure. There was no real control over what was going on. It hit a lot of property companies pretty hard”.

After the takeover of London and Edinburgh, Kaye stayed with the now Swedish-owned venture for four years,  went to Brussels in 1992 and ran the trust’s European arm,  “We had developments in France, Spain, Italy, Germany, Austria, Holland. I was flying around. It had been set up before I got there and the timing of these buildings being completed wasn’t great. There was a pretty serious recession going on from ’92 to ’94. So, I worked that out and we tried to sort out a lot of the issues”.

By 1994 he decided that he didn’t want to stay in Brussels any longer and told the Swedes that he’d like to move on. “I was introduced to Mike Slade, who had effectively founded Helical as a property company in 1984, and of all the options that were out there, I thought this was the most interesting opportunity. So I joined Helical in March 1994 and I have been here ever since”.

What was the key attraction that Slade had to offer? “Having been in Europe, I didn’t have any great desire to do much more there at the time. I joined Helical as development director. The brief was to build up the development programme. That really meant offices in London and the M25/Thames Valley region. At the time, in the mid ‘90s, you have to remember that the tech boom was happening in the Thames Valley and around the M25, not in Shoreditch”.

“After the war there were years of suburbanisation during which city centres got hollowed out and there’d be an area of dereliction around the central business district. It is only  in the last ten years that we have seen this new pattern of very strong urbanisation. The young now want to live in the city rather than in the suburbs. And the tech people all want to be in E1 rather than Camberley or Bracknell”.

Was Helical doing anything different to what you’d done before, I ask? “Not particularly. It was the same sort of thing.  Working with institutional partners, we were running a far larger development programme than our small balance sheet would otherwise permit. The first big development I did was at 33 Broad Street, which we did alongside what was then Scottish Amicable – before they got taken over by the Prudential. It was the old Goodenough, one of the Barclays Bank headquarter buildings. We let it just as we finished it, to the Halifax Building Society. That was about 200,000 square feet. It was finished in ’97”.

How would you compare Helical then and now, and to the other competitors in this business? What were you doing better than other people? What were you doing differently from other people? “I think in the late ‘90s, a lot of property companies were still recovering. There was still a lot of caution out there. There were a number of interesting opportunities which we were able to get involved in. That worked well. It was about timing the cycle again. As you know they always say there are three things that you need to know about property –  ‘location, location, location.’ I would actually say that just as important is ‘timing, timing, timing.’

That is an interesting observation so I ask Kaye to expand on it.“A lot of people think of cycles as seven years” he says.” I don’t know whether that’s a biblical thing or not. I would maintain that the property cycle is more like 15 years. If you go back, ’74 was a bad one. Then 15  years after that, we had ’89- ’90. That wasn’t good. That was fifteen years. And then say it got going again in ’93 – call the downturn ’91 to ’93 – 2008 was the next one, 15 years on from that”.

Which means, I say, drawing the obvious inference, that we are not through the current cycle yet? Kaye agrees. “It certainly isn’t over. What characterised each of the earlier downturns in the property market was over-lending by the banks. Since 2008, the banks have been very sensible and they require developers to put in a lot of their own money before they put their money in. That was why when we had the Brexit vote last year, a number of people had been listening too much to George Osborne and the Governor of the Bank of England who were preaching complete Armageddon. Everybody was expecting it. I just couldn’t see how it would happen in the property market because nobody was over-borrowing”.

So the market over-reacted? “Yes. There was a period of over-reaction and then it settled down in the autumn. The vote was on June 23rd. So everybody then went on holiday. By the middle to end of September, people were beginning to realise the world hadn’t ended and we are where we are now”. Which is still some way off the end of the cycle if it really is a 15 year one. “Absolutely. I think there’s considerable overseas demand for office investment and buyers round the globe for investment in London  particularly at the moment from China and Hong Kong.  Land Securities sold their building at 20 Fenchurch Street at a big premium, and likewise British Land at 122 Leadenhall Street. So, there’s a lot of interest and there isn’t any over-supply of offices. There’s a reasonable supply and a reasonable level of demand”.

So it is not correect to say that prices are dangerously high? “No. I think you’ve got to look at what interest rates are. The ten year gilt is yielding 1%. It makes property look attractive, particularly for the Far Eastern investors. They’re getting some very good diversification outside their geography”. And the currency is favourable. “Yes, the currency is favourable, the London market is possibly the most transparent property market in the world, there’s a rule of law that’s been in existence for centuries, it’s easy to transact, we welcome overseas investors.  If you want to go and buy a big office building in Paris, it’s much more difficult”.

So the cycle will go on until – well, until what happens, I ask? Higher interest rates start to go up or an extrnal shock to the economy? What’s the biggest cloud on the horizon? Is it Brexit?  “At the moment, I don’t know what’s going to happen. I went to a lunch where Jonathan Ruffer [founder of the famously bearish wealth management firm Ruffer LLP] spoke earlier this week. He said if any fund manager can tell you what’s going to happen next year, they’re talking absolute nonsense because nobody’s got a clue.  All we can do is have good buildings in good locations that are well run and hopefully one will survive any shocks that come.

Provided you keep your balance sheet not too exposed? “Yes. London, if it’s not the world city, it’s certainly one of the leading world cities and I think it’s got a tremendous future. I appreciate there’s uncertainty about just what Brexit may mean, but I’m optimistic that we’ll find a positive way through it all. The government must do everything it can to ensure that we have a good supply of both low skilled and highly skilled labour. We should welcome those people into the country if they can fulfil those roles”.

“The hospitality industry in London, if I understand it, is 75% overseas workers. We’re hugely dependent upon them. I heard a wonderful statistic last year, just post-Brexit, when a chap on Radio Four was saying that all the strawberries eaten at Wimbledon were British strawberries, and 98% of them were being picked by foreign workers. So parts of the economy are hugely dependent upon those people. I think the fact that so many people have come to London is why it’s prospering”.

Would  not a  hard Brexit do a lot of damage to London though? “Despite the rhetoric that we’re hearing from Michel Barnier and Jean-Claude Juncker, I think common sense will prevail. There are some people who want it all to go wrong because they want to prove they were right saying that it would go wrong. It’s a sort of self-destructive wish that they have. They’re going to harm themselves and everybody else. But I think we all need to be positive and get a solution that works”.

So Brexit is not changing what Helical is doing? “Well, it’s obviously an issue that’s out there and my optimism could be misplaced. But as I say, I think London’s got a huge amount going for it. How many American bankers want to leave London, to go and work in Frankfurt? Probably not many – and I suspect among wives of American bankers, probably even less! One doesn’t want to be complacent about it but obviously, the banks are all trying to protect their positions. They’re saying, ‘if X doesn’t happen, then we’ll go and do something else.’ But we’ll see what happens”.

Going back to valuation, I ask whether investors are right to be worried about the risk of rising interest rates? “Well, the time horizon (for interest rates going up] keeps going out, doesn’t it? Last year, they said interest rates would go up next year, and the last thing I heard was that nobody’s expecting them to go up until 2019. In the ‘80s, the average interest rate was 8-10%. When that went up 2-3%, that was quite serious. Today,  if the interest rate doubles, it only goes up to 1%. Even after you’ve added a margin on top, and everything else, it’s not going to make a massive difference. It made a difference when you went from 7% to 14%. That was not good”.

It is time to talk about Helical. You took over as CEO of Helical just around Brexit time last year, I say. Mike Slade, who has moved up from CEO to non-executive chairman (in definance of the corporate governance police), is obviously a hard act to follow.  What did you come into the job trying to do? What’s your objective – steady as she goes, more of the same? What’s going to be different under you? “Well, we’re a small cap property company. I think it’s important that what we do is clearly understood by the investor universe.  I’m trying to simplify the business so that rather than doing lots of things in lots of different places, I’m trying to be more specialised in what we’re doing. We’ve got three main strands to the business currently. 70% of our assets are in London and then we’ve got about 10% in office buildings in Manchester and then about 15% in what we call logistics. We’ve got twenty-four warehouses located around the country. They provide a good income”.

How far is this simplification driven in part by a desire to increase returns to shareholders? The property sector is obviously under a bit of a cloud , I say, with many REITs for example trading at a big discount to asset value. “What we’re doing” Kaye says, not quite answering the question, “is we’re building up a portfolio of attractive, well-located, multi-let office buildings. We’ve got a number of buildings in the EC1 area and then we’ve got some buildings around Hammersmith and Chiswick which are multi-let. They’re all buildings which the tenants like working in”.

“We’ve also got a big building just off Shepherd’s Bush roundabout. Even in the worst days of 2008-09, our occupancy level in the building never went below 97%. It’s a great building. It’s multi-let, a big café on the ground floor and it’s got a really nice atmosphere. People like being there. The Shepherd’s Bush area has improved enormously. All the money that Westfield have put in, and the BBC, that area is all being redeveloped, Imperial College are there in a big way. So, it’s really changed”.

“As I said earlier, I’ve got a strong belief in the ongoing growth of London. London has over eight-and-a-half-million people now. I was at a conference the other day and somebody was saying, ‘we want to invest in the Nordics.’ Well, you’ve got to put two Nordic countries together to get something bigger than London! And it’s such a dynamic place. There’s always something happening. London is the seat of government, it’s the home of finance, and it’s the home of tech. You go to the US and you’ve got government in Washington, finance in New York and tech on the West Coast. Over here it is all in one place. So, even if one sector might be down a bit, the others will be up a bit”.

Helical recently dropped out of a development scheme in Hammersmith, shortly after control of Hammersmith and Fulham Council changed to Labour. Was there a connection? “I think it just went on for a long time and the parameters changed”, is all that Kaye will say. OK, so what about Manchester? London is great, but what is the attraction of Manchester? “Manchester is the second city of England, part of the Northern Powerhouse, of course! it’s a thriving centre on its own. Rents are going up, there’s a good level of demand. I heard a statistic today that there 100,000 students in Manchester and 75% of them stay in the Manchester area when they’ve graduated. It’s got a highly skilled workforce and there are a number of strong occupiers up there.  It’s a really interesting city with a good heart to it. Howard Burnstein did a wonderful job putting it back on its feet. It’s a good centre”.

Simplification of the portfolio means that Kaye has already sold out of a number of schemes, incuding its other regional centres such as Cardiff.  Where do the retirement villages Helical is developing fit into his scheme of things? You didn’t mention them, I say though they are still in the portfolio. “We’ve got four retirement villages and we’re building them out until the individual house and apartments get sold. So, we’re completing the business plan. It’s an excellent business. But it’s quite capital intensive and I think our skills and our capital are better deployed in London”.

So, you won’t be doing any more? “No. If you look at the way retirement villages have grown up in the US, Canada, Australia and New Zealand, there’s a massive undersupply. The demographics are excellent. It’s for the active elderly, the over fifty-fives, really nice surroundings, a central clubhouse and everything. It’s a great concept and will be a very strong, growing market going forward. But we’re not really geared up to do that”.  Might you sell them? “We’re completing the business plan. As the units are finished, they’re sold. They’ll all be completed at the end of the process. Three of them are virtually completed and the fourth will be completed in phases over the next three or four years”.

We are getting close to the end of our time so I reel off a series of further questions about Kaye’s plans, though he is not giinge too much away. Is the idea that you’ll use the capital you are realising from asset disposals to invest in new things – or is it going to be given to shareholders? “No [not to shareholders]. We’ve brought our loan to value down a bit and we’ll redeploy the capital elsewhere in the business. And then we’ll redeploy into new assets”.

Do you have a return on equity target? “We have a number of targets that we look at”.  Are there still enough opportunities out there that you can compete over the course of the balance of this cycle? “Yes. Look, back in 2011-12 you could buy an investment in London and the market, which was going up, recovering from the 2008 downturn, was  probably growing in value 20% a year for three or four years. It was relatively easy to make money and you didn’t have to do a huge amount to do well. Returns are going to be much steadier from here, so if you are going to outperform, you need to create additional value. You need to do that by repositioning assets, redevelopment, refurbishment and so on”.

How soon do you think it’ll be before we see evidence of you putting new capital to work? “We have been redeploying some of that capital already and we’re looking at a number of opportunities going forward”. But this is still a growth business and the cycle is still intact? “Absolutely, yes. We’ve said we still believe in the dynamics of London and in what we’re doing.  Why then are so many good property companies trading at a big discount? “The London-oriented companies are trading at a discount and the companies that are not trading at a discount are those that are paying out a much higher income. Investors want income. They’re not necessarily looking at potential future capital growth”.  Is that rational or irrational, in your view? “It’s how they’re currently positioning themselves. But it will change and investors, I am sure, will begin to see the positives of the capital growth that exists in the London-based property companies”.


About Gerald Kaye

Date of birth: March 1958

Education: Radley College,Univeristy of Reading.

Favourite music: Rolling Stones ( what a great business as well)

Family: Wife Emma, son and daughter

Drives: Range Rover

Home: Essex

Most admired architect: AHMM

Favourite building in London: The Leadenhall Building – iconic

Favourite holiday destinations: Kharlovka River, Kola Peninsula, Russia and Zermatt

Golf: Aldeburgh, no official handicap

Salmon fishing, shooting, skiing, golf, keeping fit

Best buy UK investment property for £1m: apartment at Barts Square, City of London