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The cycle’s not over yet Jonathan Davis interviews the CEO of Helical plc

Face to Face

Gerald Kaye interview

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 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 25 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 to ’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.”

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’

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 correct 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.”

The London market is probably the most transparent property market in the world

So the cycle will go on until – well, until what happens, I ask? Higher interest rates start to go up or an external 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.”

Face to Face

About Jonathan Davis

Jonathan Davis

Jonathan Davis is one of the UK's leading authors and commentators on stock market investment. He is the author of three books: Money Makers, Investing With Anthony Bolton and Templeton’s Way with Money. A former columnist on the Independent and the Financial Times, he is a regular contributor to The Spectator and Money Week and writes his own newsletter The Investment Reader. www.independent-investor.com www.money-makers.co

Articles by Jonathan Davis

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