Real estate, alternative real assets and other diversions

Governments understand very little about property Jonathan Davis interviews David Lewis about his 40 year career as a property developer and investor

Face to Face

David Lewis

Thanks to a successful 40 year career as a property developer and investor, David Lewis has created significant assets, but is better known today for his extraordinary art collection than for his property dealmaking. He sold most of his remaining property assets in 2006 and 2007, thinking that the market was getting toppy, and has not been tempted back in since. In the second of our in-depth interview series he tells Jonathan Davis what he has learnt about the property business over the course of his long career.


David Lewis remembers well the first task he was ever asked to do as a young, still wet behind the ears property professional. Having earned his RICS exams exemption with a mixed degree from the College of Estate Management and the LSE, he was the first employee in a business set up by Barry East, who went on create and build Town & City, one of the most prominent of the postwar property companies. The young economics/estate management graduate’s task was to go down to the recently acquired Chiswick Empire site in west London – which East wanted to develop into ‘decentralised offices’, jargon of the day for ‘out of town’ developments – and clear a group of gypsies from the car park.

This task was not easy, because “then, as now, the police don’t want to get involved unless it has gone beyond a mere civil disturbance”. Although he says “I won’t go into the details of how we did it”, the job of evicting the gypsies was somehow managed and Lewis was on his way. He spent the next three years watching and learning everything he could as his mentor embarked on a frenetic round of dealmaking activity, driven by a fierce but ultimately flawed ambition to make Town & City as big as the giants of the development business, the likes of Harold Samuel, Jack Cotton, Charles Clore and the rest.

So that is how he became a dealmaker, I ask? “I was lucky because although I was only there for three years, I learnt more in those three years than I might have learnt in ten years somewhere else, because I was the first employee and it was a tiny office, and he was doing deals every day of the week – it was literally a deal a minute. I was thrown in at the deep end but when you are with someone like that, you learn fast.”

I was thrown in at the deep end.

Barry East’s core strategy was to find and then finance his deals through a series of sale and leasebacks, principally with the Prudential, then as now (along with Legal & General, the Coal Board pension fund and others) a leading institutional investor in property. The insurer would typically take a yield of 6% and the two partners would split any surplus return – 60% in favour of East’s venture and the balance to the Prudential. The details of every deal were dutifully logged and summarised for the board in a five-part report – a habit (and a business model) that Lewis was to maintain when he set up his own property venture five years later.

The other part of East’s strategy, once he had created Town & City, was to use his stock market listing to issue shares and build the balance sheet by acquiring freeholds. When he started out, there were still very few quoted property companies but once building controls were gradually lifted after the war, investors began to realise how much money the property men were making and it became a fashionable sector that they felt they had to invest in.

Town & City, like many others, began its life as a quoted company by acquiring a shell company, one of many rubber plantation companies that had fallen dormant. “They were turned into property companies overnight. Of course you didn’t worry about circulars and things like that,” says Lewis. “That was much too complicated. Barry’s policy, which I learnt fast, was that he would finance his developments principally by sale and leaseback and he would then also issue shares to buy other property companies.”

“Barry used to issue shares and acquiring freeholds was how the balance sheet was built up. The shares kept on rising because he was doing so many developments. In my time there it was all about the London railway stations. There were lots of leases from London Transport, such as Holborn Viaduct and Waterloo – 99 years and no rent review. It was just scheme after scheme. There was no capital gains tax in those days. Investors loved it. Property was the in thing. It was like IT companies now.”

On fashionable industries

“There’s always an industry which is the one to be in. It’s like the creation of the retail empires, which was done mainly between the wars. The chains like Burtons and Tesco – I knew Jack Cohen. I always remember him telling me: ‘I used to want to take shops, and the people would say, “We only want to lease to multiples”. I said, “If you don’t give me a shop, how can I become a multiple?”’ And he used to laugh.”

The 1950s and early 1960s were, in hindsight, a great boom time for property – relatively easy money, I suggest. “Yes, for property developers it was an easy money era, although you still have to understand that nothing is quite as simple as everybody makes out,” Lewis recalls. “If you had business flair, property development was the business to be in after the Second World War. Demand hugely exceeded supply, because after the war, not only office occupiers but also retailers were desperately short of accommodation. Town centre after town centre had been devastated. It was a time, to put it rather crudely, when as long as you had a telephone and a motor car and you could talk fast to your bank manager, it wasn’t that difficult to make money out of property development. The demand was such that you could more or less pre-let everything. The big agents had schedules of people who needed property and you pre-let.”

How interventionist policies made a difference

Things ceased to be quite such plain sailing after the election of the Labour government in 1964. The Macmillan government had introduced capital gains tax in 1962, and Wilson set up a Land Commission which was originally intended to revisit the 1947 Town and Country Planning Act’s proposals for a land tax and also introduced a notorious system of office development permits – proving in the process, Lewis observes, how little governments really understand about property (a theme that crops up more than once in our conversation).

What became the Land Commission Act of 1967 took three years to emerge and by then it had been “heavily emasculated. It was not the draconian removal of all development value that the Wilson government had planned. But obviously, during the period, it was a huge deterrent. What it did, of course, was restrict development to some extent. Then George Brown comes along with his Office Development Permits. Young people today will probably find it difficult to realise but for any office above 3000 square feet, you needed a permit from Whitehall.”

These two interventionist measures, like so many well-intentioned government initiatives, inevitably had unintended consequences. With supply now so limited, the most obvious was that “every building went up 20% in value overnight, because you couldn’t build anything. You also needed an IDC, an Industrial Development Certificate, to build factories. That is why all these factories were built up in the north and in Scotland, places that had poor communications and transport, and the wrong workforce. That was the only place you could get a certificate to build a factory. To get an Office Development Permit, normally it meant you needed to have a tenant. They wouldn’t give one for speculative development. If you had an occupier lined up, you had a chance to get it.”

By this stage, after three years with Barry East and two with another entrepreneurial company called Maybook Properties, Lewis had set up on his own. As well as his hands-on experience, he knew or was on good terms with other influential property figures of the day. These included Norman Bowie, who had moved from being Deputy Chief Surveyor at the Prudential to become a partner in Jones Lang Wootton, one of the most effective agents of that era, and he met other developers such as Maurice Wohl and Harry Hyams. (Lewis recalls in passing that the reason Hyams took so long to fill his office development at Centre Point was not because he was deliberately trying to grow its value by sitting on it, as many complained at the time, but because he had a rigid policy of only letting buildings to a single tenant. Centre Point was too narrow to appeal to large corporate tenants, and it was not until 1979 that Hyams finally relented and let a chunk of the building to the CBI.)

But the Wilson government did not deter you from going it alone, I say? “No, I set up my own office in 1964, just as Wilson came in [to government]. Everybody I knew said ‘don’t do it. The end of the world has come’. But I took the view that, as I didn’t have any money, nothing minus nothing is nothing, so it didn’t matter. I did have some minor money in the form of a few Town & City shares. But I was young, I was 25 years old, I had a wife and two children, but I had learnt my trade. I knew who to speak to at the Prudential and the Coal Board. And I knew Norman Bowie, who was retained as an adviser to all sorts of institutional funds.”

On property entrepreneurs

“There are loads of guys who have made a great deal of money in property in recent years. Alan Sugar is a very clever man; last time I saw, he was estimated at about £800 million. I don’t think he has any debt. If there is, it is minimal. You would not call him an original professional property man, but he’s a brilliant businessman. The Livingstone Brothers, at London and Regional, which is not public, are also brilliant. The two Israelis, the Zakays, have built up a huge company [the Topland Group].”

Stepping out alone

The first deal that Lewis did on his own was for a parade of shops in Sandhurst, near the military training establishment. Having worked on several shop parade transactions, he knew how to structure a sensible deal. It was funded by a sale and leaseback with the Prudential. He couldn’t buy it himself because selling it on to an institution would create a taxable event. The purchase and the funding had to be simultaneous. He did however have to put down a 10% deposit of £1400, “which I didn’t have so I had to go to the bank the next day and say I hope you will cover this”.

The trick then, he says, just as East had showed him, was to move on and do more leaseholds which, assuming they produced a surplus above the institution’s required yield, would in time produce some value in the form of an uncharged leasehold interest. “You could then go along to the bank and you had some security. With that you could borrow some money and start keeping one or two freeholds. It was just a series of steps.”

The first freehold Lewis ever kept was a parade of shops in East Moseley near Hampton Court. He didn’t have enough money to build anything on the site so granted a building lease to a builder. The builder found Tesco as a tenant and some time later the rest of the shops in the parade came up and he bought them all, funded by a mortgage from Sun Life of Canada, arranged through Norman Bowie. One of the sites in the parade had originally been leased to Woolworths as anchor tenant in 1939 on a 60 year lease at a fixed rent of £480 a year (those were the days). It is one of the few commercial properties he still owns – occupancy having since passed from Woolworths to Carpetright and now (sign of the times) Poundland. The rent is now more than 80 times what Woolworths paid.

Among the later deals that Lewis did was to take on a site in Munster Road in Fulham, which he pre-let to a subsidiary of Courtaulds for a purpose-built fabric factory. After being turned down by Barclays because of Bank of England guidelines, it was funded by Manufacturers Life, again with the help of Bowie. The profit from that deal in turn enabled him to buy the freehold of 85 Gracechurch Street in the City of London from Land Securities. He funded that deal with Eurodollars, not sterling – he thinks the first investor to take that route at the time.

Lewis then began to specialise in upgrading buildings. “Your readers would find it very boring to go through a list of every single building we ever did, because obviously, I did many, many deals. But we did gradually develop an expertise in upgrading existing buildings, which was very rewarding and very interesting. 85 Gracechurch Street was part of it. You take storage areas and you would turn them back into offices, and you would air-condition them and so on. You’d turn caretakers’ flats into offices. £10 a square foot was the going rate.”

Another profitable venture was with the Crown Agents, which Lewis cites as a further example of a well-meant but disastrous public sector attempt to make commercial investments. The heavy losses made by the Agents were eventually exposed in a report that led to the semi-autonomous body being privatised in 1979. “We didn’t give them any problems. We made them money, but they were very naïve and they hadn’t a clue what they were doing at that time,” Lewis says. “They had huge amounts of money and didn’t know what to do with it. So they decided they would become bankers and property developers, under the control of civil servants. They’d lend you 100% of the money. They thought they were being very clever, but in fact they were exploited.”

Moving into quoted companies

The Heath government of 1970-74 was again a boom period for the property business, during which time Lewis and a number of partners created and built up his first quoted property company. It was formed from a shell company called Eastern and General, whose founders had an interest in a royalty stream from a pre-war oil discovery in Bahrain (but who bizarrely failed, in one of life’s great might-have-beens, to find any oil in nearby Kuwait). The shell was eventually renamed Cavendish Land and joined in another furious spate of dealmaking as the property boom went into its final pre-crash frenzy.

The deals they did including acquiring most of the office buildings in Ealing from ‘Black Jack’ Dellal (“a brilliant negotiator and a man of honour”, much maligned, says Lewis), and two office blocks in the City that they bought at 24 hours’ notice from Jimmy Goldsmith (so that he could buy Allied Suppliers, the deal that helped to make his fortune). And then in 1973 Lewis – as a keen student of the property cycle – decided that the market was getting too hot and prudently sold the company for about £40 million to Legal & General, who already had the benefit of some stock options granted at a much lower price.

So Lewis managed to dodge the 1974-75 crisis that finished off so many other companies, I ask? Alas, he says, no. “I always follow the cycles. But although I did that perfectly for the public company, it was not the same on the private side. Of course, the Middle Eastern war and then the crash of ’74 and ’75, pulled up everyone everywhere. We had our private interests and we had significant borrowings with Legal & General and Norwich Union – long-term mortgages, fixed interest rates and only a small amount of bank borrowing.”

“But in those days, even a small amount of bank borrowing could kill you. I rather foolishly had bought St Catherine’s House, Kingsway, which was the headquarters of the census. It was a stupid deal and I didn’t have enough people with grey hair around me to say ‘maybe you shouldn’t do that’. And I bought it for quite a lot of money. It was still a wonderful building. It was let to the government.”

In those days, even a small amount of bank borrowing could kill you.

“But it lost value sharply and in order to fund that, basically I had to unravel the entire thing in 1974-75, because even though the bulk of our money was fixed, the bank element of our money was costing us 15%. Nobody could withstand that.” It was a time when even Land Securities, under Harold Samuel, was refused finance by Lloyds, his bank. Eventually, he too had to raise money on the Eurodollar market just in order to survive.

What lessons did he take from the 1970s experience? “I was always doing lots of things at the same time,” Lewis says now. “I was quite good at juggling but the mid to late 70s were a very, very difficult time indeed. I owed money to the Inland Revenue. I had a very large capital gains tax bill without the resources to pay as a result of the takeover of Cavendish Land. The money got absorbed because everybody took the cash. We managed in the end, but it was a very difficult time. It made me a lot more conservative from then on.”

On Mrs Thatcher

“Back in ’73 and ’74 when the crash was upon us, the prices and incomes freeze that the Conservatives brought in froze rents as well. That’s why the banks were going bust. NatWest were having their accounts qualified. And the pension funds were going berserk because they all had union nominees on their boards. They were finding they couldn’t increase the rents. I was asked by the British Property Federation to go along and meet the Shadow Environment Minister of the Conservatives, to help table a question. Mrs Thatcher was the Shadow Environment Minister. She made contact with me, and over lunch I started explaining to her the implications of a freeze on rents. When I got home that night, my wife asked me what she was like. I said, ‘Oh, she’s the cleverest woman I’ve ever met.’ In ten minutes, she knew more about it than I did. She was so bloody clever. No small talk, no humour. But she had a needle-sharp brain.”

Lessons from metals

It took a few years therefore before Lewis was back in the game, making deals again. His stake in the first venture was bought out by his partner in 1981. Then he started to work on a variety of deals with a close network of Iraqi immigrants. The latter’s Middle Eastern contacts eventually led to them jointly taking control of another London-listed shell company, a gold miner called Hampton Trust, which prospered and was eventually sold to New Zealanders in 1987. Privately meanwhile Lewis had bought a big block near Euston station.

Although the gold leases that Hampton Trust had had been untouched for years, when the gold price soared in the 1980s the North American mining company Newmont bought into them in return for a royalty stream and that business was eventually floated as a separate company, Mount Martin Mining. A sister company of Hampton Trust, which owned nickel rights nearby, had earlier been caught up in the crazy Poseidon stock market bubble. What was the deal with Newmont, I ask? It was “a lot like granting a ground rent for a building. You give them an interest in return for a share. And they pay you money. They opened up the gold mines. The techniques were far more sophisticated than 60 years before, so because the company still owned all this land, they were able to start extracting gold from the mines which had been shut down.”

Did Lewis learn anything from his foray into the metals business, I ask. He did. “When we did the deal with Newmont, we had a few drinks at their small office in London, Holborn somewhere. I was the CEO and was just shaking hands with their CEO, and I said to him, amongst other things, quite innocently, ‘What do you think the gold price is going to do?’ He looked at me as though I was a complete idiot. He was older than me so he was entitled to. And he said, ‘I have no idea. If it goes up, we do very well. If it goes down, we don’t do so well. But…’ he said – and this is why I’m quoting him – ‘what we will do, if the price goes down, we will cut our costs. That’s all I will tell you. If the price goes down, we will cut costs so we can still make a profit. And that’s all I’m interested in. If it goes up, it’s easy. If it goes down, we cut costs.’

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