Real estate, alternative real assets and other diversions

We should be able to control land prices more efficiently Jonathan Davis speaks to leading property academic Andrew Baum

Face to Face

Professor Andrew Baum is one of the UK’s leading property academics, currently Visiting Professor of Management Practice at Oxford University’s Said Business School, responsible for developing the school’s real estate and real assets initiative. He is also chairman of Property Funds Research, a real estate consulting and research business, and Newcore Capital Management.

Jonathan Davis is an author, columnist and professional investor, editor of The Investment Reader and a regular contributor over many years to The Spectator, Financial Times and other publications.
www.independent-investor.com


It only takes a few minutes in the company of Andrew Baum, recently appointed as the first real estate professor at Oxford University’s Said Business School, to realise why he now prefers to be an academic rather than the successful full-time property professional he trained to be. His heart is in teaching and research and in having a platform to “speak truth to power”, however unpalatable that truth may be to the natural conservatism and vested interests of the property world or the head-in-the-sand attitudes of truth-averse politicans.

Before venturing into such topical issues as the shortage of housing in the UK (“scandalous”), or the merits of a development land tax (definitely “interesting”), I start by asking Prof Baum how he came to be involved in property in the first place. The “simple answer”, he says, is this: “My father was a chartered surveyor and I couldn’t think of anything better to do. I remember being interviewed for a law degree at LSE and King’s College, and feeling completely alienated by the conversations that were going on in the corridors by the students that were doing the degree. Their conversations seemed to me to be way too intellectual and well beyond my capacity to think.”

“My father was a chartered surveyor and I couldn’t think of anything better to do.”

“So I was put off law in my interviews and I ended up, through the clearing scheme at the ripe old age of sixteen, going to Reading University to do what was called Estate Management. Why I was in such a hurry, God only knows. The school I went to put me through O Levels in four years, rather than five, and it seems like I’ve been on an accelerated timetable ever since. I never walk, I always run, and life just seems to be short of hours.”

It took several years for him to realise that teaching and research, the life of the property academic he now enjoys, was for him. “My dad had given me some work experience in Leicester City Council’s property department, and I graduated at nineteen and got a job working for the district valuer at the Inland Revenue’s property department, valuing farms for estate duty.  Then I got a job at Reading Borough Council, in order to get back close to the university, because I think I’d realised by that time that being a teacher was probably something which was more appealing to me than being a committed, full-time property professional. So, I went back to the university and I taught at Reading for ten years, always doing something on the side – rent reviews, valuations, structural surveys of houses, whatever I could find, but enjoying teaching immensely. in the end, I felt that I’d accidentally stumbled across a career that combined the things I wanted to do with something that was slightly more remunerative than being an English teacher”.

So you have had a good deal of practical experience, at least, I say? “Well, a little. I did a lot of structural surveys of houses and most of them were probably professionally negligent because I didn’t really know enough about them! I can’t imagine I was very good at it. But you learn by doing. So, I was learning my trade by doing real work, while I was teaching and enjoying being in the classroom.” For the past thirty years, in aggregate, he reckons he has worked more hours in the professional world than in academia. What he calls his “reasonably serious” professional career includes founding two successful property research firms, acting as CIO of Henderson’s property business in the 1990s and launching one of the first fund of funds in real estate, a venture that subsequently became CBRE Global Investment Partners.

Property in academia

That raises the question, I say, of whether – and if so how – property is an academic discipline which can be taught. “Yes, it absolutely can be taught,” Baum says, “because property is a multi-disciplinary subject. To be a really good property advisor, let’s say, you need to understand finance, economics, law. It’s pretty easy to put together a syllabus that is reasonably intellectually demanding. You wouldn’t say it’s a property degree, but it would involve all of the things that you need to be comfortable with.”

“A property advisor needs to understand the law of contract, the law of property, financial models and how you use them to value pieces of property [Prof Baum is the author of several textbooks on the issue of property valuation]. You need to understand land economics and why some parts of the city are more valuable than other parts of the city. And then they will tell you that you need to understand construction as well, but I never really understood that. I think economics and finance are the basic building blocks that you can teach in property. But then you need to add those things together with practical experience to become a really valuable advisor, that’s for sure.”

But that is not the way it has always been taught, I say, reflecting on my time at Cambridge University when Land Economy was the favourite degree subject of beer-loving rugger players and would be members of the Blues boat, not always known for their academic prowess. That is probably true, says Baum: “I’m sure forty years ago, they’d have said that rowing was probably better taught than finance in Cambridge.”

But the Cambridge degree, he notes, has always been more about economics and the environment, so “the market has moved forward to meet them, in many ways, because sustainability and energy use are all concepts of environmental value and are relevant. That particularly chimes with undergraduates who want to feel that they’re doing the right thing, as well as just training to be somebody who’s going to make some money.”

What then are his plans for the newly created real estate programme at the Said Business School in Oxford which he now heads? Having been a part-time professor at Reading University for more than 20 years, and having spent five years teaching a finance course to Land Economy students at Cambridge, he says the objective is to combine teaching and directing a real estate MBA elective with research into important issues of national or strategic importance.

The first fruits of this effort was a pioneering collaborative study into ‘proptech’, an investigation into the ways in which new technology has the potential to change the way that property is owned, managed and used – a subject which as Prof Baum notes in his introduction, offers great opportunities to entrepreneurs in an industry “plagued by inefficient processes and uncecessary transactional costs defended by self-interested professionals and institutions”. The real estate business, he adds, “is not known as an industry which embraces change”.

Universities are a force for good in the world

Apart from teaching and research, his new job also involves “trying to build something from nothing, which fundamentally involves trying to raise money, in order to be able to hire people to work with me and to take it over from me in the coming years. I accept the responsibility that it’s something I have to do. It’s something I did at Reading University as well and it’s something that I believe has to be done. It’s a lot easier in the US because people’s propensity to give is much, much greater in the US than it is in the UK”.

“But we need private funding for world-class institutions. I’m proud of our university system. I’m proud of the fact that we’ve got five of the top twenty universities in the world. I think it’s a remarkable statistic, despite everything that successive governments have done to damage our position by restricting flows of immigrants into our university courses and not giving them any right of remaining, for example.”

“We have to do everything we possibly can to support our university system. Because it’s one of the few things that I believe is still a force for good in the round. Universities generally haven’t been vilified in the way that the police, MPs, the Church, journalists even, pretty much everything else has been brought down by scandal. It’s not really happened in the universities yet. I very much hope it never will.”

Does that then make him a supporter of tuition fees, I ask? “No, I’m no fan of tuition fees. I would much rather be in Harvard’s situation, where they don’t need to charge any tuition fees because their endowment is so big that they can afford to give university education away as a free gift to those who’ve most earned it. We’re in the opposite situation. We’re under much too much pressure to make money.” He name-checks an Australian university which runs a Master of Commerce course with 20,000 students paying large fees. “That is just a money-making venture which you wonder what the educational benefit of it is, other than to make money for the university. I’m sceptical about that.”

“I think Oxford University should be a break-even institution whose target should be to produce world-class research to improve the nature of the living experience. That’s what we should be about. And if the business school has to make a surplus to supplement science research, then fine. I accept that challenge. But there’s a limit. There has to be a limit.”

What conclusions does he draw from the polarisation of the property world around the issue of technology, the subject of his recent report?  “Those two sides just need to be slightly more familiar with the motivations of the other side. The stodgy chartered surveyor needs to understand what’s driving these 25 year olds into spending all of their waking hours developing tech solutions, and understand the way young people think about how they communicate with each other and why should they like.”

“But equally, the young entrepreneurs need to spend a bit more time thinking about why the conservative property professionals have done reasonably well in their lives, and what is it that a conservative approach to life has offered. They do need to understand that because you can waste a lot of money evangelising about things that ought to happen, but which the past has shown you never can. There’s mutual education needed.”

The housing shortage: what can be done?

The second research project Prof Baum is leading at his new academic home is on the shortage of housing, a political hot potato. “The two problems that we want to address are the absolute shortage of housing – and in particular the shortage of affordable housing – and then the growing issue of senior housing. How do we house older people? We don’t really have a market solution to that yet. I remember somebody telling me that the guy who started McCarthy & Stone [housebuilding firm specialising in retirement projects] was complaining that he was much too dominant, that he was a near-monopolist in the market. There’s just no other people doing what he was doing.”

“That seems crazy. I think we generally need to understand how we would best cater for older people in residential, how well the market is catering to them at the moment, and if it isn’t catering to them really well, what needs to change. And then the same thing about general housing supply, but in particular, affordable housing. I think that takes you back to the planning system. Is it correct to have an absolute ban on building in the green belt? Is there really a shortage of land for housing development? Do what extent do housebuilders stockpile land and ration it, in order to make more money out of land? To what extent should we use compulsory purchase powers to use fringe land for housing? I think there are a huge number of issues that need to be considered.”

“House prices are too high in this country and we just need to build more houses, not help people buy them.”

But is this not, I suggest, already a well worked area of inquiry? “I’m aware that there are lots of people working in doing research on housing, but I’m hoping that we can bring an angle to bear on it that is slightly different, through combining an understanding of property fund management, finance and the planning system, to push back against government’s constant small changes to the way housing is produced, and to stop their focus on the demand side, to stop giving people money to buy houses. House prices are too high in this country and we just need to build more houses, not help people buy them.”

The politics of pricing

Would he also include ultra-low interest rates as one of the factors in the problem, I ask? “Yes, definitely. I would include that and I would include the Conservative Party’s policy that was expressed most cogently by George Osborne in the lead-up to Brexit, when he said that if we leave the European Union, house prices will fall by 18%. The fact that he thought that was a point worth making is indicative of the Conservative Party’s attitude. There are plenty of people outside London who would be delighted if house prices fell by 18%. The fact that he didn’t understand that is just indicative of the Conservative Party’s pro-house acquisition approach to unbridled capitalism.”

Yet when Mrs May came up with her social care proposals in the Conservative manifesto, I say, she was shot down pretty quickly by both Labour and her own backbench MPs, for fear that it would threaten people’s housing wealth. “It was unfortunate because there may have been the bones of a good idea in there somewhere. We have to be able to cater for old people and for caring somehow, and clearly we need to be able to help people who can’t afford to pay for it, while allowing people who can afford to pay for it to enjoy the benefits of their savings and their hard enterprise.”

“There’s got to be some sort of compromise in the middle and I think she was trying to get towards that compromise. But she seems to be the victim of this country’s inability to face up to hard facts. People just don’t want to hear things that are difficult, that are less than idealistic. We’re going to go through another five years of muddling through, where the government can’t face up to making difficult decisions because it’s just electorally unpopular. And it’s a great shame, the situation that we’re in politically, because it means that we can’t take firm action.”

Is Professor Baum in favour then, going to the other political extreme, of a land tax? “Well, we do have a land tax already. It’s called the Section 106 and Community Infrastructure Levy. We do have these taxes where under the new London ruling, 35% of new homes have to be affordable. That’s effectively a tax. It’s just that we’ve evolved a system of taxing land appreciation in a backdoor way, and every time we’ve tried to tax it through a front door route, like the Community Land Tax and Development Land Tax, it’s smacked of overt socialism. And as soon as you lose a Labour government, then you end up with a reversal of that strategy. But we have evolved a land tax through the back door. So, we do have a reasonably socially democratic system.”

“But it’s a bit of a bugger’s muddle, to use a technical term, and it’s not working very well. One of the reasons it’s not working is because, as some of my colleagues at Reading University are researching at the moment, the developers can always complain that they can’t make the deal work with land prices being as high as they are. They can’t actually produce any housing if they are required to produce 35% of it as affordable housing, in which case, you see the planning authority might relent on the requirement for affordable housing, in order to get any houses built at all.”

“We should be able to control land prices more efficiently.”

“The issue that’s being created is to do with the price of land. The developer has happily paid too much for the land because he knows he can get away with reducing the affordable housing component. This is a scandal that is not well-known and is about to be broadcast, I think. It’s slightly technical, but it is indicative of the inability of government to face up to facts. The fact is we should be able to control land prices more efficiently, either through a use of compulsory powers – that’s what I would recommend, that we use compulsory acquisition powers to buy fringe land at less than full market value for housing (in other words, pay agricultural value plus a bit extra) – and bring that land into use.”

But compulsory powers exercised by whom? Which agent of government would that be? “Well, I’m not even sure we’ve got the right government department any more. I’m losing track. The Housing Department would presumably be the right place to do it, but the local authorities would have to instigate it. This is why we want to do our research, because we’re not completely sure that we understand the way in which the planning system is joining together with the financial system to produce land for housing. It’s trying to map that relationship which I think needs doing.”

Could we perhaps borrow some of the principles of behavioural economics to “nudge” people to create a system which encourages all of the various parties in property to work towards the wider objective of eliminating the housing shortage?  “Yes. I think you’re right. I think my example of land prices being too high is an example of behavioural economics. You know that by holding on to your land, if you hold out long enough, you’re going to get a good price for your land, when people keep telling you that there’s a shortage of it. But if you can crack that belief and persuade people that their land, if it’s not brought forward, it will be compulsory acquired at lower prices, then it starts to stimulate people’s minds more. Whereas with all attempts in the past to get brownfield land developed, it usually falls over because there’s no pressure on the landowner to bring the land forward.”

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