Real estate, alternative real assets and other diversions

Residential property is beginning to revert to being a long-term hold, not a short term trade An interview with Willie Gething, Managing Partner of Lennox Investment Management

Face to Face

Willie Gething, managing partner of Lennox Investment Management, helped to pioneer the residential buying agent business in the Thatcher years, sold his company Property Vision to HSBC in 2001 and 11 years ago moved on to launch his own central London residential property fund. While he has prospered, it has not all been plain sailing, as he explained when I met him to talk about his career in the property business and his thoughts about current Government taxation on residential property. 

How did you get in to the property business in the first place?

I set up my first property business in 1983, with a great deal of exuberance and very little knowledge. I was twenty-four at the time. I had been living out in South America, working for what was then known as the Distillers Company, which then became Guinness and then Diageo. 1983 coincided with the emergence of video and the battle between VHS and Betamax. You’ll remember all those colossal machines? Together with a good friend of mine called Charlie Ellingworth, I set up a business called Property Vision, which was at that stage going to make videos of houses, and we were going to try and revolutionise the way that property was marketed.

The idea being that if you were looking for a house you could see what you were looking to buy?

Exactly that. The idea back then was that video was going to change the world, cinemas were going to close, so much was going to be affected by this new medium. So, we persuaded a group of estate agents to fund our videos, which were remarkably amateur, made with the most enormous cameras that you and I wouldn’t be able to pick up now, but were seen as compact then. They had satchels and enormous spools. That was revolutionary because the camera was portable.

We then did some market research and some of the buyers we were going to service said, “that’s absolutely great, but we’re not really interested in looking at your films unless they tell us all the bad stuff about the houses” – in other words, to use them as a buying tool. In those days, we were focusing on houses in the country. There was no Google Earth, poor market intelligence and if you were looking for a cottage somewhere in Sussex, you could drive for two hours there and two hours back and see within ten seconds that the cottage was on the main road, so why am I here? Why am I wasting my time?

Out of that grew a buying agency. We were some of the first people to say that the buyer needs to be looked after. We were lucky because that coincided with Big Bang. And it coincided with the belief that asking for and paying for advice was no longer an irrational thing to do. The Brits disliked doing that traditionally. If you’d said pre-1984, “is it a good idea to get advice on what the house I want to buy might be worth?”, the answer was “Don’t be so ridiculous. We’ve got an estate agent we know.” Well, yes, but perhaps he’s acting for the other side…?

So, we built that up first of all in the country and secondly in London, into this new niche, which was only advising buyers. And we eventually became the biggest advisory firm in a very small part of the overall market – the top end of residential property. In those days, the top end started at £150,000. That was the threshold beneath which we wouldn’t go. That was thirty-five years ago. We then brought the business to London, covering the London market.

That’s a twenty-year story condensed into five minutes, with lots of dramas along the way, as you can imagine when you’re starting with no knowledge and you end up knowing quite a bit more about the market. We had about forty people working with us by the time we sold the business in 2001 to HSBC Private Bank. I was the CEO and I was very lucky to have a great group of colleagues as well as my wonderful founding partner, who I set the business up with and who is still a great friend of mine, although we no longer work together. Charlie had been working for Jardines out in Hong Kong, while I was working for Distillers in South America.

Why did you sell it? Were you taking a view about the market?

It’s a key question. We’d been doing it for nearly 20 years and we’d had quite a lot of approaches from various other companies to buy us. These things build a momentum of their own.  HSBC got to know us and felt we were a good add-on service for their Private Bank. They invited me to move to the Private Bank to set up and run a global property function, which I did, although my knowledge at that stage was mainly limited to London residential property.

In fact the cultures – theirs and ours – were quite similar. It was a very happy marriage for a while. It lasted for 10 years and I sat on the Board of the private bank in the UK for 11 years, which was fascinating. And they did produce a lot of clients for us. As far as they were concerned, we were a high value-add advisory service, which had a very good reputation with its clients. We tried very hard for our clients. After 10 years HSBC sold it back to the management of Property Vision because policies change in banks and the senior management in the bank decided that owning a niche property business did not fit with their strategy. But by then I was no part of that sale back.

You weren’t tempted to go back to Property Vision?

No. I feel quite strongly that life is a series of chapters, some good, some bad. I’d left a whole lot of younger people in Property Vision and it was their turn. I thought that it would be quite wrong to go back and buy back the old business, because in a way, you’ve done that, you’ve got to move on. It was the right decision. Property Vision is now a thriving partnership, and all the people who were young when I was there are probably looking at me and saying, “God, I wish he’d stop banging on so much”. It’s their turn now.

How different is it being an investor in property rather than a buying agent?

They are fundamentally different. It’s taken me ten years of investing to realise that and to come to terms with that. When you’re a buying agent, what you’re really trying to do is to read the tea leaves and understand what people want, including understanding the dynamics in a relationship where two people might not necessarily want the same thing. I had plenty of very amusing conversations over the years, when you were taken on one side by one or the other who’d say, “let me tell you what we really want.” You’re trying to understand that dynamic, then find it for them and finally accelerate the process by which you pay the right price for it. You’re not trying to buy it cheaply, you’re not trying to be clever, what you’re trying to do is to get to reality as fast as you can and prevent people from making an error.

The aim is to minimise regret…

Yes. To minimise the client’s risk, assuming that you’re not going to go and try to buy the house for 20% less than it is worth. It is highly unlikely that you can do that. You’re there to give comfort and safety when there are five people who want to buy the same house. You hope to increase the likelihood of them getting that house when other people want it. Given that most people are greedy about what they think their houses are worth, then there is a process to get to reality that I think Property Vision helped to bring about. If the owners were asking £2 million and it was patently worth £1.5 million, we validated that process by saying, “no, it’s never worth £2 million. The reason it’s worth £1.5m is the following ten transactions. Let’s have a debate around the £1.5m mark because that’s what it’s worth.”

Until buying agents came along, that kind of conversation didn’t really happen. There might have been some friendly whisperings by the selling agent – “I think they might take slightly less” – but it wasn’t a science. We turned it into an accepted process. I suppose the balance we were always trying to strike at Property Vision was to make sure that in the end people got the house they wanted without tripping themselves up. The temptation was sometimes to over-negotiate, because that’s what we prided ourselves on. We began a culture of our colleagues going off to Harvard Business School; we had talks about the art of negotiation, and so on.

But I remember a wise man saying to me, in the middle of a negotiation “the clever guy is the guy that gets the house. You can be the cleverest man in the world in negotiations, your skills can be absolutely amazing, but actually, if they want it and you lose it and it goes to the next guy, it doesn’t matter how clever you are, they’re not going to toast you. They’re not going to be saying, ‘Thank goodness for Willie. We didn’t get the house we wanted, but at least we didn’t overpay!'”

All of this leads directly into the issue of investing, because I think that the skill set – the reason why it’s a very complicated transition from being an advisor to being an investor – is that when you’re an advisor, the yardstick of your success should be whether your client ends up with the house they want, whereas when you are investing, you must not be afraid to walk away from the deal.

“When you’re an advisor, the yardstick of your success should be whether your client ends up with the house they want, whereas when you are investing, you must not be afraid to walk away from the deal.”

So now you were about to set up as a property fund investor. Was the motivation in part about being fed up with having to deal with all these people?

No, it was the next phase for me. Having said that, when you have been advising clients for a long time, then you must be careful not to be too strong with your advice and say, “I know from experience that you should just buy this house”, because that won’t always be helpful. I always think if you’re running a good service business, you end up by looking after the clients who you aspire to look after, I wanted to create the top buying agency in the UK and with the huge help of my colleagues, I think we achieved that. But maybe when you’ve done hundreds of these property deals, then you say it’s time for the next challenge.

Nothing to do with the kinds of people who you were having to deal with?

No, I really enjoyed working with my clients. For me, the excitement of Property Vision stopped being the properties a long time before I left, and it was the stimulation of the people who I was able to advise. When that stimulation stops, then you should move away from the business. When I was in my ‘20s and ‘30s and we were advising very successful people in their ‘40s, ‘50s, ‘60s and ‘70s, that was a real kick. You entered their life for a while, they listened to you, you were able to bring some value to them.

I have to admit that I was thinking more about the arrival of oligarchs and their ilk –  people who might have very different backgrounds, lifestyles, aspirations, ambitions, ways of doing business and all that kind of thing?

No. Very few of them actually. Harvard has done some research on service businesses, looking at the percentage of your clients that you like as compared to the percentage of clients that you tolerate and the percentage of your clients that you actively dislike. Most service businesses would have a portion of each of those. At Property Vision, of course there was a small portion who were difficult but the great majority were people we either liked and were very happy to work with.

You started your property fund in 2007 – not the greatest timing, in hindsight.

Yes 2007 – just faultless timing! I decided it was a good idea to launch a property fund, with HSBC’s blessing, and they were investors in the first fund. Together with my partner, Rupert Bradstock, with whom I had worked for twenty years at Property Vision, we went out and talked to some of our old clients. Sure enough, within a few months, the whole world had collapsed – Lehman’s going bust, etc. Getting that first fund off the ground was very complicated and a lot of people who said initially that they wanted to invest then got cold feet.

The good thing is that you never, ever forget the clients who are loyal to you. I had a group of about a dozen old clients who supported me, and my loyalty to them is huge because throughout the dark days, they said, “we support you”. I’m sure you’ve seen the same sort of thing in other situations and it really focuses you when the world’s going pear-shaped. It was an amazing period.

It was difficult to get buy-in at that stage for some of the views I believed to be true. In those days, high leverage on property was considered the norm. We had an offer of a huge debt facility when we were launching.  We said, “how are we going to possibly pay this back? No, we do not want that facility.” If it wasn’t seventy, eighty, ninety per cent leveraged, at the time it wasn’t a deal that was worth doing. I was sitting there going “you can’t fund residential property with that. It doesn’t have a yield that justifies that. You can only do fifty percent max”. Now, ten years on, if you go to a bank and say, “what’s sensible leverage?” they will be looking at no more than those levels for residential investment.

What was the proposition that you were taking to people? It was residential?

Yes, purely residential, because that was what we knew about. To build a portfolio of residential property in prime central London, and to rent it, improve it and then sell it, within a fixed life fund. Private equity funds were making the headlines in those days and that suggested a structure for investing that I no longer believe is appropriate for residential property.  One of the accepted truths was that property funds should have a fixed life. Which is really like saying that your prospectus, as opposed to your good judgement and what the market is doing, is going to determine when you sell. It is a pretty odd way to look at what is fundamentally a pretty illiquid investment.

And then there was the fee structure, carried interest, annual management charges and the sort of returns investors were expecting. I remember someone suggesting to me at that stage that we should be delivering annual returns in the mid-twenty percents and I remember thinking, “that sounds like a very steep mountain to climb unless you have a lot of debt”. It became clear to me what an unrealistic proposition that is, if you’re conservatively leveraged and you’re buying conservative assets – unless the market is charging upwards.

It all depends how much risk you want to take for your investors. Because I didn’t come from an investment background, it was a sharp learning curve. I knew about property, I knew what it was worth, but I accepted the prevailing wisdom on how to structure an investment vehicle. 2009 was fascinating. Yes, the market did dip, but all sorts of stuff didn’t happen that the wise men said would happen. Asset values were going to dive, banks were going to call in their debts. None of that happened.

Sterling came to the rescue, as so often.

Yes, sterling came to the rescue – what a great way of putting it. That is absolutely right. Having been a buying agent for all those years, it made me very cautious because you’re looking for the downside the whole time. If you care about your clients, you’re questioning everything. “What are they asking? That’s too much.” That was my instant reaction. And in 2008/09, I was very cautious, worried that banks were going to call in their debts and that there was going to be a lot more blood on the streets. It just didn’t happen. Lenders pursued a strategy instead of ‘delay and pray’. That, in a way, was when my real learning process started about investing and understanding the difference between different qualities of assets.

I can remember being offered secondary property in blocks of flats outside Prime Central London that I could buy at fifty cents on the dollar. And I was going “no, I don’t know anything about those. I don’t know the tenants, the buildings, the values. So, I’m sure it’s a smart deal, but it’s not one I understand”. In fact, the market that I understood fell very little after the financial crisis and only for a short period of time. And another reason, apart from the banks, that it fell very little is that prime central London has a self-regulating element. The main vulnerability is political risk.

“So when the market starts to fall, people tend to stop selling because there is remarkably low leverage in Central London.”

So when the market starts to fall, people tend to stop selling because there is remarkably low leverage in Central London. So, the only people that sell are the people who have to, for all the usual, clichéd reasons – death and divorce and all that stuff. But they’re a small minority. Normally what happens in central London is that prices dip because there’s an extraneous event, and then people say, “I’m not selling. We’re staying. I’ll wait until the sun comes out again.”

I have lived through many crises and moments of doom and watched this cycle happening many times. After 9/11, I was told London was going to empty. After the second Iraq war, London was going to empty. Then we moved beyond that to the 2007 crash and then after that the Government changed all the non-domicile rules and then I was told that all the hedge fund guys were going to leave London. It doesn’t happen because people like their asset and they stick it out.

We’ll come back to that, but presumably with your first fund, you ended up raising less money and did you also end up with a less diversified portfolio than you would’ve liked?

Yes but we ended up with six great assets in our first fund. The model at that stage, was to buy a good property, put a tenant into it, get the planning consent to transform the house and then do the development. Reposition the asset, so to speak, in financial terms, and then sell it. That worked pretty well from 2010 to 2014 and we learnt a lot about how to do the planning process and construction.

Then we raised our second fund in 2013 with double the number of investors. What became clearer is that we had really started to understand the family house market – understand the tenants, the finishes of the houses, the rents that they will pay, the expectations that they have, the maintenance routines that are required. I’ll come back to rental because that’s where the market has taken us. We bought one or two good flats from developers, which was also an interesting journey.

Before they’d been built?

Yes, before they’d been built. With high transaction costs, it only makes sense as an investor if you can buy new-build at a very substantial discount. And guess what? The best developments aren’t for sale at a meaningful discount. You can always go and buy the tat cheaply but that’s not usually a smart or a safe way to invest.

We have always tried to find special and unusual houses. So, low-built, with good gardens, everything that you would look at and say, “that’s a really good house”, as opposed to the typical tall, thin London house where you’re going up and down stairs the whole time, that increasingly the international buyer comes to and goes, “Goodness, is that how you all live in London?” You can buy a run of the mill London house in today’s market very quickly and easily but it’s never going to outperform the market in either good or bad conditions. It becomes a commodity.

And you would get that extra value by increasing the square footage primarily?

Typically by doing two things. Adding space, but also redesigning the layout, as wholesale changes are needed to the architecture when you find a house that is poorly laid out and you need to create a space for the twenty-first century. Of course that means something to you and something different to me and something different to the next guy. But there’s an awful lot of architectural work in it. You are trying to create a completely new house. I’ve always been quite clear that our business is less about financial engineering than about design. We’re conservative with our debt, we’re not trying to flip properties in two or three years. We are investors, not traders.

At first though you’d get a tenant, you said…






Subscribe to our print magazine now for just £50, saving £25 on your first year's subscription!

SUBSCRIBE