Property expert Chris Bartram says investors should sit tight on their City office space

Property expert Chris Bartram says investors should sit tight on their City office space
Martin Waller

As you wander around the open building site that is the Square Mile, it is impossible not to ask the question. What, precisely, are we going to do with all these buildings once they are finished?

There is, according to the City Corporation, 7 million sq ft under construction in the City, about 8 per cent of its total office space. This is an underestimate, as it does not include some vast schemes not yet started.

This huge expansion in City premises has coincided with the worst downturn in a decade and a half for those financial institutions that might be expected to occupy them. It is hard for even the most optimistic developer to claim that, two or three years hence when all these offices are built, those institutions will be back in the market.

Chris Bartram, a veteran property man, thinks that the City is “seriously over-supplied” with offices and will not be making offers for any of them just at the moment, thanks. “In the City there's going to be at least a 40 per cent fall in rents from their peak.” But he is not expecting the market to go into freefall. “I think what will happen is, because speculative development is in the hands of groups with very deep pockets - Land Securities, Hammerson, one or two big funds - it's not in their interest to dump it.”

Related Links
·                                 Job fears at Wolseley as profits fall 30%

·                                 Canary Wharf likely to acquire markdown

Instead, the developers will hold their nerve, scale back on or delay some very big schemes, and use the downturn as an opportunity to move tenants from less appealing premises to other buildings and renovate the resulting vacancies before any upturn.

Mr Bartram, 59, started working for a private partnership, moved to a big corporate and now runs his own investment vehicle, so covering all sides of the industry. Along the way, he has acquired the sense of perspective that comes from experiencing several downturns. So how much trouble is commercial property in? As bad as 1991? Or worse? It took the industry four years to crawl out of that hole, coining the grim motto “Stay Alive 'Til '95”.

“I don't think we're talking anything like four years,” he says. Only this week Royal Bank of Scotland hosted an event to announce it was back in the market of lending on property. “The big banks haven't lost substantially on their property lending book,” he says. “There's a lot more life in banking than you think. That's fundamental. Hell, there's a lot of equity around, much of it international. There's a lot of cash looking for a home in the market.”

This might sound like the bravado of someone with a vested interest in talking the market up, or at least trying to put heart into the waverers. But Mr Bartram has himself just set up a £300 million special situation fund, most of the £100 million of equity coming from the sovereign wealth fund of Singapore, to invest in a selection of UK properties.

An odd time to do it? “It's an excellent time to do it.” He has a theory, not widely shared, that we are in a two-tier property market. On the one hand, there is a rash of over-valued “entrepreneurial” properties, often in London. This is mainly down to the earlier willingness of the banks to lend on virtually anything and the resulting speculative building that is covering the City with cement dust.

Meanwhile, there are plenty of respectable property investments occupied by good tenants on good leases in a good location that bring in a decent rate of return to the investor. “Investment grade properties are very good value indeed. There are 7 to 7.5 per cent yields on good quality commercial properties outside London.”

I have to stop him here. What the above means is that, if you can borrow money at, say, 6.5 per cent and spend it on a property that yields - that is, pays back each year in rents - 7.5 per cent of the total that you paid for it, you are in clover. Any subsequent rise in the value of the building is further profit.

This was what stymied the market in the early 1990s. The high cost of borrowing, as Britain exited the exchange-rate mechanism, meant it was impossible to find properties that yielded enough to cover the cost of financing.

Mr Bartram never intended to go into property. He enrolled to study law at Cambridge. “It was exceedingly dull. My father was a lawyer. He said, property people make more money, so I read land economy rather than law.”

After working for a couple of agencies, he joined Equitable Life in 1975 as deputy surveyor. The main attraction, he admits, was the 2 per cent mortgage, then standard for employees in financial services. This was not a taxable benefit, indeed it even attracted tax relief, which allowed him to gear up to four or five times' his salary and pay £18,500 for a two-bedroom flat in Hampstead Garden Suburb.

So his first essay at property investment was subsidised twice over by the Chancellor? He laughs. “In retrospect. We didn't see it that way.” He moved to Scottish Amicable and spent five years in Glasgow, moving back to London and joining Jones Lang Wootton in 1985 to create a property fund management arm. “The house we had owned was for sale again, but we couldn't afford it.” It was an early lesson in the predominance of the capital's property market.

In 1991, with the storm clouds beginning to build, he became Jones Lang's first senior partner. The fund management business had £2 billion under management and 850 employees. In 1992 Britain came out of the exchange-rate mechanism. Interest rates had soared. He remembers being at a private reception. “Someone came into the room and said by the way, interest rates have gone up to 15 per cent. The only thing you could do was laugh. It was quite scary. We never made a loss. We did have to let some people go over that four-year period.”

As it began to be possible to fund investment with borrowings again, a headhunter phoned about the vacant chairman's slot at Dutch-owned Haslemere Estates. “This lovely lady from Russell Reynolds rang up and said ‘do you know anyone who can do this job?'. I said ‘yes - me'. She said, ‘no, I didn't mean you, Chris ...'”

Haslemere was owned by Rodamco of the Netherlands and had a quote in Amsterdam. This caused problems with London investors and meant the company was never valued at its true worth. It was taken over in 2002 by a trio of Israeli investors, with American funds. He left, quite amicably, having been approached by a long-time client, the pension fund for what had been British Rail, to set up his current venture and manage its property fund.

Orchard Street Investment Management was created in 2004, in Mayfair offices. Its second mandate was to sell what was left of Haslemere on behalf if its new owners. The property world is nothing if not incestuous.

Orchard now has £1.8 billion under management, excluding the Singaporean venture. Investment will be selective. Mr Bartram pulls out a brochure for a property he has been offered. It looks attractive enough. Good location, convenient for all local amenities - one soon slips into the jargon. But apparently EU regulations mean it would cost more to refurbish than could reasonably be recouped in the sort of rent it could command in this market. It is typical of those second-tier properties.

What is it about the business, I ask? “I like buildings. I love the deals. Putting together a property transaction is very much like buying and selling a business. Any building is a business in its own right. It's tangible, too. You can see what you've done.”

Chris Bartram's CV

Born April 1949, Cambridge
1972 - 1975: Private practice
1975 - 1978: Deputy Surveyor, Equitable Life
1978 - 1985: Property Investment Manager, Scottish Amicable
1985 - 1995: Jones Lang Wootton, managing partner in 1991
1995 - 2004: Managing Director, Rodamco UK, Chairman, Haslemere Estates
Former President, British Property Federation
Former Chairman, Bank of England Property Forum