2.4.2 The Global Recession

A ‘credit crunch’ is a severe shortage of money or credit in the economy (Jowsey, 2011)

The global downturn was triggered from the sub-prime lending of US banks during the 2000-2007 property market boom. The US banks had relaxed their lending criteria, and high-risk mortgage loans were being issued to individuals with poor credit histories. August 2007 saw the first stage of the bubble bursting when the French bank BNP Paribas reported a lack of funds in their investor markets due to a complete evaporation of liquidity in the market (Jowsey, 2011) This caused banks to stop lending to each other. The following 12 months saw catastrophic losses by global banks. By November 2009 the Eurozone, the UK and the USA were all in recession.

The UK entered a double dip recession in 2012 with the economy shrinking, as shown in figure 3 where UK economic growth is shown through Gross Domestic Product (GDP). This gives a visual representation of the effects of the global downturn in the UK. The severity of the downturn in 2008 with negative growth had an effect on all types of business. The dramatic fall in share prices of UK property companies, including UK REITs, is shown in figure 3 which correlates with this GDP performance.

Figure 3– UK GDP Growth, Quarter on Previous Quarter (BBC, 2013)

David Isaac and John O’Leary (2011) comment on the fragility of property markets and the consequent difficulties encountered by forecasters. They state that a better way to look at the issues of such markets may be to:

…consider the underlying relationships between the macro-economy and average business performance which could be thought of as a proxy measure of the ability of businesses to pay for their premises (Isaac and O’Leary, 2011, p.291)

Reference is made to the performance of GDP being a ‘proxy measure’ whereby growth represents success and ability to pay rent of businesses resulting in good market performance and therefore increased investor confidence. Figure 4 below shows positive GDP growth after the recession. It is expected that investor demand will increase and therefore investment in UK REITs will likewise increase.

Figure 4 UK GDP Growth Rate (Trading Economics, 2018)

The UK listed property sector saw a major fall in shares, including real estate investment trusts (Jowsey, 2011). This is evident in Figure 1 of this report where share prices showed continued growth before peaking and falling dramatically from mid-2007 and throughout 2008.

Equity market performance was also dramatically affected in the downturn with sharp falls throughout 2008, as shown in Figure 5. Shape falls in the FTSE markets naturally cause investors to be nervous and uncomfortable.

Figure 5 FTSE 100 and FTSE All Shares Performance Data (Source British Land, 2013)

2.4.3 Performance of UK REITs

Peter Beckett, tax director in Ernst & Young, stated in a press release in April 2009 that:

“REITs will find it increasingly difficult to manage in the current climate” (Ernst & Young, 2009)

The importance of business strategy and positioning is highlighted by this point. 2009 saw British Land’s strategy and positioning focus on prime property, predictable cash flows and careful risk management in order to ride out the economic turmoil (British Land, 2008).

Despite positive global REIT performance, UK REIT performance was poor leading into 2010. The previous three years saw a negative return of -26% for UK REITs and a decline in total market capitalisation of 10% (Ernst & Young, 2010).

Mid-2012 Market Capitalisation achieved US$38.2 billion which was up on the 2010 year end figure but this still has a long way to go to reach the 2007 peak of US$65 billion (Ernst & Young, 2016).

Prime commercial space in London is continuing to attract investors and, with the new development of two new London skyscrapers currently under construction from British Land and Land Securities, it is hoped that further investment will follow. It is suggested that the true recovery of UK Real Estate Investment will occur once investment spreads to outlying markets and not only London (Ernst & Young, 2016).

Since their introduction in 2007 in the UK, REITs have shown disappointing returns (as might be expected given the market conditions) but they allow much greater liquidity than direct investment in property with the same effective tax treatment (Jowsey, 2011b, p.363)

CHAPTER 3

 RESEARCH METHOD

3.1 Introduction

Primary data comprising historical information of the REITs will be collected then a primary research will be conducted in the project with an aim to assess the performance of UK REITs since their introduction in 2007 whilst considering their expectations, the effects of the recession and the changes to legislation.

A collection of secondary research will also be conducted into gaining an understanding of how commercial property investment works, specifically into indirect property investment methods and how REITs operate. An additional collection of secondary research will be carried out to gain an understanding of the current performance of the indirect property investment method (UK-REIT) whether they are living up to their expectations since the introduction of REIT in the UK and the expectations for the sector to move forward.

Quantitative Research

Qualitative research, on the other hand, is the points of view of participants providing rich, deep data. Dawson (2007) comments that:

Qualitative research explores attitudes, behaviour and experiences through such methods as interviews or focus groups. It attempts to get an in-depth opinion from participants (Dawson, 2007, p.15-16)

Quantitative research is able to provide a variety of quantified data which can then be used to construct graphs and charts to illustrate answers to a wide range of questions. Although this may provide statistical and precise data for the research project, quantitative research techniques do not offer the researcher with sophisticated in-depth views by participants on the subject topic.

“All interviews have one thing in common: they are purposeful discussions between two or more people” (Saunders et al, 2009)

3.2 The Secondary Research

Dawson (2007) defines secondary research as:

…the collection of information from studies that other researchers have made of a subject

(Dawson, 2007, p42)

Dawson (2007) also makes comment to the reliability of sources such as the internet. The author has made effort to use reliable and established sources providing accurate analysis.

Secondary research, by way of the literature review, was carried out prior to case studies and primary research allowing the author to expand knowledge of the topic and better understanding of the research area. Literature sources included the BPF, Government publications and professional reports.

The author found limitations with the availability of published data regarding UK REITs due to their recent introduction. As a result, the definition of key terminology and legislation was primarily taken from company research reports rather than published texts.

3.3 Primary Research

Primary research provided the author with the opportunity to gain professional opinion and data of the topic, that of which secondary data cannot show. Farrell (2011) defines primary data as:

New data generated by the efforts of the researcher; that is, the words or numbers that you use in your analysis are created specifically for your research. (Farrell, 2011)

The author found the analysis of data available in company accounts more suited to the aims and objectives of this performance study. This data, although secondary, has been analysed by way of a case study looking at actual performance. Primary research was conducted by way of questionnaires

3.3.1 Questionnaires

“The term questionnaire refers to all methods of data collection in which each potential respondent is asked to answer the same set of questions in the same order” (Saunders et al, 2009)

Questionnaires can be completed via the use of the internet, by post, by hand or via an interviewer where a questionnaire can be completed by the use of a structured interview. The results of questionnaires and structured interviews are often construed into quantitative data and presented using charts and tables.

The chosen method of research for this research project is to use questionnaires, which will be able to provide resourceful qualitative data, gaining an in-depth analysis on the chosen subject. To enable questionnaires to take place, a variety of key contacts within the industry are contacted via e-mail to request them to complete the questionnaires based on the research project.

The author created an extensive contact list consisting of well positioned individuals from all UK REITs, investment agents and other REIT specialists. Quality of data return was important to the author and therefore the majority of contacts were, for example, chief executives and managing directors. Emails were sent individually addressed labelling the company and area of expertise of that individual to further improve return rates.

3.4 Case Studies

Simons (2009) defines a case study as:

an in-depth exploration from multiple perspectives… The primary purpose is to generate in-depth understanding of a specific topic (Simons, 2009, p.21)

The author used case studies to analyse performance using secondary data available in company accounts. This allows analysis of data in both a qualitative and quantitative manor.

The composition and comparison of individual case studies is a ‘multiple case holistic design’ (Yin, 2003). Yin (2003) suggests that evidence from multiple cases is often considered more compelling, and the overall study is therefore regarded as being more robust. Although replication of each case provides robust findings caution was given to the duplication of exact conditions as to not provide bias results (Yin, 2003). The author studied each case individually with comparison made at the end to prevent any duplication of results.

Yin (2003) discusses “six sources of evidence” used in case study research; documentation, archival records, interviews, direct observations, participant observation and physical artefacts. The author has used documentation as a single source of evidence for each case study. Strengths of documentation evidence are that it is stable, unobtrusive, exact and has broad coverage (Yin, 2003).

CHAPTER 4

CASE STUDIES

4.1 Introduction

Company account data will be analysed through annual reports of three of the UKs largest property companies:

1. Land Securities
2. Hammerson
3. British Land

The study will evaluate performance over 9 years before Brexit from 2007-2015 with focus on NAV, ROCE, share price and portfolio value. Further data from each report has been included where necessary.

The aim of this case study is to provide evaluative information to achieve the objectives of the study by proving a comparison of performance over a term of 9 years. Data analysis will be evaluated to prove or disprove the hypothesis that:

Real Estate Investment Trust status has brought success to companies that have joined the regime since their introduction to the UK in 2007.

4.2 Land Securities (LS)

Early measures of successful performance are evident in 2007 with an increase in total assets and earnings before interest and tax of 32.5% and 73.9% respectively, evident in figures 6 and 7 below. The £293m sale of joint venture Telereal, the valuation surplus of investment portfolio and increased rental growth with low interest rates were all influencing factors on performance. Peter Birch suggests performance was strong with unprecedented levels of property value growth which was predicted not to continue in all property sectors (Land Securities, 2006).

Table 1 Land Securities Net Asset Value Accounts Data