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June 7, 2013 6:29 pm
The red-brick townhouse at 31 Rosary Gardens is instantly forgettable. Standing in a charmless strip of west London that cushions Kensington from the backpacker hostels and neon floridity of Earls Court, the property appears entirely unremarkable.
Yet it was this house that took centre stage last year as some of Britain’s wealthiest aristocratic families launched a desperate attempt to persuade the Supreme Court – the UK’s highest court – to overturn a ruling which threatened to decimate their multibillion pound property empires, such as those of the Duke of Westminster and the Earl of Cadogan.
Part of the tiny Day Estate, Rosary Gardens was the test case for a loophole, discovered by its occupants, which allowed commercial property tenants to buy out their landlords.
The court overturned the two previous judgments and ruled in favour of the landed estates. In doing so, it awarded a crucial victory in the decade-long battle by the patrician property sector to remain relevant.
In 2002, the sprawling landed estates – already viewed by many as redundant enterprises or, worse, feudal throwbacks – were dealt a bitter blow. The Labour government introduced laws giving residential property leaseholders the right to buy out their landlord. The push to allow “enfranchisement” had started seven years earlier when two Labour politicians, then in opposition, penned an excoriating paper on the “weaknesses and injustices inherent in the British leasehold system”. Having been managed as passive rent-collecting machines, many estates disappeared or shrunk into virtual non-existence as the property world around them blossomed into a professional and highly competitive market. But others underwent a decade of self-imposed reconstruction; the heraldry and ceremonial archaism retained as façade only. Today, those that have survived are underpinned by a steel of business wherewithal and a hunger to succeed in the competitive international property market.
Hugh Seaborn, chief executive of a £3.5bn Chelsea portfolio owned by the Earl of Cadogan, says leasehold reform provided a catalyst for change. “It meant two very fundamental changes happened at once. Firstly, we were selling properties, often for the first time, whether we liked it or not. The upshot was that we had a lot of money and not really much in the way of expertise in how to invest it. So we learnt quickly.”
The gentry saw that if they kept sitting still, watching the grandfather clock ticking and collecting rent, their empires would crumble
In the case of the Cadogan Estate, as with many of the larger portfolios, the new-found capital reserves were directed not into ambitious geographical expansion but were used selectively to buy houses and commercial property close to the main holdings. More important still was the culture shift engendered by the sudden loss of control and the fear among the landed estates that it could happen again.
The centuries-old business model of signing off long leases – effectively ceding control of the building to a middleman – and collecting a small percentage of the annual rent, known as a ground rent, had run its course. To prosper, the landed estates had to migrate from being passive owners to active asset managers akin to publicly quoted property companies.
“Since being threatened with the erosion of their portfolios, the savvy estate owners have become much more aggressive,” says Bruce Dear, head of real estate at law firm Eversheds. “The property market has changed dramatically during the last decade and the gentry saw that if they kept sitting still, watching the grandfather clock ticking and collecting rent, their empires would crumble.”
The changes vary greatly from estate to estate. Some have raided the upper echelon of corporate property management and pursued hardline trading strategies, using the portfolio as a platform from which to play the cycle. Others have lavished millions of pounds on refurbishment programmes aimed at lifting the value of their holdings. Two common threads, however, are the adoption of much tighter lease structures, designed to prevent enfranchisement, and the wholesale abandonment of the “hands-off” management paradigm. The modern landed estates, especially those with large commercial property holdings, have adopted the corporate culture of shopping mall landlords, delicately sculpting the perfect mix of tenants, each one weighed for what it contributes to the overall value of the area.
The tone for change has been set to a significant extent by one estate: Grosvenor. A behemoth of the landed estate world, Grosvenor has transmogrified from stuffy landlord to self-made heavyweight of the international real estate market. The company, which owns most of the homes, offices, shops and restaurants in Mayfair and Belgravia – two of London’s most valuable areas – controls property worth almost £6bn and has interests spanning the US, Europe and Asia.
Indeed, the Duke of Westminster’s real estate empire became so large that it was spun off from the main family trust and is now managed as a separate company, publishing independent accounts. In 2012, the business posted record profits of £87.4m and turned to the bond markets to raise £90m for development funding.
The decision to cleave the property company from the main trust was, according to a Grosvenor spokesperson, a practical necessity. “It was too complicated at a board of trustees meeting, with people being asked for a view on whether or not to make a multimillion pound investment in Hong Kong offices and at the same time what they thought about a milk quota or the latest breakthrough in bovine genetics [the Duke owns the UK’s largest bull stud].”
We have gone from a hands-off business to one that is managing billions of pounds of our own and other people’s money in a highly competitive marketplace
Peter Vernon, head of Grosvenor’s UK property division, insists the size of the portfolio has not reduced its qualities as a landed estate.
“The Mayfair estate was built in 1740 and only four of the original buildings remain, so change has always been in our culture,” he says. “But one thing that has remained is an awareness that nothing we do is a quick trade; what we are doing now has to consider the needs of the next generation. We will arrange leases in blocks so that they all come due in, say, 50 years. It means the next generation will be able to redevelop a whole block in one go. It is about creating opportunities for the future owners.”
Vernon, a former management consultant at PricewaterhouseCoopers, also identifies a focus on owning property predominantly for the rent it generates, rather than betting on value growth as another difference between the landed estates and traditional property owners. “We can worry a bit less about the economic cycles as we tend to hold the stock for a long period.”
The pre-eminence Grosvenor has enjoyed among the landed estates is not what it was, however. In addition to the coterie of smaller estates getting their houses in order, the Duke is facing a challenge from the Queen.
The Crown Estate has made perhaps the most remarkable transition of all the landed estates. The £8bn portfolio managed on behalf of the monarch has gone from insouciant rent collector just a decade ago to something resembling an ambitious sovereign wealth fund.
The estate, which includes most of Regent Street and St James’s in London, 14 regional retail centres and virtually the entire seabed out to the 12 nautical mile territorial limit, has increased its transactions by more than tenfold since 2002, trading £1.2bn of property last year. Co-investment deals with Norwegian oil-wealth funds and the pension plans of Canadian healthcare workers have completed the modern property company image.
“We have gone from a hands-off business to one that is managing billions of pounds of our own and other people’s money in a highly competitive marketplace,” says Paul Clark, investment director at the Crown Estate. “That is very different to the image that most people have of a landed estate.”
This marriage of aristocratic ambition and big business represents the most important step the landed estates have taken towards modernisation. It also exacerbates, and perhaps justifies fears that these hereditary empires are losing their verve and disappearing into the anti-glamour of property management. Yet, it is in emerging from the cloistered world of gentleman’s play-portfolios that they stand the best chance not only of surviving but remaining relevant.
Ed Hammond is the FT’s property correspondent
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