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Echoes of the past: are London’s brokers stuck in a digital time warp?

The London brokerage gap between what is preached and what is practiced in tech is wide, and it’s time for global brands to bridge it for clients.

In an era where digital transformation is not just a buzzword but a fundamental shift in business operations, the Commercial Real Estate (CRE) sector, particularly in one of the world’s most liquid property markets—London—seems to be lagging – and big time!

Despite loud protestations at tech conference panels about embracing artificial intelligence (#AI), #data analytics, and #digitalisation by major brokerage firms, a simple visit to their websites reveals a glaring contradiction for their clients. The ‘Search Property’ option, reminiscent of early 2000s web enthusiasm, is prominently featured by CBRE UK , JLL and Cushman & Wakefield yet disappointingly unproductive for prospective clients seeking genuine opportunities in major markets such as London.

Leading    Search
Global     investment
Firms      results for 
           London

CBRE           1

JLL            0

Cushman &
Wakefield      0

This discrepancy is not just a minor oversight but a significant misstep for companies that are purportedly spending on property technology (#proptech). Regardless of tech, brokers like BNP Paribas Real Estate are marketing research energies to show that £41 billion of dry powder is currently targeting London #offices alone.

The absence of relevant and live Sales Particulars or comprehensive listings on these platforms is not only inconvenient but raises questions about the purported ‘on-market’ status of many deals. Brokerages have been claiming anything between ~50-70% of transactions have been conducted off-market recently, yet the visibility of 30% of presumably on-market deals is simply low to none-existent. This situation begs the question: Where are these opportunities?

The reliance on outdated methods, such as exclusive contact books, is becoming increasingly questionable in a world where emerging capital comes from unpredictable and newly-established funds around the globe, especially when targeting London.

The London listings gap also highlights a potential key misalignment between the services expected from brokers – Clients rely on their open-market sales to be marketed properly, far and wide. It is not uncommon for contracts to include all omni-channels when winning retained sales mandates, which could include a flagship home page listing. The expectation for properties to be marketed effectively across the main digital omni-channels is not just a client’s wish but a basic prerequisite in today’s digital age.

It’s high time for corporate proptech evangelists to prioritise getting their own digital house in order. The frequent showcasing at CRETech and Proptech type conferences on sophisticated topics like AI and big data analytics feels somewhat disingenuous when the basic organisation of transaction data for the largest lot sizes is, to put it lightly, subpar.

The excuse for discretion is not sufficient. The information is already out there, and often shared on individual LinkedIn accounts or multiple spam email exercises. Surely, the transactions (or “data” as the proptech geeks will call it) merits being hosted in an accessible, centralized branded website accessible to international investors. We often hear from CIOs, CTOs and Innovation officers focusing first on organising data before adopting technology and AI opportunities. After years of talk, the basic step of listing key public sales does not appear to be accomplished.

This state of affairs is not only misleading but also a disservice to prospective clients who may spend valuable time navigating these websites from abroad, hoping to find investment opportunities. So here’s a polite but firm call to action to these firms: please either update and populate your tech pages your Board has already invested in or consider removing misleading websites altogether.

In conclusion, while the promise of proptech is vast, its implementation appears to be in its infancy among some of the major players in the London CRE market. The gap between what is preached and what is practiced is wide, and it’s time for these firms to bridge it. After all, in a market as dynamic and competitive as CRE, staying stuck in the digital dark ages is not an option.

Our industry must better embrace essential digital options that have been available since the turn of the Millennium. Liquidity is already challenging for many sales initiatives. Planners, brokers, advisors, partners, sellers and city placemaking stakeholders all want to unlock opportunities and trade in as timely manner as possible (to be clear, we’re not talking about instant fantasies of immediate trades and far out tokenisation). By definition, the more ‘open market’ deals are unwittingly concealed, the less liquidity to benefit everyone in the business. Especially if we lose worldwide ‘shop browsing’ of London real estate on the internet. In retail terms, it’s like having boarded-up windows up and down Regent Street.

Fig.1: CBRE UK search for London opportunities

Fig.2: JLL search for London opportunities

New York City’s teams for JLL appear to offer more transaction listings:

Fig.3: Cushman & Wakefield search for London opportunities

Fig.4: Savills search for London opportunities

Fig.5: Colliers search for London opportunities

Fig.6: Interestingly, LoopNet UK by CoStar UK CoStar Group is displaying more items after recent launch in UK.

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Bridging the Gap: how to overcome AI Excel Modelling fears in Commercial Real Estate

Managers that understand Validation vs. Verification are more likely to lead and benefit from AI adoption to generate rapid and safer client cashflows.

Given today’s pace of change, it’s crucial to keep up with emerging technologies, especially in the realm of AI and automated modelling. Team labour required to put deals together is at the heart of market activity throughout the year – and AI is driving game-changing productivity. It is a veritable sea change since the team at Dashflow presented AI opportunities to clients 5 years ago.

However, there’s a natural apprehension that often clouds our judgment – a fear of the unknown, particularly concerning the reliability and accuracy of AI-driven spreadsheet models for client investment cashflows. This is where a key distinction comes into play: the difference between validation and verification.

Verification: your ‘spellchecker’ to ensure AI models work as intended

Think of Verification as akin to your everyday spellchecker in Word documents. AI verification ‘spellchecks’ if a model is written with the correct formulae. Think of it as asking, “Are we building the model right?” Verification ensures that the monthly, quarterly and annual calcs make sense. That they are free from basic technical glitches, #NUM! warnings or basic computational errors. It’s about ensuring the model is a well-oiled machine and runs smoothly for your convenience without wasting higher-value Analyst time.

Validation: ensuring a model is appropriate for the scenario

Validation, on the other hand, is like proof reading your document for content accuracy and relevance. It’s about making sure that the model is the right one for your specific business scenario. This means asking, “Are we building the right model?” In the context of commercial real estate, validation involves ensuring that the business plan inputs – like market growth rates, rent roll assumptions, ERVs psf, CAPEX costs, &tc – are realistic and pertinent to the current market conditions.

The synergy of AI and Human Expertise

The fear surrounding AI in commercial real estate often stems from a misunderstanding of the above two concepts. AI models, when properly verified, are incredible at managing complex calculations and data analysis, tasks that are time-consuming and easily prone to hourly human error. However, the validation of the inputs, the nuanced understanding of the market and releasing trends, still rests firmly in the hands of seasoned real estate professionals.

Best-in-class managers appreciate that validation has little to do with advanced Excel modelling analyst skills. Team success and real estate company growth depends on strengthening (and hiring) property professionals who ‘speak and breathe the real estate business’. This means Professionals who can validate cashflow input assumptions, and stand to benefit from AI which automatically and instantly verifies the underlying model – often involving thousands of formulae.

Embracing AI Without Losing the Human Touch

By appreciating the distinction between validation and verification, we can leverage AI to enhance our capabilities, not replace them. AI models can be verified for accuracy and efficiency, while the inputs – the core of business planning in real estate – can be validated by professionals as usual. This synergy allows for more accurate, efficient, and reliable cash flow modelling, leading to better-informed decision-making.

The urgency of adaptation

In a market where temperatures are often high and competition is fierce, the integration of AI in spreadsheet modelling is not just an option; it’s a necessity to stay ahead and provide competitive service. It’s time to shed over-estimated fears and embrace the potential of AI, all while retaining our invaluable human expertise in validation. The future of successful commercial real estate professionals hinges on this crucial partnership and clarity about what AI actually achieves.

It is also inescapable. Microsoft Co-pilot integrating directly into everyone’s desktops and mobile phones in recent weeks is just one example of the unstoppable march forwards of progress. AI doesn’t replace people. But people who don’t use AI do get replaced by people who adopt far smarter approaches.

Conclusion: striking the right balance

Understanding the difference between validation and verification dispels misconceptions about AI and automated modelling in commercial real estate. By embracing this knowledge, we can enhance our analytical capabilities, reduce the risk of errors, and make more informed decisions efficiently.

It’s a blend of the best of both worlds – the precision of AI and the insight of human experience. Let’s step into this future with confidence and a clear understanding of our roles in this evolving landscape.

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Deal Narratives & Cashflow Tales

In Commercial Real Estate (CRE), the Discounted Cash Flow (DCF) method is more than a valuation tool; it’s a storyteller. Institutional clients, investors, financiers and governance officers, seek clarity and comprehension. To this end they are drawn to the narrative strength of DCFs. Story structures are naturally accessible, highly memorable and can be communicated to the widest audience.

Most analysts understand DCF numerical analysis, but a deeper appreciation lies in the ability of DCFs to weave a story for clients, and thereby offering an engaging presentation. This is crucial in the RICS industry, where even seasoned valuers struggle with the value of a swift transition between DCFs narratives and alternative appraisal methods for client servicing.

Understanding Client Needs: The Demand for a Story

CRE clients seek more than data; they want a narrative that contextualizes the data and sets out the potential opportunities if they choose to deploy capital. A coherent CRE story weaves together DCF assumptions over time, and explains how capital itself will be recycled.

DCFs are increasingly the primary pillar for institutional investor decision-making frameworks. The best Investment Committees demand clear, rigorous and diligent presentations. Compelling stories consistently win team consent.

Some of the narrative components at play include:

  1. Time: The Core of DCF Narratives

DCF’s narrative power lies in its use of time and time value of money. By itemizing each relevant income and expense, DCFs guide clients through the potential future performance of real estate. In contrast, alternative methods of valuation are less dynamic, relatively inscrutable and involve a more ‘static’ interest in time.

  1. Aristotle’s Story Structure: DCF Tales

DCFs align with Aristotle’s narrative structure – a beginning (acquisition), a middle (asset management), and an end (hopefully a stabilised and profitable exit point). This helps clients comprehend and follow an asset’s likely investment lifecycle, and supports efficient decision-making.

Fig. 1: Aristotle’s Plot Structure

Source: Slideshare.net

  1. The Rhythm of Investment: a DCF Music Analogy

DCFs reveal structured patterns of income, expenses, voids and zeros. This is akin to music, where notes and silences define a melody. Reading a cash flow over time reveals the heterogeneous property characteristics within a stuctured and consistent context – much like a music stave: no matter how different the music, many players can read and rapidly interpret the sheet. In the field of finance, cashflows are the most intuitive story structure for cash-yielding-assets.

  1. Communicating the Journey: DCF as a Narrator

The DCF layout tells each story like an omnipresent narrator: this includes key elements such annual cash-on-cash yields, which are essential for institutional fund management criteria. By framing data against a timeline, DCFs make complex investment scenarios immediately accessible from a yield analysis perspective.

  1. A Common, Extensible Language

DCFs are the lingua-franca in CRE finance for good reason: they are extensible. They can be shared with 3rd parties from different disciplines beyond RICS Valuation-specific circles.

Like a story, DCF’s universal structure can be adapted/adjusted for different audiences and teams. E.g. financiers can copy an ungeared DCF and rapidly overlay a layer of debt cashflow analysis to assess likely debt interest coverage. JV Partners can add a waterfall profit cashflow to split potential deal profits. Tax consultants can append a taxable section cashflow.

While each of the above cashflow sections may sound like traditional manual spreadsheet tasks, they are precisely structured components AI like Dashflow can generate consistently and safely in a matter of seconds for different departmental team assumptions.

Bringing it all together

In a world where institutional clients crave clarity, safety and consistency around the governance of ‘the numbers’, DCFs stand out as beacons to help navigate decision-making in a complex world. It’s far more than a valuation method – it’s a narrative tool that transforms data into compelling business stories.

For commercial real estate brokers and investors, mastering the art of DCF storytelling is not just an advantage; it’s a necessity to meet the evolving demands of informed, narrative-seeking, value-add investors. As the industry continues to evolve, the ability to switch seamlessly between DCF and other methods is key to addressing diverse needs in the market.

Remember, in commercial real estate, the power of a well-told story can be just as influential as the final ROI metrics it conveys.

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Is the Mailbox worth £120MM?

Following the demise of the IPSX exchange, the Mailbox in Birmingham is coming to market with a £120m price tag.

For cashflow risk purposes, potential purchasers are likely to see this opportunity as either an iconic leisure and mixed use asset with a suitably enhanced value or simply as a more traditional office investment with some ancillary leisure.

The difference is stark. While the former is a marketer’s dream, the latter is a Morgan-Stanley-laser-type focus on intrinsic value. An initial perception can mean the difference between giving a confused view or some time-saving insights.

To cut through the confusion of what an asset fundamentally offers from different perspectives, we’ve created an interactive floor plan which transforms the process of communicating an asset’s fundamentals with every stakeholder. It’s hugely more user-friendly than, say, flicking through a 30-page PDF brochure or 85 rows in a dense Microsoft Excel tenancy schedule.

A short guide to our Interactive Floorplans:

The Mailbox Interactive Floorplan

Head to our Dashflow store to get the Interactive Floorplan illustrated above. It serves not only as a tool for Mailbox, but as a case study to improve team approaches for similar multi-let situations across stacking plans.

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ChatGPT and real estate cash flows

Is the explosion of ChatGPT about to disrupt the livelihoods of real estate investment analysts any time soon? And will opportunities at entry level be at risk? Who, how and what will be produced to satisfy the ongoing institutional needs for discounted cash flow modelling and demands of acquisition, asset management and client reporting due diligence? While these are all natural questions in the face of hype and headlines, it serves us well to take a brief step back:

The clue is in the name: the “GPT” part stands for Generative Pre-trained Transformer, which is a program that can realistically write like a human. i.e. this involves a language model, and has significant implications for tasks that involve spreadsheets.

Confusion can also abound around the degree of penetration ChatGPT will achieve in spreadsheet modelling labour. After all, Microsoft is about to release (beyond the lucky testers at Fortune 500 companies) the AI-powered magic for Office 365 across Word, Powerpoint and… yes… Excel spreadsheets. And even with ChatGPT version 3.5 there is no doubt that ChatGPT can be excellent at recommending Excel formulae based on human natural language prompts.

So what is the friction between ChatGPT and spreadsheet modelling? Therein lies what concerns high-calibre Analysts and financial teams that depend upon them:

Large Language Models (LLMs) like GPT-4 are designed to generate text based on prompts. These models work by taking a sequence of input text and predicting the next piece of text in the sequence. They are sophisticated and can generate a wide range of responses, but they operate within certain limitations.

Creating a fully functioning spreadsheet involves much more than just generating text, it involves a structured grid of cells, each of which can contain values, formulas that reference other cells, and more. Here are a few reasons why a LLM like GPT-4 cannot write entire spreadsheets:

  1. Text-based Output: GPT-4 operates by predicting the next piece of text in a sequence. It doesn’t have an understanding of the structure of a spreadsheet or the ability to generate a grid of cells. It can generate text that resembles the contents of a spreadsheet, but it can’t create an actual spreadsheet file.
  2. No Understanding of Spreadsheet Structure: GPT-4 doesn’t understand the structure of a spreadsheet in the way a human does. It doesn’t understand the concept of cells, rows, columns, or formulas. It can’t reference one cell from another or calculate the sum of a range of cells.
  3. No Persistent Memory or State: GPT-4 generates responses based on the input it’s given, and it doesn’t have a memory of past inputs or outputs. This means it can’t maintain the state of a spreadsheet over multiple turns of a conversation. For example, if you asked it to add a value to a cell in a spreadsheet, it wouldn’t be able to remember the value of that cell in a later turn of the conversation.
  4. No Interaction with External Software: GPT-4 can’t interact with external software, which means it can’t use a spreadsheet software like Excel or Google Sheets to create a spreadsheet.
  5. Limited Complexity of Generated Content: While GPT-4 can generate quite complex content, a full spreadsheet might require more complexity than it can handle. For example, if a spreadsheet has a lot of formulas or cross-references, it might be too complex for GPT-4 to accurately generate. And when best bids are concerned, investors are very focused on every dollar, euro, pound or yen they are prepared to allocate to a real estate opportunity.

Despite these limitations, GPT-4 can still be used to generate text that can help you create a spreadsheet. For example, it can help you write formulas, figure out how to structure your data, or even generate pseudocode for a script that could automate the creation of a spreadsheet. However, the actual creation and manipulation of a spreadsheet would need to be done using spreadsheet software or MaaS (‘Modelling As A Service’).

So financial analysts can sleep well. GPT-5 is unlikely to venture much into their territory from what we know today.

Credit: this has been delivered with the benefit of ChatGPT version 4.0.

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Morgan Stanley: Everything is a DCF

It’s official: gone are the good old days of all-risk-yield-driven Investment Valuations satisfying best-in-class practices as a primary methodology. While experienced dealmakers know when they see a good deal, best-in-class investors require due diligence (‘DD’) to back-up any deal instincts or implicitly mysterious arguments for a quick desktop valuation.

Since the 1990s this DD workload has only become more layered/complex, time-consuming, and costly for businesses. To add to that talent inflation is on the rise. But there is no going back. Most international institutions allocating money to global gateway cities like London and New York demand Discounted Cash Flows (‘DCFs’) – to satisfy rigorous processes, investor questionnaires and higher degrees of financial scrutiny. Back-of-the-fag-packet math no longer cuts the mustard.

Unfortunately teams without good software & human processes tragically reduce otherwise top deal-making instincts into an institutional drip of ‘paralysis by analysis’

Unfortunately businesses without good software & human processes, tragically reduce their deal instincts into an institutional drip of ‘paralysis by analysis’. Better teams eat their lunch by efficiently filtering new deals for their fund strategies. This also has an internal detrimental impact on staff motivation and retention. We regularly hear stories of chronic and risky methods: down to granular copy-&-paste activity between blackbox appraisal software (e.g. Argus Enterprise or MRI Software) over to butchered legacy spreadsheets to complete a Board report task.

Morgan Stanley’s recent paper “Everything is a DCF Model” explains why DCF models are important not just for valuing commercial real estate but for all cash-generating assets. It warns those professionals who tend to consider them “quaint” exercises as many remain in awe of skyrocketing valuations across many fields, not least of all technology.

Morgan Stanley’s recent paper “Everything is a DCF Model” explains why DCF models are important for valuing all cash-generating assets.

Morgan Stanley, “Everything is a DCF Model”, Q3 2021

The discipline of DCFs -i.e. to be explicit about each income and expense line over time- makes them the primary tool for best-in-class advisors, investors and lenders. Just as penning an essay brings clarity of thought to each writer, converting a business proposal into an explicit DCF reveals the inescapable dynamics of investment scenarios. Many of which are impossible to document from highly-generalised human instinctive opinions.

Not only is there a demand factor today driving the need for DCFs. There is also a supply-like tension thanks to the sheer changing structure of the real estate market:

The leasing tech community often talks about how 25-year leases are a thing of the past…i.e. how Landlords need a customer-centric outlook, and how tenants benefit from shorter terms, flex space, hybrid working options, etc. While this phenomenon is very important for the leasing brokerage industry, there is also a DCF consequence for the Capital Markets side of the real estate industry:

From an all-risk-yield perspective: 25-year leases were easier long income to value implicitly with a yield-driven opinion from a traditional RICS valuer. Shorter lease patterns and greater tenant flexibility generate more complex income & expense patterns. As night follows day, DCFs are the best methodology to work through this reality on a deal-by-deal basis.

Professionals that have been in the real estate investment business for a decade or two will have come across valuation professionals that can wax lyrical about their implicit valuation methodology, and how it is essential in order to bring into play investment comparables (‘the comps’). An entire methodology and fee-earning industry has been built upon this implicit approach.

The Global Real Estate industry is not alone in how it has shirked away from fully embracing Discounted Cash Flows as a primary methodology. The Morgan Stanley paper spells out the various arguments all professions must occasionally rehearse to themselves for the sound and proper financial reporting of cash-generating assets.

In terms of the property sector, it is a mark of great progress to see that the January 2022 RICS Investment Valuation Report moves the industry forwards. All global surveyors must now embrace DCFs as the primary methodology for Investment Valuations.

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15-year Smartphone Anniversary: 9-Jan

The iPhone redefined and encapsulates what everyone wants in their pocket. It set the bar. It’s strange to think that 30-year-olds are practically tech veterans in terms of understanding how the iPhone is entering the business scene. 20-year-olds can’t remember graduate life without them.

15 years ago Steve Jobs revealed 3-innovations-in-1 in his indomitable style. It’s worth reminding ourselves of the sheer innovation leap presented to the world in 2007: “we’re introducing a widescreen iPod with touch controls, a revolutionary mobile phone and a break-through internet communicator device…..  An iPod.  A phone.  An internet communicator…. These are not 3 separate devices.  This is one device…. And we are calling it: iPhone”.

Video: Steve Jobs launching the iPhone revolution on 9 Jan 2007

Figure 1: Steve Jobs explains Apple’s UX breakthroughs for customers

To quote CNBC in the run-up to Covid in Dec 2019: “it’s possible to look at the last 10 years as the iPhone decade — when smartphones went mainstream, created billion-dollar corporations, rearranged existing industries and changed the world.”

Figure 2: Apple’s advent of mass-market smartphone/GPS drove On-Demand:

Unquestionably, it’s the most impactful consumer tech product over the past decade

apple analyst Gene Munster, cnbc, Dec 2019

The iPhone has created arguably as many new industries as it destroyed.  Ride-hailing companies Lyft and Uber are collectively worth more than $60 billion, and they exist only thanks to the always-on GPS location and high-speed wireless connections that became common with the iPhone.

For sure many can raise their eyes today at the mention of an iPhone.  They may prefer to mention other manufacturers and their own competitive product: an Android variety or some other smartphone.  But the iPhone remains the revolutionary product. All competitors follow a similar path. They look and feel broadly the same as the Apple design: slick, slim and a seamless experience for users across all generations.

Figure 3: Apple set the bar for all smartphones today.

On this anniversary, we share 3 take aways below: sensible science prevailed, swathes of the public joined a veritable tech journey, and the initial ‘fake it until you make it’ Steve Jobs launch for which we remain grateful 15 years later.

Years of research and development delivered game-changing success

At a time when pseudo-science and political interventions confuse people’s respect for science, it is fantastic to see an example in which years of proper research and development trumped widely-held truths: 

  • Many betted against touch screen keyboards versus fixed plastic keyboards of Blackberrys, Nokias and Palms.
  • Many thought a device for personal life (music, books, movies) could not meet the needs of the business blackberry world.
  • Many believed a mobile-first device cannot deliver desktop class applications and business-grade connectivity.

Figure 4: Steve Jobs explains the desktop technology packed into the first iPhone.

  • Many IT managers were of the opinion that business would not be influenced by iPhones.  In 2017, Microsoft issued the full Office 365 suite for business iPhones and iPad devices.

It’s got all the stuff we want… [it] let’s us create desktop class applications and networking… Not the crippled stuff you find on most phones.”

Steve Jobs, Apple launch of iPhone

On each count naysayers have been proven wrong.  Now it is great to see top FTSE and NYSE businesses grasping and organising B2B benefits from the resulting technologies and innovative software available on the Apple App Store.

Technology is a journey

Over 15 years, we can clearly look back at legacy moments related to the iPhone.  Many overlook or certainly have forgotten the earlier iPhones limitations.  Like any good tech progress, it’s a journey:

  • 24 months after iPhone launch to introduce the App Store. Until then you very much got what you’re given by Apple managers..
  • 24 months to upgrade 2 megapixel to 3 megapixel photos
  • 24 months for video recording
  • 36 months for a high-definition display…. And the list goes on.
  • 36 months for selfies with a front camera

Figure 4. Selfies introduced new styles, branding techniques, companies and spawned new industries.

Fake it until you make it?

While the iPhone experience receives some of the highest user reviews year after year, the New York Times revealed just how close to the sun Apple flew to introduce such a new and complex technology to the world. Steve Jobs presented “the golden path” to make it look like it worked:

It worked fine if you sent an e-mail and then surfed the Web. If you did those things in reverse, however, it might not. Hours of trial and error had helped the iPhone team develop what engineers called “the golden path,” a specific set of tasks, performed in a specific way and order, that made the phone look as if it worked.

New York Times

The debate will rage on between the healthy balance between solid products and investor expectation management. But as far as this ‘fake’ launch may be concerned, we are grateful the launch succeeded, the product thrives the test of time – and new products build upon this marvellous achievement.

Cheat Sheet for Commercial Real Estate IRRs & Fund Management Metrics

It’s time to put IRRs in a more positive light. And we’re delighted to provide this real estate guide which parallels the thrill of F1 Racing with the strategic nuances of institutional real estate investment, ensuring you’re equipped to navigate the full twists and turns of the market and deal scenarios. Download to turbocharge your team’s investment awareness and strategy today.

Download this complimentary Racing Guide to Client Fund Management performance metrics in CRE.

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Disclaimer: As part of our commitment to excellence and in line with the RICS Investment Valuation Report recommendations, this Cheat Sheet is your pit stop for mastering fund management metrics. Gain insights to fine-tune your approach to Discounted Cash Flows and related analyses, empowering your investment journey. For the avoidance of doubt this guide should not be construed as advice for any final investment decision. We encourage a professional advisor is recommended to proceed with any proposed investment.

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Rethinking IRR: a critical tool in the ROI toolkit for Commercial Real Estate investment

It’s time to place CRE IRRs in a more positive light.

In the world of commercial real estate investment, discussions around the Internal Rate of Return (IRR) often evoke a spectrum of opinions, particularly among the academic circles of prestigious institutions like Wharton, Reading, or Cambridge University. Here, a fascination with dissecting the limitations of IRR is commonplace, leading to spirited debates in professional settings. This academic scrutiny, while intellectually stimulating, sometimes misses the forest for the trees when evaluating IRR’s role in investment decision-making.

IRR: Beyond Academic Skepticism

In the workplace, the dichotomy between academic theory and practical application becomes stark. Institutional real estate researchers, armed with their scholarly insights, frequently highlight the so-called inadequacies of IRR, casting it in a less favorable light. This perspective, however, overlooks the indispensable role IRR plays in the day-to-day analysis of investment opportunities by professionals who leverage both IRR and Discounted Cash Flows (DCF) to navigate the complex terrain of investment strategies.

The critique of IRR as being overly simplistic or misleading is akin to critiquing a single instrument in an orchestra for not capturing the entirety of a symphony’s beauty. Yes, focusing solely on IRR can lead to a narrow view of an investment’s potential, much like obsessing over a statistic without considering its context can skew perception. However, this critique fails to acknowledge IRR’s foundational role in the broader composition of investment metrics.

IRR: A Symphony’s Tempo

To draw a parallel, consider IRR as the tempo in a musical symphony. While it’s true that tempo alone does not define the complexity or emotional depth of a piece, no symphony can exist without it. Tempo sets the pace, creating the framework within which melodies and harmonies flourish. Similarly, IRR sets a fundamental pace for investment evaluation, providing a critical measure of an investment’s potential return over time.

Best-in-class fund managers understand this. They recognize the importance of situating IRR within a comprehensive toolkit of investment metrics. This holistic approach enables them to appreciate how each metric, like instruments in an orchestra, contributes to the overall performance of an investment strategy. It’s not about dismissing IRR but about recognizing its critical place and function within a broader investment analysis framework.

Refinancing Ahead? Get faster & smarter at DSCR negotiations

The fastest and easiest way to prepare for negotiations is to rapidly visualise the DSCR narrative. A compelling story of what can unfold going forwards is essential for a CRE lender.

As the landscape of Commercial Real Estate (CRE) investment continues to evolve, one metric has surged back into the spotlight: the Debt Service Coverage Ratio (DSCR) or ISCR (Interest Service Cover Ratio). In an environment where refinancing existing loans has become more prevalent, understanding and negotiating DSCRs is not just a skill but a necessity for investors. Here’s why DSCRs are commanding attention and how technology can play a pivotal role in mastering the narrative to negotiate terms that may win or kill a deal:

1. The Renaissance of DSCRs

With the wave of loan refinancing sweeping through the market, DSCRs have become more crucial than ever. This metric, which measures an investment’s ability to cover debt obligations, is a vital sign of financial health and sustainability. In today’s dynamic market, having a firm grasp on your property’s DSCR means staying ahead in the game of loan negotiations and long-term financial planning. It also enables advisors to provide rapid upfront value-added advice to busy clients for a given investment profile, lending situation or refinancing challenge.

2. The Art of Smart Negotiation

Negotiating DSCR terms is akin to walking a tightrope. It’s about finding that perfect balance where temporary dips don’t spell disaster. For instance, consider the scenario of an Interest Service Coverage Ratio (ISCR) falling short in one quarter. This shouldn’t automatically trigger alarms or penalize investors if it’s an outlier rather than a trend. Smart negotiation involves setting terms where soft breaches are understood and allowed within the framework of hard breaches, ensuring that a momentary lapse doesn’t jeopardize your investment’s standing or future.

3. Visualizing the DSCR Narrative

To negotiate wisely, investors need to see the full story of their DSCRs — a story that unfolds over time. This is where technology steps in. Tools like Dashflow offer investors a way to visualize cash flows and DSCRs across a timeline, turning complex data into understandable and actionable insights. By seeing how DSCRs fluctuate over quarters, investors can anticipate potential issues, strategize more effectively, and communicate more convincingly with lenders.

4. Understanding Through Visualization

Consider the following graph where a Quarterly ISCR metrics dip below a crucial threshold momentarily, pointing to potential stress. However, the Average ISCR (the dotted line) remains healthy, above the lender’s minimum requirement (the horizontal red line – aka “Above water”). This visualization clearly shows that despite short-term fluctuations, the investment is sound overall. It’s a powerful argument in negotiations, illustrating the importance of a nuanced approach to loan covenants and the value of tech in making these nuanced arguments clear and compelling.

Figure 1: A screenshot from Dashflow’s COVERAGE RATIO interactive screen.

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But the trick is to produce these narratives conveniently, quickly, intuitively and without consuming your work day. We are talking about running a lot of simple but mundane calculations manually, which are mostly simple divisions. Furthermore, any of this geared ISCR analysis will require a NOI cashflow to be modelled from your latest tenancy schedule. It adds up to quite a bit of work for a simple picture.

By leveraging advanced analytics and visualization tools like Dashflow, Commercial Real Estate investors and brokers can transform data into a compelling narrative. This narrative not only aids in the smart negotiation of loan terms but also provides a holistic view of an investment’s financial journey. Understanding and communicating the story behind the numbers is key to securing favorable terms and ensuring long-term success in the competitive world of commercial real estate investing.

Get in touch to discuss how to streamline your CRE cashflow workflows.

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Dire times: ‘money for nothing and [Analysts] for free’

The great Excel illusion: are institutional standards falling?

You may have seen the common job ad: “Seeking enthusiastic graduate with 3 years of experience in real estate investment that is a self-starter and can lead due diligence across all assets mixing commercial and living assets…. and oh… can build and design institutional-calibre financial models from the ground-up for investment committee, which will also serve as user-friendly templates for the whole team to use”. OK. This is facetious. But you get the point:

With lower costs, lower budgets, smaller bonus pools, firms are trying to have their cake and eat it. To paraphrase Dire Straits, they want money for nothing and analysts for free. Unfortunately recruiters may also not know what a candidate requires for expert Excel financial modelling.

StripMallGuy’s list

This post by StripMallGuy puts a lot into perspective. Many of the Commercial Real Estate skills are not taught at college or even by a first employer. Look at this long list about real estate management – let alone possessing an advanced ‘excel’ modelling skill:

Where are the mini-mes?

In any other walk of life, you see a hierarchy that broadly respects a degree of correlation between age and expertise. In a typical institution, there tends to be a Head of Fund Management (i.e. not in nappies during the ’08 global financial crisis) and an Assistant Manager in tow. Or a Head of Finance and his deputy treasurer. You get the drift… Top person and a mini me. Holmes and an admiring Watson.

But when it comes to financial modelling, there is less care and attention (and salary compensation) dedicated to organising financial modelling resourcing for commercial real estate. How often do you see a Senior Modeller alongside a Junior Modeller? In an industry noted for commonly strong egos (note the Church of England current search for a “low-ego team player” as real estate Chief Investment Officer) and highly-opinionated environments, it simply does not fly to call a high-achieving graduate a “junior modeller” these days. Especially if they’ve been hired on the presumption that they are already “experts”.

Excel users are mostly junior coders.

In the field of software, the tech industry appears to be far more cognisant about appropriate skillsets. It takes many years to become a “Master Developer” and move up from a junior amateurish level. They even seem to embrace the journey, and recruiter job postings are designed appropriately.

Even if you are tremendously smart, the fact remains that there are many time-tested conventions and tricks of the trade that take time to practice and incorporate into different Excel model template designs. This necessary groundwork is akin to training at length on a musical instrument before having the freedom and expertise to play jazz alongside the best at Ronnie Scotts.

What most Excel modellers do not realise is that they are already ‘coders’. Every Real Estate Associate or Analyst out there already is responsible for programming for international pension funds. Excel is the most common programming language in the world. Due to generational training differences, senior managers are often one-step removed from Excel to appreciate the complexity of work that now sits on the shoulders of relatively young professionals still learning the ropes. And then they get puzzled when simple answers are delayed, templates are butchered and people whisper about legacy file issues…

There is a simple word that may help clarify the situation. While a newly-trained recruit may certainly be highly-proficient, advanced or even “expert” at Excel compared to traditional line managers – the real question is: are they seasoned financial modellers? Have they built from the ground-up models that stand the test of time, and have a track record of colleagues using them for deals?

New real estate demands new models

We have noticed a number of requirements emerging for new recruits to help teams develop new models for Living Capital Markets purposes. The new normal of real estate is not only moving under Fund Managers’ feet but also Analysts: funds are experiencing the monumental shift of capital away from the traditional 1990s offices, retail and shed themes. Global money wants modern distribution centres, power-hungry data centres and living capital assets that offer an array of uses such as co-living, resi unit sales, BTR, PBSA, hotelification, healthcare, etc.

From a modelling perspective this is the equivalent of watching the tide move out and spotting who are proper modellers with swimming trunks on. As investment opportunities increasingly involve multiple uses of real estate, this in turn demands more complex models from analysts.

Solution: proper Analyst training + AI support

For slightly different reasons, the Royal Institution of Chartered Surveyors (RICS) has already sounded the alarm in its recent Investment Valuation Report review, calling for an upskilling revolution. Training analysts to handle today’s growth of mixed-used opportunities and respective financial modelling needs is a start, but it would take too long. It’s time to accept the fantastic opportunities AI offers to help Analysts sift through 10,000 or even 20,000+ Excel formulae in minutes.

The above list of tasks provided by StripMallGuy isn’t a to-do list – it’s a syllabus for a lifetime of learning in the field of real estate. Expecting a graduate of a few years to *also* design a model with the elegance of a Swiss watch and the complexity of a space shuttle’s control panel is akin to handing a scalpel to a first-year med student and wishing them luck in open-heart surgery.

Get in touch if you’d like a chat about DCF + AI.

Hospitality innovation: a Real Estate brand on the move

Now we know why the 19-year JLL veteran and high-flying Global Head of Hotels with Latina flare was lured away to the “client side”. The challenge was too good to miss: the French juggernaut Accor Hotels group appointed Gilda Perez-Alvarado alongside the creative architect Maxime D’Angeac to spearhead their latest global innovations.

Source: The Future of Hospitality Summit 2023

The duo will lead a team to contest the dominant US luxury players like the Four Seasons and Starwood boutique hotel experiences. Among their leading projects, they will deliver a reimagined art-deco experience to define next-generation train travel on Orient Express.

Source: Orient Express interior designs by Maxime D’Angeac

The Orient Express pipeline not only includes a couple of hotels in Rome and Venice, but also the tremendously exciting Silenseas Yacht powered by wind and Liquid Natural Gas:

Source: ACCOR Group

The Architect Maxime D’Angeac certainly doesn’t mince his words – indicating that he must get out of Paris to create major new projects given the enforcement of tight rules in the French capital. He is a creative force with that seemingly compelling mix of commercial zeal to deliver for both user experience and investor stakeholders.

The real difficulty is to find a project with a certain amount of money to put it in the game

Maxime D’Angeac

A train experience that went bust

The Global Financial Crisis coincided with the last failure of the American version of the Orient Express. The business model didn’t survive the squeeze for tickets amounting to ~$5,000 per head. In its final voyages it’s reported that there was often more crew than passengers on board. It was sold off for parts in 2008.

Accor’s vision will undoubtedly have to up the ante to achieve far greater train ticket inflation to match its elite designs. The design previews certainly promise to leave as a distant poor cousin the more mundane fit out you’ll find on, say, China’s Shangri-la Express.

The luxury vs pricing point for the internal fit out will be one to watch. When it comes to trains, it’s amazing what a simple journey and pleasing view can be offered at a relatively cheap fit-out cost. Take for example the Californian Surfliner: an underrated low-cost journey from LA to San Fran. It’s a veritable value-for-money eye-opener, especially for those who can only imagine enjoying the US Pacific Route 101 views in a convertible.

Source: Amtrak

Over in Europe, American and other international visitors already plan months and years in advance the relatively modest Sleeper Train from St Pancras London to wind through the Harry Potter valleys and soak up the Scottish Highlands. Yet the fit out is quaint, cramped and tired by any modern hotel standard.

Yet this Jacobite Express’ 84-mile journey has often been described as the most beautiful railway journey in the world. It’s the Scottish version of the Wild West blessed with broad-shouldered vistas and deep gorges.

The Harry Potter and Scottish Highlands train experience.

The Power of Brand: Orient Express + Accor Design & Strength

But the Accor team know they have acquired a secret weapon: the nostalgic power that underpins the Orient Express brand – and believe they can build upon the timeless thrill of a slow journey coupled with spectacular views while you sit and sip in Art Deco surrounds. It’s akin to Live Theatre with nature which plays very well with today’s sustainably-minded tourists. It can also command a premium to capture that increasingly elusive slower pace that is a world away from our instantly connected world.

The global romanticism and sheer history of the Orient Express stretches from London to where Bram Stoker’s Dracula escaped to the Black Sea at Varna. It also reached further south to what today remains one of the most popular tourist destinations: Athens. The inaugural Accor Orient Express train will cover most of the length over the original route from Paris to Istanbul.

Historic routes of the Orient Express since 1883

Now that the traditional era of marketing is over, the deeply shared narrative and visual spectacle of the Orient Express will be a prized asset in a world where social media and instagrammable backdrops power today’s exponential word-of-mouth.

Conviction for Innovation

Gilda Perez-Alvarado’s title may focus her for now on Orient Express hotels, trains and yachts, but it’s the wider Accor Hotel commitment to innovation that has clearly appealed to her. She claims it is evident that Accor has demonstrated more innovation than anyone else in this field. That is quite a statement about a global corporate stacked with subsidiary brands:

The signs are certainly good: the group has a long-standing commitment to innovation and walks the talk by putting serious resources behind their efforts. One need only visit their dedicated domain: accor-design-innovation . com.

And they don’t rest on their audience laurels – they identify new user segments and ensure that new product development serves emerging trends such as the growth of the glamping-and-nomadic leisure market crowd:

Source: Accor

It is no wonder that, after much management change at the top of Accor, they recently realised that it needs to split its leadership by product groups rather than simple shared geographies. E.g. a CEO of Fairmont Hotels will undoubtedly be a bit out of their element when it comes to nomadic rooms with cows mooing at the end of the bed…

Modular hospitality production. Source: Accor

Mobile Hospitality Revolution

A new brand for mobile times. Source: Accor

Dashflow is known for empowering busy real estate professionals to achieve far more in terms of investment appraisals when out of office, with clients, and away from a traditional desktop. This growing mobile revolution is self-evident across industries. Accor Group not only has adopted the mobile trend (e.g. a common innovation is to use handheld devices to manage Smart Room lights, music, entertainment prefs, etc), but it fully embraces the mobile revolution in both ‘software and hardware’ terms across its wider business.

Accor’s nomad product caters to mass experiences that demand better accommodation to capture those transient moments: festivals, F1 tours, Yellowstonesque seasonal experiences – practical innovation that allows customers to have more time and be more immersed in their chosen experience. Be that the sound of live music, roaring engines or cicadas under the night skies.

Metaverse applications

Some may recall the leading global fund that grandly claimed it would create a digital twin of its assets down to the last ‘blade of grass’ (and then quietly parted ways with its head of innovation and recent recruits).

In contrast, Accor maintains a pragmatic approach to the field of innovation. Rather than run-off in a highly-abstract direction with metaverse hype and questionable ROI , Accor appears to maintain a sense of balance in their commercial application of technologies.

For example, the hotel group has chosen to go for a metaverse experience for guests in Pompeii. Not only is it pursuing a ‘try-before-you-buy’ initiative to reserve rooms, but it will use the same technology to entertain guests by illustrating the archaeological wealth and life that was destroyed by Mount Vesuvius.

Passion for hotelification

Perez-Alvarado has highlighted an extra ingredient. Coming from a family where her mother and grandmother have been involved with hotels, she is a Costa Rican who can authentically claim that hotels are in her DNA. She also brings a refreshing take on what drives her at work: referring to US business back at JLL as just business and not personal. For Gilda, now “it’s business and it’s personal”. This hotel ambassador’s heightened and dedicated attention to customer needs bodes well for Accor’s direction.

New horizons

We wish Gilda Perez-Alvarado well. She could have remained in the comfort of her glamorous Global Head of Hotels role for the largest brokerage firm in the world. But, no, she moved on to keep pushing the envelope in the highly competitive hospitality industry “with an owner’s mentality”.

She may not be involved in the two space hotel projects yet, but don’t write her off from taking this French brand to even greater heights. In the meantime, she and Accor have their eyes set on the USA market. Its ~5 million hotel rooms is dominated by national brands. And 87% of Americans prefer domestic travel. An Americano version of the Orient Express could well hit the spot in future. It could be the perfect transatlantic combination of American rancher landscapes and nostalgic mode of classic European travel.

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The Office Conundrum

A Regional Dilemma or a Global Uniform Destiny?

As the commercial real estate industry stands at the precipice of change, a pressing question looms: are the differing narratives of office space use in North America, EMEA, and Asia-Pacific merely convenient tales to assuage short-term pains, or do they hint at a universal shift in the office sector’s future?

CRE executives from Colliers, JLL and others have been on global news distribution channels sharing the clear narrative that the current office story differs across the three regions.

This complex puzzle beckons us to delve deeper, considering whether North America’s more severe move away from traditional offices is a harbinger of a global trend, or if unique regional dynamics point towards divergent paths. A remark from a Dakota Governor in USA (see below) further complicates the landscape, suggesting that North America’s urban planning history, dominated by the automobile, may be showing its age in these evolving mixed-use times.

A Convenient Tale of Three Regions – or same long-term fate for Offices?

In North America, the rapid adoption of Work-From-Home (WFH) models has triggered a fundamental reassessment of office spaces, propelling a shift towards mixed use real estate solutions. This transformation raises the spectacle of a deep-seated change akin to the retail sector’s overhaul, with office spaces potentially facing their own moment of reckoning.

Contrastingly, EMEA’s varied response reflects a more measured transition so far, indicating a region at the crossroads, while Asia-Pacific’s continued affinity for traditional office setups and greater compliance with return-to-office employer requests underscores wider cultural and practical implications.

So with harsher times unfolding in the USA, less so in EMEA and ‘healthy’ back-to-office stats in Asia, is today’s market snapshot indicative of the long-term fate of offices?

Delving Deeper: The Future of Office Spaces

The divergence across regions begs a critical examination of the office space’s role in a post-pandemic world. While Asia-Pacific’s adherence to office work highlights distinctive socio-economic factors, North America’s shift towards flexible, decentralized work environments signals a potential paradigm shift, spurred by a quest for a balanced work-life integration and innovative urban living solutions.

Americans, while known for their work-driven ethos, are also highly-focused on convenience. Take their morning drive-through culture, their automated toll-road charging, and sports bars with multiple info screens like an investment banker’s desk. They pride themselves on efficiency. Remove friction, delays and aggravations at every possible turn.

While they may not hanker for the European Swiss village lifestyle, it should be no surprise if they lead the global charge to remove the major daily friction of commuting to an office and stay within the realms of their ranches.

Reflecting on the American Urban Model

The insights from Dakota touch on a deeper reflection about the sustainability of North America’s car-centric urban development. This perspective invites us to consider whether the changing dynamics of work and urban living might necessitate a reevaluation of longstanding planning principles such as US zoning and rapid semi-urbanised sprawling:

The Linear Feet Cost of Everything in Commercial Real Estate

See this 2-min video from the US National Governors Association Winter Meeting 2024:

Doug Burgman’s comments refer to the historical planning baggage the US market appears to contend with – summed up neatly with “the linear feet [cost] of everything”. He reflects on the growth of American cities being predicated on the growth of commuting of the automobile market at the expense of multi-modal public transport opportunities. This makes for a particularly deep challenge for US Central Business Districts (CBDs) – at a deep root and branch level that will not be familiar to those who come from cities that have grown organically over centuries.

A Regional Dilemma or a Global Uniform Destiny?

As the commercial real estate industry stands at the precipice of change, a pressing question looms: are the differing narratives of office space use in North America, EMEA, and Asia-Pacific merely convenient tales to assuage short-term pains, or do they hint at a universal shift in the office sector’s future?

CRE executives from Colliers, JLL and others have been on global news distribution channels sharing the clear narrative that the current office story differs across the three regions.

This complex puzzle beckons us to delve deeper, considering whether North America’s more severe move away from traditional offices is a harbinger of a global trend, or if unique regional dynamics point towards divergent paths. A remark from a Dakota Governor in USA (see below) further complicates the landscape, suggesting that North America’s urban planning history, dominated by the automobile, may be showing its age in these evolving mixed-use times.

A Convenient Tale of Three Regions – or same long-term fate for Offices?

In North America, the rapid adoption of Work-From-Home (WFH) models has triggered a fundamental reassessment of office spaces, propelling a shift towards mixed use real estate solutions. This transformation raises the spectacle of a deep-seated change akin to the retail sector’s overhaul, with office spaces potentially facing their own moment of reckoning.

Contrastingly, EMEA’s varied response reflects a more measured transition so far, indicating a region at the crossroads, while Asia-Pacific’s continued affinity for traditional office setups and greater compliance with return-to-office employer requests underscores wider cultural and practical implications.

So with harsher times unfolding in the USA, less so in EMEA and ‘healthy’ back-to-office stats in Asia, is today’s market snapshot indicative of the long-term fate of offices?

Delving Deeper: The Future of Office Spaces

The divergence across regions begs a critical examination of the office space’s role in a post-pandemic world. While Asia-Pacific’s adherence to office work highlights distinctive socio-economic factors, North America’s shift towards flexible, decentralized work environments signals a potential paradigm shift, spurred by a quest for a balanced work-life integration and innovative urban living solutions.

Americans, while known for their work-driven ethos, are also highly-focused on convenience. Take their morning drive-through culture, their automated toll-road charging, an even sports bars with multiple screens like an investment banker’s desk. They remove friction, delay and aggravations at every possible turn.

While they may not hanker for the European Swiss village lifestyle, it should be no surprise if they lead the charge to remove the major daily friction of commuting to the office and stay within the realms of their ranches.

Reflecting on the American Urban Model

The insights from Dakota touch on a deeper reflection about the sustainability of North America’s car-centric urban development. This perspective invites us to consider whether the changing dynamics of work and urban living might necessitate a reevaluation of longstanding urban planning principles such as zoning:

See the video link above to comprehend the historical planning baggage the US market appears to contend with – summed up neatly with “the linear [cost] of everything”. This focuses on the growth of American cities being predicated on the growth of commuting of the automobile market at the expense of multi-modal public transport opportunities. This makes for a particularly deep challenge for US Central Business Districts (CBDs) – at a deep root and branch level that will not be familiar to those who come from cities that have grown organically over centuries.

Conclusion: follow the money trail

As we grapple with these questions, it’s clear that the trajectory of commercial real estate, particularly the office sector, is amidst a significant transformation. But a crucial consideration remains: American pension funds often lead the way in setting investment trends.

As we follow the money, the crux of the matter becomes the long-term viability of office spaces as a core investment allocation. Will the necessary liquidity and investor interest sustain the office market, or are we witnessing a fundamental shift in the valuation and utility of office spaces across the globe? JLL mentioned that $1.3 trillion is due to be invested in “Living Capital Markets” as pensions funds divert their focus from the previous primary exposure to the office sector, and towards alternative logistics and residential-based asset classes.

This nuanced inquiry suggests that while regional stories may differ, the long-term fate of office spaces also hinges on broader financial and investment trends, with American pension funds potentially leading the charge towards a reimagined future for workplaces and workforce viable contributions.

This nuanced inquiry suggests that while regional stories may differ, the long-term fate of office spaces also hinges on broader financial and investment trends, with American pension funds potentially leading the charge towards a reimagined future for workplaces and workforce viable contributions.

Protecting the critical balance of Embodied Carbon considerations in UK Planning

After the Secretary of State’s unlawful planning intervention and Embodied Carbon confusion, Marks & Spencer may be allowed to build a viable modern flagship Oxford Street presence. If so, this astonishing saga may yet help restore some investment confidence in the sector. It remains to be seen if the UK government will allow best-in-class commercial real estate assets to be developed which befit the international retail destination that is London’s prime West End….

The dialogue surrounding Embodied Carbon within the realm of UK property development—also referred to more progressively as “placemaking”—has reached a pivotal juncture. Friday’s highly-awaited judgement by the UK High Court has illuminated a stark oversight in the application of policy related to Embodied Carbon (legal ground 5 of 6). This oversight not only risked undermining the intricate balance required in planning decisions but also highlights the risks of a one-dimensional approach to sustainable development.

Embodied Carbon: the judgement’s definition was that Embodied Carbon “is generally referred to as that from the construction phase, including demolition. These analyses are necessarily complex and can go into ever greater levels of detail, but in broad terms construction impacts can go back to the construction of the materials, the transportation emissions, and the construction of the building itself.”

Operational Carbon the judgement indicates that Operational Carbon “impacts cover matters such as the heating and cooling of the building.”

The court’s findings underscore a crucial point: the assumption or implicit bias against new developments, predicated on the supposed superiority of retrofitting in terms of embodied carbon, lacks a legal basis unless explicitly stated in the National Planning Policy Framework. This clarification by the Court serves as a crucial check against the potential for policy manipulation by environmental advocacy, ensuring that the multifaceted nature of planning considerations remains paramount.

“It is clear beyond any rational doubt, and accepted by all parties before me, that the [carbon] offsetting requirements in SI 2C are in relation to operational carbon, not the construction carbon impacts.” (emphasis added)

Mrs Justice Lieven in Marks and Spencer plc v Secretary of State for Levelling Up, Housing and Communities and Westminster City Council and Save Britain’s Heritage.

It’s essential to recognise that while the emphasis on reducing Embodied Carbon is a laudable goal in the fight against climate change, it must not overshadow other critical aspects of planning decisions. These include the public benefits of development projects, such as economic revitalisation, job creation, and the enhancement of community spaces, especially in nationally significant urban zones like Oxford Street, Regent Street, and Bond Street.

“Utterly pathetic…short-sighted act of self-sabotage” on Mr Gove’s part had forced M&S to re-evaluate its future on the country’s busiest shopping street.

Marks & Spencer CEO Stuart Manchin quoted in The Independent, 21 July 2023.

The discourse, fueled by campaigns that spotlight the carbon cost of new constructions—like the proposed new M&S headquarters—often fails to present a holistic view of the situation. Actors and comedians may recite the line that Embodied Carbon amounts to 40,000 tonnes. But this nationally important commercial real estate project only represents a one-off 0.01% of the 330,000,000 tonnes of carbon the UK produces each year.

In one respect, there would be no need for time-consuming carbon counting scenarios if planning decisions were simply a foregone conclusion based on a tautology: the Embodied Carbon impact of development is inherently higher than that of refurbishment, by virtue of being development and not a “retrofit”.

The recent legal critique of the Secretary of State’s intervention in such matters also reveals a concerning lack of understanding in this area or perhaps a disregard for the established and carefully-worded national policy framework. This not only detracts from the credibility of the Secretary of State for Levelling Up but also raises questions about the motivations behind such decisions.

“As a very general proposition it is obvious that a refurbishment may well involve less carbon than a redevelopment, but that tells one nothing about the facts of this case, and the carbon impacts of a deep refurbishment.”

Mrs Justice Lieven in Marks and Spencer plc v Secretary of State for Levelling Up, Housing and Communities and Westminster City Council and Save Britain’s Heritage.

In light of these developments, it is becoming clearer that a ‘retrofit-first’ approach cannot be universally applied as a de facto standard for all planning decisions. The complexities of each project must be evaluated on their own merits, considering both operational and embodied carbon, among other factors. This nuanced approach ensures that the overarching goal of sustainable development is pursued in a manner that is both legally sound and aligned with the broader public interest.

The High Court’s ruling offers a moment for reflection and recalibration in our approach to planning and development. It reminds us that in the quest for sustainability, balance is key. Policy documents must not be virtually rewritten by the Secretary of State, decisions must be well-informed and fairly explained to property owners, and the broader spectrum of benefits and impacts must be considered. As we move forward, it is crucial that the discourse on Embodied Carbon evolves to reflect these principles, ensuring that our approach to development is both sustainable and equitable.

Full judgement here:

Marks and Spencer plc vs Secretary of StateDownload

Addendum:

Monitoring Retrofit-first ambitions

In light of the recent judgment, notably concerning the considerations of embodied carbon and retrofitting logic, there is a pressing need for the City of Westminster and the City of London Corporation to undertake a meticulous review of their drafts for future planning policies.

City of London’s Retrofit-first policy drafting

Before moving forward with the Corporation of London’s March 2024 draft, which leans towards a “retrofit first” policy, it is crucial that this case’s outcomes and implications are fully considered. The intent would be to ensure that any inclination towards establishing such a policy does not inadvertently align with a framework that could be considered premature or insufficiently substantiated.

Fig. 1: City of London Corporation draft re a new ‘retrofit first’ approach

The challenges arising from deep refurbishment vs development analysis

The challenges of deciding between deep refurbishment and entirely new developments are significantly magnified in instances where the existing structures present unique difficulties, such as awkward building floor plates or facades and ground floors that are deemed unfit for their intended purposes.

The rise of data analytics and spurious accuracy

The necessity for precise, albeit potentially speculative, estimations to support planning applications adds an additional layer of complexity to these decisions. Given these intricacies, the efficacy of a blanket “retrofit first” approach is questionable. It reveals the indispensability of a planning inquiry process, where decisions are meticulously informed by a thorough examination of the specific facts and circumstances of each case.

“Retrofit-first” may be a sensible result, rather than a universal principle

Moreover, the City of London stands at a critical juncture, contemplating the advancement of a “retrofit first” policy in a landscape where methods for calculating hypothetical carbon emissions are still evolving. With the consensus on these methodologies yet to be reached, and their accuracy and reliability still in development, adopting such a policy stance at this time could amount to a precipitous intervention.

Fig. 2: Westminster City Council’s drive for retrofit-driven decision-making.

This is a partial screenshot from the City of Westminster’s website.

Should JLL Brokers come last?

By fostering a culture of collaboration and innovation that leverages charismatic real estate personalities, corporates can unlock vast PR and branding opportunities on a global scale...

In an era where corporate narratives about “culture” and “innovation” are carefully cultivated, last week’s departure of Robert Knakal, a prominent figure and leading fee producer from JLL, has captured significant attention. It highlights the growing importance of personal brands and social media within the upper echelons of real estate brokerage, sparking intense debate among professionals as evidenced on platforms like Wall Street Oasis and X formerly known as Twitter.

After news of Knakal’s departure broke, it was widely reported that JLL responded as follows: it will prioritise clients first, the firm second, and the individual broker last. Some claimed this is JLL attempting to emulate an investment banking approach.

The management style, while principled, highlights a potential culture conflict: the challenge a traditional business faces when integrating charismatic personalities who leverage social media to enhance their personal and professional brand. These individuals demonstrate an exceptional capability to cultivate an international online presence at minimal cost, attracting client interest and, consequently, lucrative business leads from wherever they choose to operate.

In the UK, individual CRE professionals are also developing a symbiotic relationship between the corporate and their personal brand online. Take Edward Gamble of ACRE Capital Real Estate LLP and Shaun Simons of Compton who have garnered a significant following through their regular online engagements and brokerage uses of social media.

In a similar fashion in the legal realm, top London lawyers Mishcon de Reya LLP’s Partner Susan Freeman 🎤🎧 is synonymous with PropertyShe on X and her successful podcast features a wealth of leading Landlords, fund managers and property entrepreneurs. Podcast reviews provide a clue as to why audiences want to hear directly from authentic individuals behind a corporate brand:

“Great to hear such senior real estate figures talk so openly about their experiences and ideas for the future!” Apple Podcasts. 3 years ago.

On the client side, the news of Oxford Properties Group acquisition of M7 Real Estate Ltd fades away as investors and other operators now turn their attention to its founder Richard Croft as he embarks on a new Pan-European adventure. His social media and online presence simply underscores how an already prominent personality is increasingly able to lead investment interest elsewhere in the real estate world.

At the highest end of global real estate, Blackstone‘s executives lead from the front on social media. Stephen A. Schwarzman and former head of global real estate Jon Gray are all in on LinkedIN. This week’s photo opportunity to put shovels in the ground for Blackstone’s new office in Berkeley Square would have traditionally been relegated to the back pages of a newspaper. Today this public event is organised via Blackstone’s online media machine: converted into a stream of blog articles, videos and vibrant punchy collage ‘shorts’ to connect with followers of all ages around the world in schools, universities, homes and workplaces. Personal brands are smartly leveraged for the wider benefit of Blackstone across social media.

This shift towards the significance of individual online branding over traditional corporate branding is now recognised across the management industry. Scott Galloway, a Professor of Marketing at NYU Stern School of Business, highlighted at the 2023 Cannes Lions International Festival of Creativity that we have transitioned into a product-focused era, moving away from the “era of brand dominance”. He also raises the clear effect of charismatic leaders who drive success, challenging conventional marketing strategies and advocating for a more integrated and complex approach to brand building and customer engagement.

In essence, the synergy between corporate brand, team culture, and individual employee brands can become a formidable force when harmoniously integrated. Bob Knakal’s prominent display of JLL’s logo in his “Success Stories” circulated online worldwide was one small example of how there can be a mutually beneficial relationship between JLL the corporation and its uniquely-branded individuals.

Modern managers appear to be embracing social media platforms (see Fig. 2 below), particularly LinkedIN for business. In our highly-sociable real estate sector and evolving hybrid workplaces, it will prove increasingly difficult to ensure that star performers and authentic individuals remain part of the corporate wallpaper.

A collaborative culture that engages customers by promoting both individual and corporate brands to greater heights can grow the pie for everyone in the team.

NEWS: Richard Croft, Martley Group, maintains that fractionalisation is appropriate for Commercial Real Estate.

Richard Croft, of Martley Group, is a trailblazer in transferring real estate resources into Proptech for industry evolution. Leaders like Croft are rare gems, challenging the traditional field with initiatives like his M7 spin off Coyote Software and the vision to explore global proptech interest via the Unissu platform. His recent commitment to fractionalisation in Commercial Real Estate (CRE) has been causing a stir in the landscape for over half a decade.

Looking forward, it’s vital to steer future resources towards the most impactful tech endeavors. Post the multi-million IPSX experiment, the big question remains: Is ‘fractionalisation’ still the future for CRE?

The IPSX Case Study: A Closer Look

Recap: IPSX, backed by industry giants like British Land and top brokers including Cushman & Wakefield, JLL and Avison Young, promised a revolution. But why didn’t it soar as expected? This raises concerns for smaller start-ups eyeing up success in fractionalisation. It’s also a critical point for graduates and RICS APC candidates exploring and studying this domain.

Let’s not just be armchair critics. It’s essential to learn from the past: was the buzz around NFTs and tokenisation, including real estate, just a fad?

The issue with IPSX was seemingly straightforward: a shortage of willing parties to launch properties on the exchange.

Last week’s report from REACT News highlights Richard Croft’s launch of the Martley Group, his unwavering belief in CRE fractionalization, and a playful challenge to potential competitors who stand to be billionaires when triumphant with his original ambition.

Croft sees the IPSX situation as a hiccup in execution, not a potential flaw in vision. Indeed, IPSX set up the first CRE exchange for single assets and gained FCA regulation, drawing support from prominent UK property establishment businesses. The execution was more successful than critics may suggest – better than even Croft’s self-styled assessment. So, why the reluctance from brokers and fund managers to embrace this innovative platform?

The Place of Property: A Deeper Insight

There are deeper reasons to approach CRE fractionalization cautiously. Here’s why:

  1. Active Management Needs: single CRE assets typically demand focused management for value generation. Quick decision-making is crucial, especially now with shorter lease terms and operational scenarios.
  2. Property and Power Dynamics: Cambridge University’s Professor Denman’s 1970s insights into Property and Power are even more relevant. These concepts continue to be overlooked in public and political discourse. In a ‘woke’ world, the contrast between seductive communal ideals and the realities of ownership is stark. If Denman were around today, he would be the first among Oxbridge dons to challenge wealthy elite advocates of a ‘rent-everything-own-nothing’ world.
  3. The Law of Proprietary Magnitudes: Denman’s theory highlights the inverse relation between the number of owners and degree of care bestowed on a property. More owners often mean less attention to maintaining and enhancing value.
  4. Supply and Demand for CRE capital: The dynamics of supply and demand don’t necessitate a fractionalisation solution in CRE. Institutional Sellers and Brokers seek credible, well-funded bidders, a challenge for fractional ‘owners.’ JLL’s recent Q4 report reveals $404 billion dry powder reserve for asset purchases, and emphasises the advantage for first movers with ways and means.

In Summary

Fractionalisation in CRE:

  • Is not a pressing need from the market’s sell-side.
  • Introduces undue ownership complexity and dilutes property rights.
  • Makes proactive asset management for value less feasible.

While fractionalization adds an exciting dimension to CRE, it requires a balanced, careful approach considering the industry’s unique dynamics and needs.

For any student of commercial real estate, Professor Denman’s book comes highly recommended: