I am like a child on Christmas morning I can tell you! The reason being that I have been looking forward to this series on property heavyweights for some time. Some of my guests on this series joined me quite some time ago now and so I appreciate their patience with me here.
Today, I am joined by Ben Habib. Ben founded and is CEO of First Property Group plc, an award-winning commercial property fund manager with operations in the United Kingdom and Central Europe. He has immense experience, which he shared with us very generously, so let’s hear his words of wisdom right now then.
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Resources mentioned
Ben Habib from First Property Group Contacts: www.fprop.com in particular - Thinking from First Principles & How the Property Market Works, under the title of Commercial Property - A Minefield?
Property Deal Tips & How to Reach me By Telephone
Link to the Podcast feedback survey
TPV Apprentice Programme info HERE
Today’s must do’s
Subscribe to and review the show in iTunes…and while you are at it please help us to spread the word by telling all your friends too!
Send in your property stories, questions or moans to podcast@thepropertyvoice.net and we will try and feature YOU on the show too!
#PropTech: A guide to how property technology is changing how we live, work and invest – a link to the latest book.
Property Investor Toolkit – here is the book link on amazon.co.uk & amazon.com in case you would like to get yourself a copy to accompany this series
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Transcription of the show
Hello, and welcome to another episode of The Property Voice podcast. My name is Richard Brown and as always, it’s a pleasure to have you join me on the show again today.
I am like a child on Christmas morning I can tell you! The reason being that I have been looking forward to this series on property heavyweights for some time. Some of my guests on this series joined me quite some time ago now and so I appreciate their patience with me here.
Today, I am joined by Ben Habib. Ben founded and is CEO of First Property Group plc, an award-winning commercial property fund manager with operations in the United Kingdom and Central Europe. He has immense experience, which he shared with us very generously, so let’s hear his words of wisdom right now then.
Property Chatter
Ben Habib - Background
Lehman Brother in corporate finance, learnt everything I know about business; not specifically in property.
1994 started in property – finance was a very key component at that time. This coincides with the ‘super-cycle of property’.
Raising debt, understand the metrics of property returns and how to use debt to generate returns.
Got on the ladder at a good time. Was possible to raise debt and leverage. Coupled with rising prices magnified returns.
Markets became illiquid, which lead to a sticky period.
First Property Group founded in 2000 with an idea of capitalising on the Internet explosion at the time. The business model was not viable, so in 2001 looked at other ways to make money. 2001 we had 9/11 – central banks cut interest rates, despite strong economies at the time. This lead to low-cost borrowing to buy high-yield property assets.
Making 20% to 25% per annum…lead to going into fund management. Started with £1m of third-party capital and few hundred thousand of own equity. This grew steadily, leading to £50m institutional investment backing from USS.
Value became squeezed and so they expanded into eastern Europe to ride the growth of Poland. Between 05-07 sold out of the UK prior to the financial crisis came. This led to a good run during the credit crunch.
NAV grew during the credit crunch, including a spectacular rate of return.
Key point: gap between the yield return and the cost of debt is large.
Since the credit crunch subsided now have £750m Assets Under Management (AUM). Mostly offices with some retail.
What sparked the transition into property? A friend suggesting a JV!
Fortunate? We all need a bit of luck…couple with some sound strategic judgement and principles. We were also born at the right time.
The basic landscape was better at that time.
Today is not quite as fertile. Ben did not have wealthy parents; growth is lower and as a result of this it is harder today.
Investment Philosophy & Principles
Investing for income over the potential for capital gain. You can measure the income and compare it against other comparables. It is much more difficult to predict where capital values will go. Some can do it, but it’s extremely difficult to do. Prefer an 8% yield in Leeds as opposed to 3.5% in London for example.
Long-term 80% to 90% of returns in commercial property come from income not capital, according to research.
Influences
Bank lending dictated that the interest cover, total debt-service ratio and post-tax all played a part.
Coming from a financial background also helped as it trains how to value income and the implications of losing it.
KPIs
- Look at each property on its merits (not a one-size fits all approach)
- How sustainable is the income in the long-term?
- What level of debt could the property sustain?
- Hedging strategy…how much to fix or cap? Fixing currently 40% to 50% of interest rate exposure.
- Debt is determined by looking at the total yield versus the cost of debt.
- Defray your debt – reduce your bank exposure in other words
Ben didn’t foresee the financial crisis but the gap of yield over debt meant properties cost more, so looked at other avenues for growth. However, capital values had grown to such an extent that the market was over-valued, so they were able to cash in on the capital growth, cash out and look elsewhere.
Cycles & patterns
There are patterns, although the credit crunch has broken many patterns as interest rates were cut from quite a low starting point. Most cycles follow a distinct pattern: interest rates are used to fight high inflation leads to economic setback and then a market crash.
We are still not out of the woods yet, lots of Government debt, individuals are highly leveraged and interest rates cannot rise too much. The beast has been tamed for now.
Having Strategic Agility
First principles – be prepared to set your policies aside if the market is telling you something different. An example was that office blocks down the M3 & M4 corridor were unattractive and yet Permitted Development rights changed the returns from commercial to residential. As a result, bought £32m got PDR and sold for £56m within a year.
Personal & Business Values
- Never ever buy a property that you won’t put your money into – a key ethical principle.
- If anyone in the team does not want to buy the property; don’t buy it.
- If we keep coming across hurdles to work around with the property to justify buying it, then just walk away as it usually doesn’t stop. The opposite is also true.
Emerging trends and their impact
Greater sustainable buildings – so buy properties that are not particularly environmentally and sustainable and improve it to add value.
Workplace like a second home with breakout areas – following this trend of more amenity space within buildings.
WeWork is a flawed business model Ben perceives in his personal view – it takes the modern break-out area to usable space area model too far, which means they are burning cash. This cash pot is not endless; they are a property company not a tech company.
Tips for emerging property investors
Do anything differently? Gone into fund management earlier than Ben did. This would have allowed greater growth and scale to magnify the growth. Get to the co-investing model earlier and it takes a long time to build a track record.
Start young, be honest, sacrifice a bit of immediate faster growth to attract longer-term income.
Steep yourself in financial knowledge – property is just an asset class through which you make money. Ben uses many of the financial principles that he learned back in the late 80s.
Merits of Co-investing
- It keeps you honest
- It demonstrates that you have skin in the game
- Superior rates of return Leverage personal returns over and above fee-income and salary. Put your money where your mouth is
- There are different types of fund-manager…be the one where you put your own capital into a deal…roll your sleeves up and get stuck in
Is there a secret sauce?
Anybody can do it! You have to have the nous, work at it, do your research and due diligence. Do the heavy lifting and then anyone can do it.
Ben Habib from First Property Group Contacts:
www.fprop.com in particular:
Thinking from First Principles
How the Property Market Works
Remember, if you want to talk about anything from today’s show, or just talk property investing more generally, email me at podcast@thepropertyvoice.net, we would be happy to hear from you! The show notes can be found at our website www.thepropertyvoice.net
All that is left to say, is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao-ciao.