Cleo Folkes
At Property Overview I teach people the basics of property, and how the industry, like any other, is in a constant state of change. In my consultancy work this topic is even more prominent, and I would say urgent.
Companies, CBRE included, act on the current and expected structural changes in the industry. It can be a fight for survival or an exciting opportunity to grasp growth in new areas. This is where the deal, announced in early July, for CBRE to buy Telford Homes through its wholly-owned development and investment division Trammell Crow, comes in. The announcement took many by surprise, me included.
Property consultancy is being impacted by dozens of trends at the same time, for example money flows, technology, disruption, ESG, demographics and cultural change to mention just some. CBRE, like others, are future-proofing their business by insulating weaker business areas and investing in growth areas. And by adding more services.
CBRE aims to dominate the market and add market coverage. Besides offering a one-stop shop – so there is no need for clients to go elsewhere for specific services – diversification in activities can help make the company more robust.
By adding in Telford Homes CBRE is probably hoping to strengthen its reach within the Build-to-Rent (BTR) sector in the UK, a sector seeing strong growth from only tiny beginnings 5 years ago. CBRE doesn’t have a large estate agency and residential investment presence like some of its competitors. It could attempt to gain market share by adding a specialist brokerage or advice function or, in this case, by adding services on the delivery side.
In the UK one of the many factors that held back institutional investment into the residential Private Rented Sector (PRS) was the lack of suitable stock. Investors accessed suitable large schemes either by forward purchasing schemes from developers or to build the stock themselves and take the development profit attached to it whilst also having more control. Few investors opt for the riskier route, leaving a strong demand for ready-made BTR schemes.
Word on the street is that residential schemes are currently being put on hold in a tougher for-sale housing market. Telford Homes opted to move away from the for-sale market due to a decline in demand, especially in London, its home market. Another factor to consider is that the future of Help-to-Buy, a government-supported scheme that helps housebuilders sell new build stock and support prices, isn’t secured.
The for-sale market previously offered higher returns, but housebuilders that sit on sites, have staff on their books and debt to pay off increasingly consider offloading schemes to institutional investors by changing them to suit Build-to-Rent. Doing this lowers their profit margin, but it decreases risk as the sale to an investor is certain, and income is secured. BTR also offers good prospect of demand going forward. For a development division like Trammell Crow this can add an important string to their bow.
Commercial construction is mostly even more volatile than housebuilding. Alas housebuilding is quite different from building commercial assets, and one cannot simply switch. You build people’s homes, a highly personal and emotional property which demands greater perfection and attention to detail. Commercial developers struggled to switch to develop residential. Gaining specialist residential knowledge and adding a source of more stable income to Trammell Crow makes sense.
Telford’s sites are located around and in non-core London, the city that is the powerhouse of the U.K. and which long-term should be able to support many BTR schemes.
Trammell Crow might also have bought Telford Homes to get a route to residential investors, for access to sites and the knowledge how and what to acquire, or to gain knowledge on BTR-related planning, design, construction and investment management. It helps CBREs consulting business.
I can see why Telford moved into the BTR market, but not necessarily why CBRE bought Telford Homes as their best route in. Telford have limited BTR experience themselves and limited UK market coverage. I am keen to find out more about how this investment will pan out, and how Telford Homes will be integrated into CBREs bigger plans. Will CBRE aim to buy other such developers? Do you see better ways to buy into the growing BTR sector? Will others follow suit?
Cleo Folkes is CEO of Property Overview Ltd, a property training & consultancy business based in the UK.
This article was published in the Property Chronicle on 19th August 2019
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