5th March, 2017

Property barons change the world — and now they rule it

Donald Trump’s seizure of the White House is perhaps the crowning glory for that formidable breed, the property developer. They dominate the urban landscape and the rich lists, yet somehow their machinations mostly stay out of the limelight. A recent book, Placemakers — A Brief History of Real Estate Development, by Herb Auerbach and Ira Nadel, attempts to put their impact over the centuries in perspective. The subtitle of the book is Emperors, Kings, Entrepreneurs, suggesting that the occupation has moved from being carried out by giant landowners such as monarchs and rulers, to becoming the fiefdom of specialist business people.

I will admit I am not a great fan of landlords: they sit there passively collecting rents, adding no value to the economy — merely extracting a toll from the efforts of others. But property developers are different: they actively create structures and make things happen. They are classic chancers, yet with the vision and ambition to change the physical world. They transform the built environment — sometimes magnificently, sometimes grotesquely — and their works influence society profoundly.

Successful property development requires a raft of skills: the ability to spot an opportunity; financing prowess; planning expertise; knowledge of design and architecture; construction capabilities; and marketing flair. Most, if not all, of these contributions can be subcontracted to experts — estate agents, bankers, planning consultants, architects and town planners, and builders. But these various professionals need to be orchestrated. The developer has to be at the centre of the team, directing, motivating, and risking his or her capital for speculative gain.

More than most types of commercial activity, property development seems to suffer from cyclical booms and busts. I have met a number of participants in London’s market who have gone from financial hero to zero and back again during their careers.

I suspect this is because their trade involves lots of debt. When times are good, the leverage amplifies their gains, but when the downturns come, lenders can foreclose and take all their assets.

Of course, the cleverest players never give the banks personal guarantees, so any insolvency is corporate not personal. The best property entrepreneurs have limitless confidence, and appear able to rebound from any setback.

A fascinating primer on the nitty-gritty of putting up New York skyscrapers is Bill Zeckendorf’s Developing: My Life, a book by the single most active developer in Manhattan between 1972 and 1994. The heart of the book consists of 20 or so short chapters, each one focused on how he erected a specific building. Zeckendorf developed hotels, office blocks and apartment towers. He was fortunate in that during his peak developing years, the city’s property values were going up almost faster than his towers. According to Jason Barr’s book Building the Skyline, from an inflation-adjusted index of 49 in 1979, values rose to 3,517 by 2013 — an appreciation of almost 72 times in 34 years.

Ironically, New York’s most famous skyscraper, the Empire State Building, was developed not by experts but a couple of property amateurs: Al Smith, a politician, and John J Raskob, the legendary General Motors industrialist. Neither had ever undertaken a real estate venture before — yet they ended up building the tallest edifice in the world. Unfortunately, it never made them any money, and only really moved into profit 15 years after being completed.

I have witnessed development genius first hand, observing my friend Stephen Conway in action. He is the brilliant driving force and principal owner behind Galliard Homes, where I serve as a non-executive director. Stephen has an unerring judgment for prices, costs and knowing which projects to back — as well as how to fund them, and how to gain permission for the best use. He is modest, generous and possesses a wonderful sense of humour.

He and his small team are living proof that for all their resources, giant institutional developers can never outmanoeuvre the most accomplished entrepreneurs. But inevitably the industry is far more dominated by corporate developers than it used to be. Oliver Marriott’s classic book The Property Boom describes the rise of swashbuckling tycoons such as Harry Hyams, Nigel Broackes, Charles Clore and Harold Samuel in the 1960s.

That was the era of individual entrepreneurs, mostly former estate agents, who gambled and won — and occasionally lost — amid the frenzied wheeling and dealing going on in London’s property market at the time.

That all fell apart in the secondary banking crisis of the early 1970s, but the big operators remained largely unscathed.

Developing property is by its nature project based, and generally requires considerable patience in order to assemble the right sites, financing and planning consents.

Sadly, rewards these days are heavily geared towards gaming of the planning system, which is an art perfected by the most successful developers. It means new projects cost too much and take too long to build.

I lack the temperament and connections to be good at property development, but I do admire the enduring legacy of its output.