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  • Writer's pictureMichael Hammond

Stephen Galpin, Money & Me COVID-19 Special

In this programme Graham Rowan interviews Stephen Galpin, commercial property consultant and director of Property TV about the effects of the coronavirus pandemic. This is the forth episode in a series of Money & Me COVID-19 Specials, click the subscribe button and turn on notification to see more.


- Hello and welcome to another edition of "Money, Me, and COVID-19," where we talk to opinion leaders to find out their take on what's going on at the moment, how we as investors can respond to it. I'm sure my guest today won't mind being talked of as a heavyweight in the property sector, he's been around it for some decades now, he's been involved in some enormous projects, like Canary Wharf, been an advisor to the government and the Bank of England, he's a justice of the peace, a freeman of the city of London, and his name is Stephen Galpin. Stephen, welcome to the show.

- Hello Graham, good to see you.

- I know as a freeman you do have the right to herd your cattle across the bridges of London, I hope you're not gonna get involved in that for the next little while while we talk to you.

- Actually it's only the sheep.

- Oh, okay, well if you can you just keep them in the background for now? That'd be great.

- I will try.

- Okay, now Stephen, as you know a lot of people talk about the property market, as if it was a single entity and we both know there are hundreds of property markets, so let me try and get specific with you on certain sectors, 'cause obviously there's so much going on at the moment, it's quite hard to see the wood for the trees. So if we take, let's say, the commercial sector, let's start off with perhaps a sector that was already somewhat in trouble before COVID-19, and that's the retail sector. What's your take on what we're gonna see on the high streets of the country in the coming months?

- Well, I think you've already seen over the last two or three years that the high street's in trouble. We've seen a change of attitude towards high streets. A lot of people putting a lot of time, a lot of effort into trying to refocus the high street, maybe into a greater mix of residential and various different types of services, some entertainment, some food, some retail, rather than this just strip of highly priced shops. The majority owned by some of the institutional investors who simply look for the highest rent for the longest period of time. I think that kind of ethos now has to finish. I think that was resultant of the various commissions that have been sought over the last few years to try and regenerate the high streets, but even more so now, I just don't think it can ever return quite to what it was.

- I guess we're seeing this almost conflict going on now between the businesses in the high street, and the landlords who sometimes are not that receptive to the idea of being a bit more realistic about rents, or rent holidays. I mean, how do you see this ending in terms of this spat that we're seeing?

- I mean, I have to say just on a slightly humorous note, I mean I know some years ago I had to act for one of the private banks who had encouraged the fairly small firms to go into a fairly large premises, and I ended up talking to one of the chairman at one of these institutional companies, and I said, "You have totally inappropriate tenent paying a totally "inappropriate rent, in a totally inappropriate building," and he just looked at me and he said, "Well, yes," he said, "my hooks are full of such people, that's how we make our money." And, I thought, whoops, I'm not quite sure where we go with this one, but we did negotiate a way out of it, but I think that's been the attitude of the institutional investors for a long time. They wanted blue chip covenants, they wanted high rents, and they wanted long leases. That is going to have to change. We need to rekindle this entrepreneurial spirit amongst our smaller traders, our smaller companies, and give people opportunities. And restriction on high street covenants isn't gonna do that, we need to free up. And this is why I think you'll see the breakdown, we saw it some years ago, I don't know whether if you know the Whitecliff building in west two, it was one super shop at one time, I think it was owned by Selfridges, if my memory serves me correctly, but it got broken up into various smaller units, and sectioned off into various trades, and food halls, and it worked very well for quite a number of years, and I think that's maybe what we have to see again. If we don't, I can just see an awful lot of empty shops, and sitting there empty for a long, long time.

- Okay, and I think obviously, most of us we're kind of aware if the challenges in the retail sector, but what's really happened with COVID-19 is this enforced working from home, and the use of technology like Zoom as we are using today, truly that's gonna start making companies think, "Do I really need to spend so much "on this great big fancy office building "that brings everyone together? "Why don't we just have a small head office and everyone work from home?"

- Well, once again, somebody said to me once about the cost of London lawyers. You've only got to look at some of the offices with swimming pools, five star chefs cooking the lunches, and things like this, and even some of the banks, with their own in house hairdressers, gyms, and all, and of course all this has to be paid for by the end user at the end of the day. But over the last, again, four or five years, maybe a little bit longer even, we've seen even some of the top firms have their partners working from home, or from serviced offices in their home town, or whatever, and that's been a growing market, and I can only see that this crisis is going to push people further down that road. I mean, yes, maybe you do need to take serviced offices with boardrooms, and meeting rooms that are available to you as and when you require, but is there this need now for these huge, posh offices with huge facilities? I just don't know. I personally don't think so, I think we're going to have a change.

- And of course, I think people may be sitting there watching us, thinking, well, "Why should that concern me? These are big institutions." But of course the reality is a lot of peoples pension funds, and a lot of peoples property real estate investment trusts have their assets tied up in these kind of building.

- Well, they do indeed, but I think you've probably seen in the press this week, people are coming out of property bonds, they're coming out of property investments, I actually think they'll probably be rushing in like there's no tomorrow very shortly in a few months time thinking there's a lot of bargains around, but yes I think the whole climate is changing, and I'm not sure that this move that we've had since the crash, into big institutions controlling everything was the right way to go, and I think it's being reversed now, and I think we're certainly seeing a change.

- Okay, well let's talk about the other major side of property, obviously, is the residential market, and again there are hundreds across the country, if we start with London itself, I think you've got some pretty strong views about some of the changes recently having quite a big impact on the London residential market.

- Well, look, I mean I don't think it takes a clever person to realise that we have these recessions in property every perhaps 10 or 15 years, they seem to come around every time it's all horror stories everywhere, and let's just go back to our most recent one in 2008, we suffered a lot of consequences from that, I believe that yes Mr. Carney and the Bank of England certainly encouraged the banks to have stronger balance sheets after that episode, but actually it's almost been done at the price, to our young people. Big deposits, which they can't afford, higher interest rates, and when I say higher interest rates I mean perhaps larger margins from base rate to mortgage rate. It's not been helpful to our housing market because I think one of the failings of government has been to realise that whatever section, whatever part of the housing market you freeze, penalise, or hurt, it actually has a spread right across the board. From first timers to last timers. It happens every time, and the government just don't seem to want to learn this lesson. Now, without being critical of any particular individual, or political party, or any body, Royal Institution of Charter Surveyors will tend to give advice to the government, but their perspective is very much about property values, and how they're arrived at, and on what basis they're set. Our government ministers, well, we heard from our last one, he was gonna go out into the market and get to the grassroots of what's happening, and how it works and all the rest of it, well I'm not sure that somebody with two homes in London, another second home, and then a constituency third home, I'm not quite sure how grounded that particular person is. Now that's not a criticism, but I just wonder what his knowledge of the first time buyer and the sensitivities of that market are. So, we need to get a better way of putting information together. We need to have a better understanding. Now, going back to 2008, we collapsed here because of the subprime market efficiencies, that caused us a lot of problem, I said earlier it took four or five years for us to get over that, and I today stand as I think that's going to be shown as a pretty modest recession. I think we're in for a really bad time; now, why? Let's take London. We've had a transitional change over the last 15 years or so from relatively low rise buildings to now buildings, I'm just looking out my window here at Canary Wharf, I'm looking at one just opposite me, 70 stories, best part of a thousand apartments in one building. Now, I'll have a wager with you that probably 70% of those have been bought off plan by overseas buyers. Now, does that matter? No, I'm not somebody who would demonise that process, or that kind of investment, any investment in our country coming from abroad, or anywhere else, has to be welcome, and it's a compliment that people have so much respect for our property regulations, our laws, and our safety, that's great news. But I just wonder whether it could be on the cards that we have exchange controls, again, like you and I might remember from the 70s when you, I think you could only take 25 quid on holiday, nevermind about investing overseas property, I think governments here, we're faced with the choice of going out of this recession, or whatever it's going to be called, by either borrowing money, printing money, or huge investment. Now, if the governments are going to say, "Let's have investment in our own country," I can quite see that there may be restrictions on wanting to invest abroad, especially in speculative things like housing, in a country other than your own. So, I wonder, all these people, for instance, say looking across the road, who've bought maybe five, 600 apartments, 10% down, I wonder how keen they're going to be to complete in six or eight months time, because this is the problem we had in 2008. Now, people like me get very busy in that sort of scenario because we're asked to advise, how do we remarket? How do we do this? How do we do that? But this is going to be a huge collapse, because the height of the buildings today that are being given planning permission, and the volume in any one building is so high, that I mean, a building, say like I'm looking at, is probably heading towards a billion pounds in total of gross development value. Now, if that developer takes a hit of almost a billion pounds, that's almost unrecoverable from the banks. It's not something you can quickly work your way out of. The remarketing would take two or three years. So it's going to cause a huge, huge problem. Now, I don't know quite how we're gonna solve that. Whether it be the government say, "Well okay, let's regenerate the market, let's have stamp duty holidays," we have as a plus side got absolutely the lowest interest rates I've ever known or seen, I mean I go back, trying to think how many years, 30 years, I remember sitting in an office listening to interest rates going up half a percent every half an hour, until they got to about 15%, it was about 1989, wasn't it? If I remember right. That was shocking, but we're at less than 1% at the moment, and what I'd like to see is the government taking these restrictions off purchase, taking these implied restrictions on deposits, but also maybe, at the same time, as a safety level, insisting that the banks are capped in what they can charge. Now, I mean, you'll remember Graham, perhaps for business purposes, you want to borrow money, well if you're a blue chip client you pay one over base, and if you're a bit dodgy you'd pay 2% over base, if was a bit more entrepreneurial. So I think something like a 2% over base cap on what the banks could charge, that in itself could do a tremendous amount for the market and stimulate it. Now, you'll know if you ever watch me on Property TV or anything, you'll know that we'll take the mickey and say I'm too London centric, and I'm too focused on London, but the reason I focus on London is because that is where these things happen in volume, and then it tends to spread out to the rest of the country, so it's very important to look at what's happening here.

- So what, obviously you're painting a relatively gloomy scenario there, if I had to nail it to the wall, what would you say is gonna happen to prices in the residential property market when we come out of this lockdown phase?

- Well, I think there's two factors there. One is what are the prices going to be? Is there going to be just a blanket percentage drop? And a lot of the valuers are telling me that they're looking at a 30 to 40% drop in values. Now, it does worry me that, I've spent almost a lifetime battling with valuers over property values at developments that I've been involved with, and of course I'm not sure the public always realise, but a valuer always tends to be a little bit pessimistic, because they have something called liability insurance. And what that means is if they accidentally overvalue, or show any negligence in doing so, the lender who relies on that value can sue them. And so you do get a strain of valuers who tend to be, let's just be polite, overly cautious when they value. Now they are going to be the key to what happens, because at the end of the day it's not what you or I agree to buy or sell a property at, it's what we can get it valued at, and how much we can borrow on it, and that brings me to the real key, which it'll be borrowing that takes us out of this problem. If we free up borrowing, if we get activity in the market, if we make our purchases fundable, then we'll do okay. So that will then quickly take us out of this initial drop, this initial scare, and get us on the market to an upward, all right I accept inflationary sort of market, but that's how everybody's enjoyed property in this country for many, many years, it's called inflation.

- Okay, let's talk about a particular sector of the residential market. We have something like two million buy to let landlords in this country, they've already had a succession of measures going all the way back to good old George Osborne and his section 24, now suddenly, I read recently that in the month of March, only 44% of rent was actually paid in full and on time. So this is obviously a really challenging time to be a buy to let landlord, what are your thoughts on the impact on that sector?

- Well, I think again we'd have to look at where the buy to let landlords come from. We've got our home investors and we got our overseas investors. I see a problem for overseas investors because they are going to, they are going to want to see property not directly in their control let quickly, and those returns being shipped out of the country. Now, that's going to be difficult, because that's going to cause a problem for values in this country, and in the recession that we had I think from memory it was late 80s, we had a situation where people, this was before buy to let had really caught on, but we had a situation where banks were saying, hold on, we've lent you X amount on these rental properties, lovely, you've got your rent coming in, but we've looked at the value of the market at the moment, it's dropped by 20, 25%, so unfortunately you're going to have to put some more equity in for us to continue the lending. Now, I would hate for that to happen again, but I can see it coming. I mean, we've had direction, we've had direction from the banks, from the government to the banks, over this business interruption scheme, I can tell you now one particular bank that we deal with, told us that if we wanted a business interruption scheme we'd have to guarantee it personally as directors, we'd have to put housing up to go with it, it would be at a certain interest rate, and our guarantees would be for 100% of the money. Now when you say, "Well, okay, sorry, "where does the government 80% guarantee come in? Where does it come in, and where does it stop?" They say, "Well that's your problem not ours. We want to know you fit the criteria." So you've got banks who were very keen to be helped in the 2008 scenario, not so keen when it comes to putting something back. They still want to put in control of their own criteria for lending, and to some extent they've got shareholders to protect, and they got to take a responsible view, but they have got to tow the line, and the same thing is going to have to happen in the housing market if that's where they want to be. Again Graham, you and I will remember at one time very, very rare you would borrowing money for a house from a bank, it would always be a building society, a special lender. And ever since it's gone over to the banking side, to take the lion share of lending, the market has become unstable at certain times, because you're subject to the bank's whim about what they think about the housing market at any one time. And again, we're very keen to avoid that. Now that's the one area that I think will affect badly the buy to let market. And I also think that it'll be the first to suffer in terms of looking for new funding, because I don't think what the banks will say, "We've expended so much money on these government schemes, "on staying solvent ourselves, and all the rest of it, "we're not going to be lending money for speculative "ventures or investments, we need to concentrate on providing homes for people." In other words, a real market. So, again, coming back to one of my earlier points, for all this borrowing that's got to take place to take us out of these scenarios, somebody's got to have money to lend, and I'm not sure where that's coming from.

- Okay, so, I think one of the hardest things that I'm seeing, to try and predict, is where we are on this tug of war between deflation and inflation. Because obviously a lot of what you're describing in terms of prices going down, and so on, is deflationary, but then we talk about money printing, and all the rest of it, potentially being inflation, so where do you see that deflation versus inflation going in the coming months?

- Well, I recently did a very short paper on what I thought the prospects for this market were, in the fairly short term, and we shouldn't lose sight of the fact that interest rates are at 0.1%, we shouldn't lose sight of that, and that's a very, I mean for somebody who's been in the property market for many, many years, that's a very exciting prospect, the only trouble is going to be is getting your hands on it. Now, if we can get our hands on money at low rates, I mean let me just quickly revert back to again 2008. One of the consequences for developers was you'd go along to one of our big high street banks that were so keen to get into housing one day, say, "Well, I want to do this development, "it's three, four, 500 million pounds to build, and to construct," and the first thing that they'd say is, "Well, it's a bit strong for us, "it's a bit strong for our balance sheet, so I think you'd better syndicate it." So you go trekking around on the banks, yes you'd probably get four or five banks to come in and do it, and if you've ever been in the position that I've been in with some of these developers, where you then, you've made the sale, and you've got to get five sets of consent from the banks for that sale to go through. You say, "Well, look, we were asking 500,000 pounds, we got 500,000 pounds, can we sell it?" And they say, "Well, you got that quite quickly, "so if you can get it that quickly, maybe you can get 550." And the answer from one of them will be no, which, it's quite a fractious journey, really. So again, I would hate to see banks syndicating again, banks have got to have the money to lend, and they've got to have the will to lend, and if they don't, we're going to be in real trouble. Now if they do, if they can find this money, then actually, if you look at the market, there'll be product available, there'll be cheap money available, and there'll certainly, because we've been through quite a flat spot for the last two or three years, there'll certainly be a pent up demand to want to buy that product. Now actually with those three key factors in place, we could almost have a boom. So there you are, that's where you're in a quandary, we've gone from total depression to a boom, but I think that's the volatility of the situation.

- Okay, I mean one job in which, over the last decade, that would have been very hard to get a mortgage would be that of housing minister, because they've averaged I think less than a year per person, if I was to make you the next housing minister, Stephen Galpin, what would you be doing in your first hundred days in office to turn this whole thing around?

- Well, I think one thing I would do is refuse to appear on television with my hardhat and my yellow jacket saying, "We're going to build 200 or 300,000 houses." Whenever this has happened, and I suppose it started with George and Dave, whenever this happens I want to say, "Who's we? Who's going to build?" Now, look, I can think of, I can think of one particular company, in the north end of London, that used to specialise in starter homes, fabulously. They were very square, very straightforward, architecturally uninspiring, but very functional, very fundable, and very affordable. And they used to do particularly well, but we seem to have come away from that demanding single architectural features, green features, our current housing minister said he was going to legislate, and insist that fruit trees were put in back gardens, and things like that. Well, that's really going to change the market, isn't it? That's really going to solve all the problems, having an orange tree, or an apple tree in your back garden. We've got to get real about this, we've got to provide what's needed and what is possible for people to buy. And until we grasp that fact, we're going nowhere. If you take stamp duty, now I've been trying to persuade people for years now to put stamp duty as a tax on the seller, not the buyer; why? Well, one because when it's somebody's starter property, unless we're in a particular recession, they're usually making a profit. So, that small taxation, it is fairly small, normal housing, can be paid by the seller at the point of sale, doesn't have to become a fact of argument as to whether you can fund it or not if you're buying, or extra cash if you've got to find for a deposit for young people, so that would help tremendously. You must remember now, if we're looking at getting foreign investment into the housing market to keep our construction industry going, then again stamp duty, under current legislation, is going to get to almost 20% for a lot of this investment property, it's too much, it's too much. And we've just, well that's what I would do. I would just make the path to purchase so much easier. It wasn't our kid's fault in 2008 having too big of mortgages, at that time 100% mortgages were quite often the case with first time buyers, and little or no harm. You think that just because somebody has got 100% mortgage they're keen to throw away their home by not paying or anything? Of course they're not, their home is their castle. It's what they want. It was the American situation of selling these mortgages that caused the problem, it wasn't us, it wasn't our kids. But it's those kids that have actually been penalised for what happened there. So we need to open it up, and that's what I'd do if I was housing minister. But I have to say, I have to say Graham, I think that the chances of that are pretty slim.

- Okay, well you get my vote, Stephen, that's great advice you got; Stephen Galpin thanks very much for joining us.

- My pleasure.

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