Tyler Goodwin, CEO of Seaforth Land discusses that profit needs to be placed back on the agenda and while sustainability and social initiatives are essential, profit must remain a priority.

Am I alone in being concerned that the word profit - and even the concept of profit, has somehow left the UK real estate development lexicon? Yes, profit is still being made in high-yield, distressed, and structured equity lending, but development profit has for the past few years been an oxymoron.

 

Profit needs to be placed back on the agenda – and at or near the top.

 

To be clear, I’m not one of those developers about to rant about the perils of “the green agenda”.  As the founder and CEO of Seaforth, our reputation and track record of delivering sustainable, experiential development and best-in-class conservation has been at the foundation of our ethos and our refurbs speak for themselves. I’m not afraid to advocate for conservation and I believe our industry can and should help solve some great social inequities. But without profit, we lose the opportunity to accelerate these important agendas.

 

Why am I speaking up now?  Let’s say it’s been building up over the past few years, but this came to a head over the weekend after reading a new draft local plan for a London borough. In it is a proposed change that, if approved, would require 20% of the gross floorspace of any refurb to be allocated to affordable offices at 50% of market rent for 15 years. To be clear: that’s not 20% of the increased space, it’s 20% of the entire building.  I spend close to a quarter of my time meeting with institutional investors who are already risk-off and have lost their appetite for planning risk.  “Policy inflation” like this at a time when our industry needs to encourage and attract capital back into the market threatens profits and frightens away the capital, we need to resuscitate our economy.

 

Of course, some will claim the tales of woe from the development sector are a convenient narrative for developers to demand “more”, but I think the right choice of word is “any”.  

 

Let’s not forget, profit is the cornerstone of a functioning real estate economy. Scratch that, it’s the cornerstone of any functioning economy. When public policy supports the generation of profits, our industry can successfully attract more investment, creating professional services jobs and helping support some of our world-leading creative industries.  

 

And, of course, more investment helps support more public facilities, government programs, services, and urgent initiatives like affordable housing.

 

Some believe that policy inflation is a strategy to penalize developers for holding land.  Maybe, but no landowner or developer is going to start construction on a scheme that has no hope of generating profit.   It also undermines the confidence of institutional capital who want to make long term investment decisions without punitive regulatory risk.

 

And yes, profit should not come at the expense of conservation or the climate crisis.  Seaforth, our partners, and many other reputable developers have made it our mission to prove that sustainable refurbishment can deliver outperformance in terms of rent and values.  Last year we completed a speculative refurbishment at 8 Bleeding Heart Yard and sold it – at what was clearly the bottom of the market- at the highest price per square foot of any building in the City market.

 

We are incredibly proud of this building and the awards it continues to garner.  Just last week, the building won a Civic Trust Award. It was, said the judges, “a welcome example of future proofing and upgrading of existing building stock… no mean feat in the speculative office market.”

 

This really is the definition of outperforming the market through the experiential and sustainable repurposing of buildings.  But outperformance through these past few years is no guarantee of profit – and so it went with Bleeding Heart Yard where we simply broke even.  I can only assume those buildings that sold for less last year, suffered a worse fate.

 

I’m not sharing this fact for pity. I’m sharing it because we need to have a frank conversation about the importance of profit. These past few years have been incredibly challenging for many London real estate developers.  While we may not agree on the impacts of Brexit, Covid - and the economic pain that has followed - has hit office developers hard. 

 

The cost of construction materials has soared 40%, and close to 50% for plant and equipment costs, according to the BCIS. Rising interest rates have made refinancing painful and further driven up costs. And it is only recently that questions about the future of the office have started to ease to a point where investors will even be willing to talk about offices again. 

 

It may be too much to hope public policy acknowledge the needs of our industry and the importance of some wins. But we have to stop with the policy inflation and start asking how and where we can work together to ensure development is profitable. Rather than extracting maximum concessions from the few developments that are up for planning approval, we need to think about how to attract more investment – by prioritising profit. 

 

It's time to work together now to prioritise not just profit, but profitability. For everyone’s benefit.

What do you think?

Please send reactions/counter arguments to david.taylor@nla.london