Developing delusions

I downloaded some publicly available data from Glenigan this week (“THE UK’S LEADING PROVIDER OF CONSTRUCTION PROJECT LEADS AND INDUSTRY ANALYSIS”).  They’ve just published annual leagues tables of the largest construction contractors and their largest clients (and the largest QS and architecture firms).  When investigating and analysing real estate development, academics tend to default to the volume housebuilders and large institutions (REITs, institutional fund houses, SWFs etc.). as key agents in the production of the built environment (aka property development).  I also try to point out to students that many public sector organisations and corporates engage in major real estate and infrastructure development programmes but that they’ve been largely ignored.   This was just an inference based on experience and I had little hard evidence to support my point.

A while back, I coined some glib phrases to classify real estate developers. My taxonomy looked something like this

  • Dedicated Developers – real estate organisations whose core competency and main business stream is the development of real estate assets. The typical business model is develop-to-sell. I’d put the volume housebuilders in this group – although I often bang on about their land investment function.
  • Diversified Developers can be categorised into two types. The first are real estate organisations who have at least two core competencies – development and investment management.  These can be large listed REITs companies such as Land Securities, Klepierre Hines and Unibail-Rodamco, investing institutions such as M&G, TIAA-CREF, Axa, Allianz or private real estate owners such as Grosvenor Estates.  Found more commonly outside the UK market, the second category are typically construction companies who believe that there are economies of scope, diversification benefits or business generation opportunities in engaging in both real estate construction and real estate development.  The Kier Group are about the only example that I can think  of in the UK.  The typical business model of this diverse group is develop-to-hold with completed assets being held as long term portfolio investments – although the contractor developers may be different .
  • Incidental Developers tend to be corporate and public sector organisations for whom real estate development is not their raison d’etre. The typical business model is develop-to-operate.
  • Opportunistic Developers tend to be corporate or public sector organisations who can, sometimes unexpectedly, find themselves with large real estate holdings that are surplus to requirements. Faced with a complex development process, land-owning organisations considering the commercial development of redundant land reserves are faced with difficult decisions about the amount of (financial) risk they wish to undertake.  In the past, often in periods of high demand, some organisations have seen it as an opportunity to diversify into real estate development.  In some instances the real estate development ‘spin-off’ has since been separated out to create independent real estate development companies.
  • Forced Developers are often also reluctant owners of real estate assets. The typical examples are banks or other lenders who can, sometimes inadvertently, find themselves in possession of large portfolios of partially built developments and development sites.  The typical business model is develop-to-dispose with the objective being to maximise recovery of loans.

I think that I was more right than I thought I was (aka wrong) about the Incidental Developers.  They are, by a long way, the main clients of the construction contractors.  They are – Network Rail, Department of Health, MoD, RWE, Lidl, various local authorities, universities etc.).  Only Henderson (£866m spread over six projects) and Argent (£389m spread over five projects) appear in the top ten.  There are only six more dedicated or diversified developers in the top 50 (Prologis, Intu, Peel Holdings, Derwent London, GPE and L&G).  Also bear in mind that the volume house builders don’t usually use the major contractors and tend to build out their own projects themselves.

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