The EG Interview: Martin Jepson, ‘deal junkie’

Martin Jepson knows his reputation. He is seen as a “deal junkie”, he says, someone never happier than when involved in the cut and thrust of negotiation. With that in mind, establishing his own investment and development business was a long-held ambition for Jepson, who spent much of his career embedded in some of the UK’s most prominent investors and developers. A little over two years ago, having bid farewell to Brookfield Property Partners, where he was president of the UK offices division, he set up Ergo Real Estate and achieved that ambition. “Being able to do deals is at the heart of every person in property,” Jepson tells EG. In a big, expanding organisation, he adds, it can be impossible to escape the pull of report writing, board papers and business plans. Since launching Ergo, Jepson has invested about £200m of a £250m-£300m mandate in eight properties across the UK on behalf of NFU Mutual via its Aver Property vehicle (Jepson’s co-founder, Christopher Cope, has since left the business). “We did a lot of our buying pre-pandemic,” Jepson says. “Fortunately, we made some good decisions.” One of these properties, a 460,000 sq ft industrial facility at Magna Park that Aver Property acquired last March for £39.7m, is understood to have already been sold for a profit of more than £5m, which will be reinvested. Jepson is also thought to be working on several more deals that could add 1m sq ft more industrial and distribution space to the portfolio, although he declines to comment on specifics. What he will talk about is Ergo’s successes: the company made it into the top 10 in the MSCI UK Quarterly Property Index for each quarter of 2020; Jepson has been able to build out the team, with three recent additions; and the performance of the portfolio (which is currently 60% industrial and distribution, 20% offices and 20% retail) remained relatively robust during 2020. The 2020 March quarter collection rate slipped to just 85% and for each quarter since has been above 90%. “We’ve had some really good results this year,” Jepson says. “I’ve been very, very fortunate and I’ve got a great sponsor behind me [NFU Mutual] that has been very supportive.” Is there anything he would have done differently so far? Other than letting his wife cut his hair the evening before this virtual interview, he jokes, regrets don’t factor into his thinking. “There are always things I would do differently, but you make the decisions at the time for the best of reasons,” he says. “Talking about them is irrelevant because they’re done.” Leaving London behind With Ergo, Jepson has not only left the large corporate structures behind, but also his 15 years in the central London office market. That’s a big change for someone who helped to establish Brookfield as a major player in London’s office sector, buying the majority of the office portfolio of his previous employer, Hammerson, for £518m in 2012.    Prior to Jepson leaving Brookfield in 2017, the company had already favourably exited or sold off portions of several of the properties, including 125 Old Broad Street, EC2, to Blackstone in 2014 for £320m and 50% of Principal Place, EC2, to Antirion SGR based on a £763m valuation for the office and retail portion of the development. Hindsight might suggest that Hammerson would have been better holding on to its office assets given how well Brookfield has done out of the properties, but Jepson doesn’t subscribe to this train of thought. Hammerson lacked the asset management structure of Brookfield and the appetite for speculative development in the office sector back then, he says, adding that at the time the market reacted favourably to the sale. For him, the bigger question is over Hammerson’s execution of its strategy following the exit from the office sector. “History might tell you they didn’t execute particularly well,” he says. “The share price has collapsed.” Jepson’s focus since his departure from Brookfield has been getting to know the UK’s regions again and getting to grips with other commercial property sectors, a “refreshing” change after such a London-centric spell. Searching for substance Among those other sectors has been retail. A bold and, perhaps, brave move given the battering that retail has taken in recent years – a battering that has intensified in the face of Covid. Jepson says the decision to acquire a retail park in Liverpool and a B&Q in Southampton was based on both properties providing good yields off low rents – on average £10 per sq ft at the retail park compared with others charging £25 per sq ft, and £12.50 per sq ft for B&Q – from tenants that were expected to endure the shifting retail landscape pre-Covid. He expects demand to continue for this type of retail and for tenants to continue to want the space provided it is affordable. Jepson bought the assets with confidence that both could be repurposed for alternative uses in the longer term, depending on how the market “pans out”. For now Jepson has his sights on industrials. There has been regional growth and yield compression over the past two years but Jepson still considers industrial yields sustainable given investor appetite and the long-term supply and demand dynamics. The acceleration of online shopping and the need to boost UK supply chains, in addition to Brexit, has only hardened his resolve to concentrate on the sector. Industrial and particularly distribution, Jepson adds, is “the only investable sector of substance” out of the traditional real estate sectors currently. But he isn’t banking on further yield compression. “My underwriting is fairly robust and conservative,” he says. Jepson has not completely abandoned the office sector. There are two small office buildings in Birmingham within the Ergo portfolio. But he won’t be acquiring any more for the time being. “I think it will be some time before we get back to full occupation of the sector, and therefore I’m in no rush to invest,” he says, adding that he would need to see some movement in pricing before returning to the office investment market. Jepson does, however, believe there will be more occupier interest in the hub-and-spoke model once the UK’s third lockdown wends. “Zoom fatigue kicked in quite a while ago [for people],” he says. What will the post-pandemic office look like though? “Over my career, we have gone from everyone striving to have their own office… probably something like 150 sq ft per person or more, which has shrunk down now to 80 sq ft or 60 sq ft per person. You can see [that] moving back the other way.” He adds: “Even with vaccines and reductions in transmission of the disease, it raises this question of what is a safe environment for this pandemic and any future viruses and diseases that are around… You have got to persuade people back to work.” The vendor/purchaser standoff With the economy propped up by the government, Jepson says it is almost impossible to see how robust different asset classes truly are. “It’s interesting what I see coming across my desk and what I don’t see coming across my desk,” he says. “There’s a bit of a standoff in terms of where vendors’ aspirations are and where purchasers’ pricing sits at the moment, and as a result there are certain parts of the market just not doing anything.” For Jepson, the challenge is making sure he finds the right opportunities for his business and keeps it “moving forward”. “You have to find a way of growing and moving, even if you’re not acquiring or selling, of making sure your business plans get progressed as best you can. You can’t just sit around, turn off for a year and watch the world go by. You have to find a way through it.” He adds: “It’s pointless complaining about what’s happened [in the past], it’s happened. You have to deal with it, whether it’s the pandemic, whether it’s the fact that you bought something in retail that actually was the wrong thing to buy or whatever. It’s about how you deal with it and make the best.” To send feedback, tweet @DransfieldL or @estatesgazette Photos: Ergo