Why One Of London’s Biggest Real Estate Firms Is Playing Banker And Investor To Its Tenants

Grosvenor, the Duke of Westminster’s property company, has completed its fifth deal to provide capital to help its tenants expand, as the 300-year-old company looks to innovate and diversify its operations. 

The company has completed a deal to provide finance to British fashion-design house Roland Mouret, one of its tenants in a store on Mount Street in Mayfair, London. The capital will be used to help the brand expand its online presence and invest in its new line of athleisure wear. 

All told, the company has roughly £7M in deals closed and in the pipeline for what it calls its tenant investment fund.

It is extremely rare for a property owner to provide capital to its tenants in this way; mall owner Simon Property has bought struggling retailers out of bankruptcy in the U.S., but providing capital to help tenants expand is not a role landlords have typically played. 

“Even before the pandemic, we felt that the relationship between occupier and owner was fundamentally changing,” Grosvenor Chief Executive James Raynor told Bisnow. “We are going to be in a low-growth, low-return environment, so you need to be thinking about how you can be creative and brave and how you are going to create good returns through innovation and adding value.”   

The deal with Roland Mouret is the fifth time Grosvenor has provided either equity or debt to one of its tenants to help it expand, and its first deal with a retailer. In May it announced it had provided debt to JKS Restaurants, the company behind Gymkhana and Hoppers, to open a new concept called BiBi in a unit in North Audley Street in Mayfair; and it provided debt to another hospitality concept, Atis, which is opening its second site in Eccleston Yards in Belgravia.

There have been two further undisclosed deals to provide capital to tenants, and Grosvenor has invested £2.5M across the five deals, Raynor told Bisnow. He said the company has a further pipeline of investments totalling £4.5M from its tenant investment fund. 

“When you look at the relationship between property owner and occupier, in broad terms a commercial property company is part of the occupier’s supply chain and provides space for people to do business in,” Raynor said. “You want to add value for those customers and facilitate them to do business and you get remunerated for that, but that doesn’t necessarily mean you exclusively get remunerated through providing a lease.”

Retail and hospitality have the most room for evolution here because there is a move to shorter, more flexible leases, and more creative models like turnover leases, in which rents are at least partially based on landlords receiving a percentage of sales businesses close in a period.

“The natural consequence of that is that you have more of a partnership model and are aligned with them,” Raynor said. “You want them to be successful, and in this kind of model when they are successful, we are remunerated in a different way.”

Raynor said there is a particular opportunity now because while retail and leisure as a whole are having a torrid time, there are some companies that do want to expand, but the problems with the wider market mean that debt and equity capital is not widely available, particularly to the smaller independent businesses that tend to be Grosvenor’s tenants. 

As a company with a £3B UK portfolio, mostly in central London, and £1.7B in cash and undrawn debt facilities, Grosvenor is in a good position to provide investment to capital-constrained companies. 

The company brought in Sebastien Herren as retail transactions manager as a specialist to oversee the investment program and decide in which companies to invest. His background includes spells in retail, hospitality and investment banking. 

Herren works alongside the asset management team but has a separate reporting line, Raynor said, to ensure that there are no blurred lines: Investments are made on their own merit, not because of a company’s importance as a rent-paying tenant.

But he added that part of the reason for investing in tenants was to get a better understanding of how retail and leisure occupiers worked, so the company could make better decisions on leasing across its business, which also takes in investment divisions in Europe, the U.S. and Asia. The lessons learned from investing in tenants are being disseminated throughout the company, he said. 

Raynor said Grosvenor assesses each investment opportunity on a case-by-case basis, deciding on whether to make a debt or equity investment depending on the capital needs of the company in question. After a slowish start to the program, which was announced in autumn last year, enquiries from tenants are picking up, he said. 

The companies Grosvenor chooses are looking to expand in some way, but capital is not provided only to companies that are going to take more space in a Grosvenor property — for example, while Atis and JKS’ BiBi are taking new leases, Roland Mouret is not. Atis is taking a green lease, which commits it and Grosvenor to hitting certain sustainability targets. 

There are no special lease terms for companies in which it had invested, Raynor said, but in general, turnover leases are becoming increasingly common in the retail world, which further increases that sense of partnership and alignment between landlord and tenant. 

“A few years ago if you had asked people to describe Grosvenor, they might have said that the company was quite slow, traditional, thoughtful, and took a long-term view,” Raynor said. “All of those are good things. But I want people to think of us as a company that is also forward-thinking, progressive, agile, with a respect for its heritage as well.”