Episode 50: Ian Livingstone - Co-Founder of London Regional Properties

0:00Ian Livingstone:This week on Generating Alpha, I sat down with Ian Livingstone, co-founder of London Regional Properties, one of the largest and most respected private investors in Europe. Ian and his brother have spent four decades building quietly and deliberately, letting the results speak for themselves. This is only his second podcast ever. Ian grew up in Ealing, London as a son of a dentist. He studied optometry, qualified in 1984, and five years later opened his first iWear store. Within three years, he'd acquired the David Clulo chain and growing it to 170 stores, including concessions in Harrods and Selfridges, eventually selling to Exotica in 2011.

0:36Ian Livingstone:With the business, he spent four decades quietly building to something else entirely. In 1987, at the height of the commercial property crash, Ian and his brother founded London Regional, buying distressed assets at half price while every institution was running for the exits. That contrarian bet became the foundation of a portfolio that today includes David Lloyd Leisure, the Hilton Hotels in London, the leasehold on Cliveden House, a$2 billion development in Panama City, and the Fairmont Monte Carlo, among others. In our conversation, we talked about going from optometrist to entrepreneur, the conviction it took to buy when everyone else was selling, four decades of family control, how he sees opportunity across wildly different asset classes, and what the market looks like to him right now.

1:17Ian Livingstone:This episode also marks a milestone. Episode 50 of generating alpha. Thank you to everyone who has followed along since the beginning. As always, if you've enjoyed this episode, please follow the podcast, rate it five stars on Spotify, subscribe on YouTube, and share it to anyone who you think might find it valuable. I really enjoyed talking to Ian, and I hope you guys enjoyed listening to this conversation. Thank you. Thanks, Ian, for coming on. I really appreciate it. Okay, good. All right. Well, I want to start where I always do, the beginning. If I'm correct, you grew up in Ealing, London, the son of a dentist.

1:49Ian Livingstone:Tell me a little bit about your childhood, what that environment was like and how you think that might have shaped you. I think, you know, growing up, most of our friends, you know, came from families where they were middle class professionals. And that was the assumption that you became a professional. So you became a doctor. to a dentist or a lawyer or an accountant. And so the school really was careers. And it was very, it was living in the area. Eventually, I would say that probably half of them stayed in those careers and half moved out. Some in some to business aligned to that or something fairly close on.

2:49So the expectation was that you did much of the same.

2:53Ian Livingstone:And if I'm correct, you started off in the business or in optometry at City University, qualified in 1984. Again, as part of being a professional, I was sort of what do you want to do? and I decided that medicine was a bit too long of a slog, even though a lot of my friends and family were all doctors.

3:22So I thought optometry was better because ultimately you could have a business as well. And so that was how I started.

3:31Ian Livingstone:And in 1989, if I'm correct, you opened your first optometry store, Optica. Yeah, I worked for other people. Okay. And then I bought my first store in 89. And then I started expanding it in 1990, 91. And yeah, in three years, you'd acquired David Clulo and were running a chain worth about 20 million. Tell me about those early days. How did you decide to expand? What was the expansion looking like? And yeah. Well, I never had much capital. And so it was a question of eking out the cash flow, managing your suppliers, your creditors, borrowing a little bit of money from the bank, but keeping borrowings to an absolute minimum because I didn't really want to be over leveraged.

4:18and in those days you could get stores there was a bit of a financial crisis i seem to remember one of many but and um in those days landlords had a load of empty shops and they would give you quite big incentives so you could end up with a package of a bit of you know a years for two or two years free rent and some capital towards your fit out so it really in that case in many cases it cost nothing really to get the store open. And then if you traded profitably early days, then that was a great business. So for a while, we enjoyed the benefits of having the landlords on side. Of course, as the economy picked up, then those incentives evaporated, and you had to go and compete with everybody else.

5:16But overall, I have to say, it was a good time to be in business because it was dominated. The business was dominated by some groups that were not really that efficient so that if you could be nimble in business, if you could be quick to change your products, quick to offer different services, and you could differentiate yourself, it was quite an easy time to expand the business. You couldn't do that today. It would be much more difficult.

5:48Ian Livingstone:And how did you guys differentiate yourself? And why did you eventually at the beginning decide to build a business instead of becoming a pure practitioner? I think it was exciting opening a business, actually. Yeah. I think it was exciting. It was challenging. It was fun. It was interesting. And don't forget, I'd worked several years for other people And therefore, I knew who all the best staff were. And they wanted to come on. You know, you could incentivize people to move quite easily. So we built up a really, really good management team very quickly. And that helped us expand because I knew immediately who would be the managers of the next stores as we opened.

6:31We grew our own talent. We trained people. And I was very, very hands-on in the beginning of that business. Very hands-on. I knew everybody. I knew what was going on. I knew all the turnovers of the stores every single day. Of course, as it got bigger, that was, you know, I became a bit more remote from it. And then I started working with my brother in real estate. But the foundations of the business were that, really, which was about customer service, about being adept, being quick to change, not being stuck in a particular business model.

7:09Ian Livingstone:and i know it's fun yeah and a few years before that um during 87 during the commercial property crash you and your brother founded london regional properties um yeah and everyone else was running for the exits you guys had conviction to go up um and buy a property in a brand new industry how did you take advantage of that situation with you had some capital from the business but we had We didn't have a huge amount of capital, but at the time, we found one or two lenders that were prepared to back us who believed that long term we would be right and that prices would recover. And property at the end of the day, to some extent, is a leverage game.

7:53If you can't put leverage in, you can't make really serious returns on property. and so if you if you had no leverage we couldn't have done it but at the time we found one or two smaller banks that were prepared to back us giving us decent amount of loan to buy distressed properties and then of course your equity multiplies very very quickly if you've got debt

8:19Ian Livingstone:and what gave you the conviction as someone who wasn't necessarily in the business before um and new to it to go the completely opposite way that everyone else was going um my brother was at the time i think he started at richard ellis before it was cbre and he'd been in the investment market he'd seen the values and we could just see distress and when you see things where prices have you know halved um then i think that you you look at it and you think well there's something wrong here either the market is going to collapse completely and tenant demand's going to dry up or you think it's going to come back.

9:02And we were fairly convinced it would come back and things were mispriced because of panic selling, really.

9:12Ian Livingstone:And through the high level, I'd love for you to walk me through the evolution of London regional properties from 87 until today. What's been the biggest milestones or crises that most shaped where you guys are today? I think one of our big businesses was the sale and leaseback model. And we did many transactions without going into details. But we did most of the big sale and leasebacks in Europe for several years. So that was a great business for us. We had what we called at the time triple net leases and mission critical real estate very often where the business took place in the asset. So there were things like that.

9:59That was a strategy. We got into hotels quite early. And we started to understand operational risk quite early. We did a bunch of deals, PPP deals with the government. Again, we understood the transfer of risk when institutions weren't prepared to do those kind of deals because they weren't institutional. And I think you have to remember the backdrop of all this was that real estate in those days was a business controlled by pension funds, large public property companies. And PE was minimal. There weren't really any big PE funds in real estate in those days. And so if it wasn't institutional, like sale and leasebacks or hotels or whatever, the big public companies and the institutions, the life funds, all those sort of things, were just not interested.

11:01And so you could create that. You could find value very easily. now every niche is being picked over by a fund who's deploying usually other people's money desperate to get money out the door earn fees for AUM and it's not clear you know with all of them that they're going to be successful some will be very successful others

11:23Ian Livingstone:won't and how is your approach to making money developed over time as that kind of evolved it It was just, we were contracyclical. If you did nothing else, but buy when the institutions were selling and sell when they were buying, you could make a very good living. It wasn't much more complicated than that. And then it evolved into buying niche things that they weren't interested in. As I said, it could have been hotels. it could have been doing a sale and lease back of a i don't know a sports club or a cinema or a petrol station or something they didn't get it they just said that's not institutional it doesn't fit into our bucket now of course it's very different because private equity bc whatever you want to call it you know they're looking for returns and they'll buy that stuff so the market's much more crowded than it was and it's harder to differentiate yourself and one of those specific hotel deals was the fairmont mona carlo which you guys bought 2007 one of the more iconic hotels in the world i'd love for you to tell me the story behind that purchase and kind of how you've built it over the years uh it's not a great deal to say about it you know it was owned by a consortium that included Prince

12:55Ian Livingstone:what's his name? The Monaco one? Yeah, Monaco was no, no, no, no, no, no, no, no. The consortium that owned it was the Saudi Prince. MBS? No, no, no, no, no, no, no, no, no. Al-Waleed. Oh, yes. Al-Waleed bin Talal. so he owned it in a consortium with Fairmont and some private equity anyway they they rebranded it to Fairmont um and they just wanted to resell it because it was a short-term play for them a long-term play for us so we bought it from them it was there was no great secret we spent recently a lot of money refurbishing the hotel that's doing well um and we're very happy with it and it's i live in monaco and it's nice to own a big hotel here it's one of the biggest in this part of the med and you just mentioned something that the the saudis were trading versus you guys kind of had a long-term approach to yeah um and you've talked about distinguishing between those two kinds of assets for yourself um how do you think about that split and what move something from like one category to another i think as as we develop our business we have in my mind not physically but in my mind we have two pockets and the first pocket is deals that we buy which we don't think we want to own very long term um but we think that there's a way to turn them around and resell them or sell them in a few years and make a profit.

14:37And that's kind of trading stock. And that's what most property companies do. But given the fact that we've been reasonably successful, we look at some assets as assets for our family office, for our kids, for the future, which are very long term. And we can take much lower returns on those because we're in it for the very long term and it doesn't really matter whether, you know, the income is up or down over the next five years because you're looking at capital value. I'm just going to go and sit here where it's a bit quieter.

15:21You're looking at capital value appreciation or, you know, safe haven assets. So I think that if we ended up with, for our family office, a bunch of safe haven prime assets, that's a good place to be.

16:07Ian Livingstone:Thank you.

16:34Ian Livingstone:Thank you, and back to the episode. And over time, you've kept the firm, if I'm correct, entirely within family control. Now it's had capital nearly four decades. Was that delivered from the start, or did it just happen that way? No, it happened that way. I think there were many times when we wanted to get external capital because we saw deals that were really interesting. and every time we tried because we were a bit contracyclical or a bit ahead of the curve people looked at those deals and said no no no those are the wrong things we could never raise third-party capital in those days so we had to do it ourselves so we pushed it and we reinvested a lot we saved up you know we we were very careful with what we did and we did deals ourselves and And we've made decent money out of doing it.

17:26But in many cases, we would have taken third-party investors in had they believed in it, but they didn't believe in it. And then they would come back six months after we'd done the deal and say, oh, can we look at that now? And we'd say, no, we can't. That was the story of what happened. It wasn't that we didn't want to. We couldn't.

17:46Ian Livingstone:Incredible. We were too entrepreneurial, I think. That's great. It's a weird thing to say, but it's very much was the case. I mean, now we can, but we've got our own capital. It's not to say that we won't partner up with institutional capital on some deals. And I think that's the next phase for us. We've built this amazing platform, or Kodi, that works for us, that runs our hotel business, has built a sensational hotel management platform, which is probably best in class. and we now will partner perhaps with more institutional capital on some of the very big deals and we'll be the operating partner.

18:29But uniquely for an operating partner, we're prepared to put serious equity into a deal and that could be 20%, 30%, 50%. Whereas most operating partners want fees, fees, fees and don't put any equity in.

18:46Ian Livingstone:Can you just mention office? Sorry? I was saying, you just mentioned operating properties, and you guys operate, if I'm correct, most of your properties directly. I'm interested in just what does owning and operating give you rather than just owning passively? It gives us a much, much better control over the P &L. It gives us control of the staff, the quality of the asset. It means that we haven't got an operating company whose aims may diverge from that of the owner. Yeah. In other words, you know, a big hotel management company, no names, is to maximize the value for its shareholders, to maximize its fees, not necessarily to maximize the bottom line for the hotel owner.

19:36so that i felt that in many cases the hotel owner was coming second uh or even third after the guest services and we've had instances of that where that where it's not the whole hotel management contract model is not really aligned with ownership very well and therefore if you can own it and keep flexibility then you you can decide much more quickly how you want to operate it, how you want to change things. You can be more nimble. You can be more flexible on bringing in food and beverage brands, for example, or changing the staff or managing it differently. Whereas if you're part of a big, big, you know, thousand hotel plus chain, it's very hard to be nimble and change things.

20:27Ian Livingstone:And let's say you buy a franchise hotel and they hand you a CapEx list that's inconsistent with what you guys want. How do you navigate that tension? You don't buy it yeah and so what happens is the seller is getting screwed because it's going to come pound for pound off his pricing yeah and your ability to manage that pip depends on your relationship with the brand so if i own 50 marriott's i've got a better chance of negotiating something sensible than if I've got two Marriott's or Hilton's or whatever. And so that capex, it's a big issue, that PIP, because I understand from the brand's perspective, there's their checklist, but it's not always consistent with the business model of that individual hotel.

21:20And it needs to be proportional and isn't always. It can be, and in some cases it's not. and that's it can be a um a big detractor of value and franchise hotels you mentioned that

21:35Ian Livingstone:that was part of the kind of diligence process what is the entire diligence process for you guys for a high level what what are some key things you evaluate um we evaluate the strength of the market you know what are the drivers how much is business how much is leisure how much is seasonal. We evaluate what's the pipeline of new product coming into the market. What's the five-year look forward and look back on occupancy? Can we operate it? We look at what's the, how's the ability to hire and fire staff, the flexibility of labor. Can we get labor? If we got labor that's wrong, can we move people out?

22:20Can we swap people, get rid? how strong are the unions how helpful are the unions in some cases they're very helpful in other cases they're very unhelpful um we look at what the economic forecast is like for that country or city we look at key drivers like uh conference centers airports arenas all those sort of things there's many many things that you've got to take into account you know we we've seen lots of things recently we saw one the other day where it was a an airport at a a capital city hotel in europe but not a major camp not a major city and it was it was a it was a sort of a b location for the airport but it was fairly solid and it was great until we found out there was a 500 room terminal linked hotel opening within three years in a small market yeah and which was

23:22Ian Livingstone:the end of that deal and you've done deals across different kind of sectors in real estate so retail hospitality but you've also done some tech deals and things kind of across the place um is there a unifying lens in which you see opportunity or do you kind of look at each opportunity in and of itself? We've always been opportunistic. People bring things to us and we've got a gut. My brother or I usually has a gut feeling whether it's something that you want to invest. And of course, what you're looking at in these investments is risk return. So if you can find something that's limited risk with a decent return, you're going to do it.

24:02But if the risk return scenario is wrong, and that's what happens in real estate in some markets, you find out there's huge competition there's very little margin and there's downside. And so you have to learn to sit on your hands in those points and say, this market is not for me. I'll either find another market or I'll just stay out completely if you're not seeing pricing where you can make money because there's always risk.

24:31Ian Livingstone:And on the topic of risk, how has your relationship with risk evolved from 87 until now? Have you become more comfortable taking risks because it stayed the same where you're always as comfortable? No, I think where we've got really good properties, be they hotel or commercial, if they are not leased long term or they've not got long term income, we're much more capable now or more sophisticated at taking a view about either reletting or performance going forward. Whereas when we first started with hotels, we started out with leases because we couldn't really understand the operational risk. Now we understand the operational risk.

25:11We're happy to buy something that's unbranded or untried. We're happy to buy an office building if it's got different lease lengths, because if we think that it's fundamentally a great play, we'll buy it. So we've got more sophisticated underwriting things. When we started, it was all about getting long leases.

25:34Ian Livingstone:And one of your more unique projects right now is Panama Pacifico. How does a firm like you guys end up developing $700 million worth of real estate in Central America? It's probably about$2 billion or$3 billion by the time it's finished. Well, there's a couple of things. Number one, I have a great partner who's been my partner in it getting on for 15 years, who's been incredibly supportive and has great contacts locally. So that's a big plus, having a good partner. And we've built a proper management team there. We don't try and manage it remotely from London or New York. We believe in Panama as a destination.

26:16We believe in it as a good place to do business, transparent, decent rule of law, US dollar, and a beneficiary from what I would call unstable countries in the neighborhood. So long term, we think everything aligns for Panama. We've had our challenges there with infrastructure being delivered late and things, but that's normal for that part of the world. But it's a sensational project, an amazing land bank, and it will do very well for the foreseeable future. So very happy with that. But it's not something that everybody would have done.