SHARE THIS ARTICLE Share Tweet Post Email

Photographer: Christoffer Rudquist/Bloomberg Markets Photographer: Christoffer Rudquist/Bloomberg Markets

Fifteen years ago, London’s Regent Street was known for Liberty, the high-end department store with its mock Tudor facade, and Hamleys, the 255-year-old toymaker. Otherwise, it was a West End backwater filled with airline offices, carpet shops, and stores selling royal kitsch aimed at tourists.

Today, it’s a global shopping mecca. Apple, J.Crew, Hugo Boss, Michael Kors, and Brooks Brothers, among others, have opened flagship megastores on Regent Street, turning it into a giant outdoor mall in the heart of London.

This didn’t happen by accident. Almost all of Regent Street, along with huge swaths of central London, is owned by the Crown Estate, which manages a property portfolio worth £11 billion ($17 billion) on behalf of the British monarchy and Her Majesty’s Treasury. Once a sleepy rent collector, the Crown Estate has morphed into a nimble corporate property investor that has helped keep London in the forefront of great world cities.

Like London itself, the Crown Estate is booming. It posted a record £285 million return to Treasury coffers in the year ended on March 31, up almost 7 percent over the previous year.

That’s been good news for Queen Elizabeth II, who gets 15 percent of the estate’s annual profit in the form of a Sovereign Grant to fund the royal family’s living expenses. While the rest of Britain endures lingering austerity alongside modest growth, the queen’s annual income is set to rise to £42.7 million in fiscal year 2017, up from £31 million in fiscal year 2013.

“It’s the original sovereign wealth fund, investing on behalf of the crown,” says Tom Appleby, a senior lecturer at the University of the West of England. “They’ve acquired a lot and done joint ventures, which makes them more a sovereign wealth fund than a passive land manager.”

CEO Alison Nimmo on the terrace at the Crown Estate’s main office in London. Photographer: Peter Searle

Alison Nimmo, the Crown Estate’s 51-year-old chief executive, says the business’s focus on total return makes it more like a real estate investment trust paying high dividends than a sovereign wealth fund, which is typically a more-diversified portfolio designed to accumulate wealth for a nation.

Nimmo downplays the role of the royal family, saying she meets with the queen just once a year to give her an update. Not that the queen is a mere bystander: “She’s very interested in the business,” Nimmo says. The queen faced uncomfortable headlines about her rising paycheck in June, at a time when the government was readying deep welfare cuts. Still, she remains almost impregnably popular; 68 percent of Britons believe the monarchy is good for the country, according to a YouGov poll in September. By contrast, recently elected Labour Party leader Jeremy Corbyn, a staunch anti-monarchist, is the least popular new opposition leader since such polling began in 1955.

A map of the Crown Estate’s London holdings resembles a Monopoly board at the end of a game in which one player is clearly winning. In addition to 1.2 miles (2 kilometers) of retail frontage on Regent Street, the estate owns half of St. James’s—the rectangular historic district defined by the Ritz, Piccadilly Circus, Trafalgar Square, and St. James’s Palace—where it’s overseeing a £320 million commercial redevelopment to revitalize the area. With 8 million square feet (743,000 square meters) of mixed-use space worth about £6 billion, the Crown Estate is the largest landlord in the West End. It also owns most of so-called Billionaires Row: Kensington Palace Gardens, a street where it’s sold long leases to the likes of steel tycoon Lakshmi Mittal and Chelsea Football Club owner Roman Abramovich.

Outside London, the Crown Estate holds 340,000 acres (138,000 hectares), making it one of the largest rural landholders, after the Forestry Commission and the National Trust. It owns about half of the U.K. foreshore (the land between high- and low-water marks), giving it leasing rights for marinas and harbors, as well as the U.K. seabed out to 12 nautical miles (22 kilometers), which it’s turned into a money-spinner by selling leases to offshore wind farms that generate 5 percent of the U.K.’s electricity supply. Plus, it owns 19 shopping complexes across the country.

One of the quirks of the Crown Estate is that it’s barred by law from taking on debt. For a real estate company, that’s like boxing with your hands tied. To raise cash, it’s brokered £1.5 billion worth of joint ventures during the past five years with high-profile partners, including Norges Bank Investment Management, which manages Norway’s sovereign wealth fund, and Gingko Tree Investment, a unit of the agency that manages China’s foreign-exchange reserves. “We’re a very active asset manager,” says Nimmo. “We realized partnerships are a powerful way of driving forward our business model.”

Like many British institutions—the House of Lords, the monarchy itself—the Crown Estate has a distinct set of rules and defies neat and tidy categories. It manages the holdings for “the crown,” but they’re not the queen’s personal private property.

The line between queen and crown is sometimes fuzzy. Windsor Castle is where the queen spends many weekends. It’s owned by the charitable Royal Collection Trust (yet another entity), but the Crown Estate owns the surrounding 15,800 acres that include Windsor Great Park. While the Crown Estate’s stated aim is to “enhance” the return on all assets in its portfolio, it runs the Windsor holdings at a loss and is barred from selling them.

The oddities of the Crown Estate’s portfolio sometimes kick up bizarre questions, such as this one from its website: “Do whale carcasses beached on Crown Estate foreshore belong to The Crown Estate?” Answer: “No. Whales, amongst other species, are part of what is known as ‘Royal fish,’ and when beached, theoretically The Queen can claim ownership. In practice, however, it is dealt with by a government or local agency, dependent on the location of the whale.”

Some of the Crown Estate assets date back to the Norman Conquest. In 1760, George III surrendered revenue from crown property in return for a fixed annual payment called the Civil List. Management of the crown’s assets has undergone various permutations since then. From 1851 to 1924, something called the Commissioners of Woods, Forests, and Land Revenues managed the portfolio.

It wasn’t until the 1961 Crown Estate Act that the current public body came into existence. The next monarch, presumably Prince Charles, will be expected to sign over the revenues of the Crown Estate to the government once again.

Further changes came in 2012, when Chancellor of the Exchequer George Osborne scrapped the Civil List and eliminated separate grants covering royal travel, communication, and maintenance of the royal palaces. He replaced those payments with a Sovereign Grant that pays the queen 15 percent of the Crown Estate’s annual profit from two years prior. It was the first time since 1760 that the queen’s funding was pegged to the Crown Estate. The formula wasn’t designed to deliver bumper paychecks to the queen. In announcing the Sovereign Grant, Osborne said it would ensure the royal family will “do as well as the economy is doing.”

Not exactly. However the Crown Estate’s profits are sliced, its success and, by extension, the queen’s bank balance are inextricably tied to U.K. property prices, whose growth has far exceeded overall economic growth. The value of the portfolio has soared to £11 billion today from £6.2 billion in 2010. “The Crown Estate is an odd beast, but it works,” says the University of the West of England’s Appleby.

The Crown Estate’s transformation into spry property manager began in the early 2000s. By then, most of Regent Street’s 100-year leases, inked during Queen Victoria’s reign, had begun to expire. In 2002, the Crown Estate launched a £1 billion project to regenerate the street, renowned for its curved shape designed by 19th-century architect John Nash.

The turnaround began in earnest in 2004, when Europe’s first Apple Store opened on Regent Street. Other global brands followed: Banana Republic, J.Crew, Superdry. In 2011, when Burberry’s then-CEO Angela Ahrendts announced that the luxury label was planning to open a 44,000-square-foot space, she likened Regent Street to “the Champs-Élysées or Fifth Avenue.”

That same year, under Nimmo’s predecessor, Roger Bright, the Crown Estate teamed up with Norway’s sovereign wealth fund, which paid £450 million for 25 percent of a 150-year lease on the Regent Street assets. Nimmo, who was working at the Olympic Delivery Authority ahead of the 2012 Summer Games, recalls headlines comparing the transaction to selling the Crown Jewels. “It was brave and controversial at the time,” she says. “It allowed us to fund the development program that’s driving our growth now.”

Paul Clark, the Crown Estate’s investment director, in Osprey, a store in London’s St. James’s district Christoffer Rudquist/Bloomberg Markets

Sitting in the Crown Estate’s office off Regent Street, investment director Paul Clark spreads out a map of central London with a sea of pink and blue blocks delineating the portfolio’s holdings. He points to St. James’s, where the Crown Estate took another bold step in 2013 by setting up a £320 million joint venture with Oxford Properties, a Canadian real estate firm, to develop 260,000 square feet of office, retail, and restaurant space near Regent Street. That, together with more Regent Street redevelopments, means the Crown Estate will be delivering half of all new office space in the West End over the next year. “It’s the Crown Estate’s most significant development pipeline in its history,” Clark says.

He has little doubt he’ll be able to find tenants, given demand from hedge funds and other businesses clamoring for office space. The West End is the most expensive place in the world to rent an office, with occupancy costs per square meter of more than £1,715 last year, according to real estate services firm Cushman & Wakefield. Even so, Clark says the Crown Estate has pushed the pause button on new acquisitions because of concerns about London real estate prices. “We’re more motivated sellers than buyers,” he says.

As the Crown Estate disposes of noncore assets, it’s running into opposition. Last year, it began selling 200 rural homes spread across the country, offering tenants the right to buy. Those who couldn’t raise financing were evicted, some with as little as two months’ notice, says Ross Henley, a local councilor in Somerset, where about 20 properties were sold last year. “You’d expect the Crown Estate to act differently to other property companies,” he says. Clark says, “We understand this may have been difficult news for tenants so we provided extended notice periods of up to six months.”

The Crown Estate’s portfolio will soon shrink. Under government plans to devolve more powers to Scotland, the Crown Estate’s £261.5 million worth of Scottish assets will eventually be managed independently by authorities in Edinburgh. Those assets—including offshore wind farms, salmon-fishing rights, and the Glenlivet estate, maker of the famed whisky—will remain technically owned by the crown, but the revenue (£14.6 million last year) will most likely remain in Edinburgh’s hands.

Given the political sensitivities of such a move, Scottish First Minister Nicola Sturgeon felt obliged to deny reports in June that her government planned to cut funding to the queen once the Crown Estate assets were devolved. Nimmo and Clark declined to comment on Scotland, saying the terms of devolution are firmly in the hands of politicians.

Whatever happens in Scotland, the queen is in no danger of penury. Besides, Elizabeth II isn’t your average shareholder focused on quarterly returns. Like many before her, she and her successors can afford to take the long view.