In light of the intense interest in UK real estate, Orlando Crowcroft looks at how fund managers are diversifying their investments both within the UK’s borders and slightly further afield.
The primary focus of real estate funds over the past two years has been UK commercial property, but equally the sector has been a victim of its own success. As the money flows in, yields on London commercial property are falling, and fund managers have to seek other opportunities to find the kind of returns investors expect.
“People are now looking to get out of London, so the south east is seeing new buyers come in,” says Philip Hendy, wealth manager at corporate services firm JTC. He also says two sectors of interest are student accommodation and the private rented sector.
While the private rented sector remains a small proportion of the total number of invested assets, it is proving more popular as house prices increase in the UK. Many firms either see it as a solid investment at a time when house prices are rising beyond the income of many people in Britain, or even as a boon to a firm’s corporate social responsibility, or CSR.
“I think that because some of the big funds think CSR is something that they need to do – whether that is driven by economic circumstances or for the greater good of man – we have seen a number of the larger funds start to invest in bigger social projects,” Hendy says. He cites Legal and General’s purchase of a large share of a UK house build last year, and Greystar, which recently invested in student housing.
Other areas are popular too, says Jon Barratt, director of real estate services at fund management firm Elian, as fund managers aim to differentiate their products at a time when the UK commercial property fund space is saturated. These include regional business parks and logistic hubs for major retailers such as Amazon and John Lewis, which guarantee steady returns and good quality tenant covenants as consumers increasingly choose to shop online.
“We’re also seeing more opportunistic funds, as managers try to generate a greater return than the central London office market. There may be an extra bit of risk in there, be it development assets, land or even distressed assets which banks are letting go of,” he says.
NEW STRATEGIES
James Walton, head of real estate at Canaccord Genuity Wealth Management in London, also cites the office sector in Ireland and Continental Europe as having investment potential.
“Warsaw is interesting, and Prague and Dublin. There is quite a lot of pipeline in those areas,” he says. Although the Irish market is small, Walton highlights the relevance of the recovery in some of the worst-hit Eurozone economies, which includes the Republic of Ireland.
The direct property investment market in Ireland was up 36% at the end of the third quarter of 2014, he says, and three new Irish real estate investment trusts had been launched.
But as well as new sectors or geographies, others feel that new strategies will also be useful to investors.
Steve Grahame at North Row Capital launched the UK’s first actively managed Ucits core property fund in 2014, which invests in property derivatives, property equity and debt rather than buying physical assets. It has doubled in size over the past year. Assets under management stand at £30 million (€41 million).
“It is very difficult to launch new and innovative ideas. It is difficult to identify new fund managers that have been built in the last few years. Look back to 2000. You could name a lot of new investment management houses and you could also name an awful lot of new products. I don’t see that today,” he says.
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