From penthouse to pavement

Written by: Dave Waller Posted: 26/10/2017

BL53_realestateReal estate investment is going through a boom time – and it only looks set to continue as demand increases and projects expand into new areas and geographies 

In June this  year, the Sunday Times reported a $1.3bn property deal that included Grosvenor House, one of London’s most iconic hotels, and majority stakes in the similarly luxurious Dreams and Plaza hotels in New York. The buyers? A consortium of Middle Eastern family offices, US property tycoon Ben Ashkenazy, and Hamad bin Jassim, the former Prime Minister of Qatar – an international all-star cast that shows how, even in a deeply uncertain world, you can’t shake the foundations of real estate as an investment.  

Recent research by Preqin revealed a sector in rude health. Fund managers returned a record $668bn to investors between January 2013 and June 2016 – and funds are currently perched on a record $255bn of ‘dry powder’ – unused money sat waiting to be deployed into investments. 

Uncertainty has, of course, played its part, as funds hesitate to commit their cash. But there’s a problem – these vast stockpiles have pushed up prices, and while there are now more real estate funds than ever before, all competing with each other for investors’ capital, it’s proving harder to find assets with a sensible price tag.   

“From a global real estate perspective, volumes are down in terms of fundraising, reflecting a lack of product in the market,” says Alistair Horn, a Partner at Mourant Ozannes in Jersey. “There’s huge competition for the assets and when the right ones come, it sparks a fast, aggressive bidding pattern. But it’s been a very strong real estate year to date. Very strong.” 

The UK market provides a decent illustration. Much of the caution that followed the Brexit vote has thawed and investors are returning to the country’s commercial property market. With the pound now low against the dollar, investors from the Middle East, Far East and US are being lured in by ‘bargains’ – or deals that appear to be bargains, compared with when the pound was stronger. 

“For international investors, the currency differential meant a 15-20 per cent discount to previous expectations,” says Fiona Le Poidevin, CEO of The International Stock Exchange Group. “And that’s made UK property more attractive.”

In February, German fund Deka Immobilien bought the new Facebook headquarters, Rathbone Square in London, for £435 million (a price four per cent lower than the value of the building the previous September). In April, the same fund acquired the entity that owned Cannon Place, a landmark development by Hines, for £485 million. 

Funds are also increasingly looking at UK regions beyond London, mirroring the European trend towards investments in hotels, student accommodation and distribution centres. And investors are seeking greater control of how the assets are handled. Institutional investors such as pension funds are, for example, moving from using fund managers to direct investments and joint ventures.

Simon Hopwood, a Partner at Bedell Cristin, says: “We act for a lot of student accommodation deals, some of which are done through joint ventures with sovereign wealth funds from Singapore, for example. Just before Christmas, we closed a joint venture for student accommodation across Europe. That sector is very strong. You’ve got lots of foreign students coming into places like London, prepared to pay pretty high rents – and it’s secure income because of the parental guarantees.”

Breaking new ground

Elsewhere, fund managers have had to be more creative in where they find assets – and they’re getting the go-ahead from investors to enter uncharted territory in the search for yield.

Take, for example, funeral homes, or accommodation for people with disabilities. In January, pension fund the Universities Superannuation Scheme joined Morgan Sindall Investments to launch the Supported Housing Investment Limited Partnership. Each committed £100 million to deliver more than 500 purpose-built supported-living apartments across the UK, designed to enable vulnerable people to live as independently as possible.

There have been plenty of smaller deals too. “The funds themselves may be getting bigger, but many of the deal sizes are smaller,” says Michael Morris, Group Partner at Collas Crill. “Those in the regions pay £5 million to £15 million.” Morris cites a fund that invests in country hotels, where assets could be “in the region of £3 million to £6 million”.

Collas Crill is just one Channel Island firm benefiting from the solid flow of real estate business. While Jersey is traditionally seen as stronger in the area than Guernsey – a reputation that springs in part from its Jersey Property Unit Trust (JPUT) vehicles – both islands are now channelling plenty of work. They’re acting as a natural conduit into the London property market and providing a route to raise capital to buy real estate assets.

“I’ve worked on various international deals,” says Dilmun Leach, Group Partner at Collas Crill. “City Airport was reported to be worth $2bn, while the Australian railway network was sold using Jersey entities.” 

Leach also describes other “very significant international infrastructure deals” sold via JPUTs. Then there are the smaller deals being done across the UK. “In the search for yield, we’re seeing a lot of lower level real estate acquisitions – offices in Milton Keynes and Birmingham, deals of £10 million to £12 million. In the Channel Islands, more niche funds are being launched and more real estate sectors are being targeted.”

There’s plenty to keep the buzz going. This April, Jersey introduced its Jersey Private Fund, which offers relatively light-touch regulation and a greater flexibility that appeals to new fund managers. By June, it had already sparked the creation of 44 new funds. 

Meanwhile, Simon Hopwood reports an increase of real estate work in Sharia-compliant structures, thanks to the influx of Middle East and Malaysian money. “Fifty per cent of our practice is in Sharia-compliant structures, purely because of the levels of flows from these regions,” he says. “Malay pension funds are buying assets in London, as are those from the GCC region.” 

And it’s not just about working with the UK – the Channel Islands are well-placed to guide work elsewhere too. “Lots of institutions are buying up in Germany, the Netherlands and elsewhere in Europe, as well as the US,” says Hopwood. “They’re looking – but the problem is the lack of stock globally, and trying to find value in assets is very difficult. It’s hard to find assets in the UK, for example, so investors are looking to Europe.” 

Building blocks

One of the key areas of growth for the islands is in real estate investment trusts (REITs). Introduced in 2008 – perhaps the worst possible time to launch a property investment vehicle – REITs have come into their own since 2012, when the laws were relaxed to allow smaller closed funds, opening the door to institutional investors. 

REITs are attractive because they work well from a UK perspective. That means different types of investors come together to invest in UK property, including pension funds and sovereign wealth, everywhere from the US to Africa to the Middle East and Asia. Hopwood reports seeing “Asian sovereign funds and institutions joining to do large London investments like the Broadgate estate”.

It goes much further than that. “Student accommodation REITs are very popular too,” says Fiona Le Poidevin. “We’ve seen a residential REIT. These are sizeable – several hundred million pound structures, very big and significant and well-known in the market. One trend is REITs investing in other REITs in other jurisdictions, in US REITs or French REITs, for example.”

Le Poidevin points out that the Channel Islands can claim a quarter of the UK market for HMRC-approved REITs, and that there’s been a huge pick-up in enquiries and registrations of the vehicle since September 2016. 

As for the coming year, things are sure to keep building. As long as returns remain tricky to come by elsewhere, investors will always look to bricks and mortar as a solid, reliable option. Plus all that dry powder has to blow somewhere. 

But, as Preqin’s report pointed out, it’s a ‘crowded marketplace’, with ‘challenging pricing’ and ‘fundraising is going to remain extremely challenging for most’. 

All of this is an improvement on the period before the Brexit vote, however. Hopwood says he’s “encouraged” by the levels of activity, while Horn appears to agree that the islands are well-placed to build.

“We have the servicing, the cost-effective regulatory environment, the regulatory standards, and that ability on all sides of the fence to execute transactions quickly,” he says. “And our exposure isn’t linked to the success or failure of the UK property market – they have the pan-European approach. 

“So I see no reason, given our clients and what we know, why they wouldn’t continue to have faith in the Channel Islands’ mature platform.”

Ones to watch

Three areas in which real estate may boom in the next 12 months:

Private rented sector – These are new housing developments built specifically for rent, not for sale. A lack of traditional affordable housing stock has led many to believe that in 20 years’ time, more people will rent in the UK than own their own homes. A lot of funds are setting up to capitalise – their investors benefit from the property’s rising value, and from rising rents too. 

Distribution centres – E-commerce is expected to account for about 15 per cent of overall retail spend in 2020, and its continued rise is revolutionising how supply chains work. The international network of distribution and logistics warehouses holds an obvious appeal for investors – rents are hitting record highs as demand for storage soars.

Student accommodation – The banks are always fond of this one, as it’s seen as secure income. Student pads are more like hotels these days, in amazing buildings, and foreign students are prepared to pay high fees. And their parents are there in the background, guaranteeing the rent. 

 


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