By Padraig Floyd
If you were to summarise what was going on in the commercial property market in one word, you could do worse than to alight on ‘renaissance’. At least as far as the pensions industry is concerned.
Since 2008, all the comforting investment market landmarks have shifted. Volatility isn’t something to avoid, but limit; you can’t necessarily bank on the equity risk premium; and there is no such thing as a safe haven. Pension funds are not speculative beasts; their raison d’etre is income to meet the liabilities their members’ benefits represent. And so, as gilts became expensive and other sovereign debt got a bit too hot, they were forced to look elsewhere for solid indexlinked returns.
Love/hate relationship
That led them back to real estate, an asset class UK pension funds have always had a love/hate relationship with. Commercial real estate saw something of a recovery in 2013 in global terms. The market grew by about £330bn (US$549bn), an increase of 18% on 2012, according to Jones Lang LaSalle.
The biggest single winner was the UK, largely London, mostly the City with prime commercial taking twice the considerable amount allocated to the west end. The UK saw almost £50bn (€58bn) invested in the last year, mostly by sovereign wealth funds and very large pension funds, says Ben Sanderson, director of fund management, Hermes Real Estate.
“The globalisation of real estate is accelerating. It’s not just people placing cash to avoid the troubles of the world, but significant allocations from pension funds from Asia, Canada and Australia, among others,” Sanderson says. “For pension funds, real estate is classic portfolio diversification. These funds are strategically diversifying into real estate across the major markets of the world.”
Thinking outside the box, or square mile
Conventional wisdom says if you’re not buying prime real estate in central London at 3.5%, you’re out of the market, adds Sanderson. With London prices so high and demand so strong, investors are looking further afield – to London Bridge Quarter or Aldgate rather than the traditional square mile of the City. The regions are also being considered – Birmingham, Manchester and Leeds are in the premier league with strong regional markets and good transport networks, while Bristol, Glasgow and Edinburgh are all competing for promotion.
Despite government programmes designed to stimulate the residential property market with the £130bn Funding for Lending package for business, two Help to Buy campaigns for consumers and easement of the permitted development rights for developers looking to convert commercial properties into residential, residential simply is not high on the agenda for the commercial property managers. Though many like it in overseas jurisdictions, they avoid it here and with good reason, says, Kiran Patel, property fund manager at Cordea Savills.
Residential property faces two major problems before it can become a mainstream asset class. The first is about achieving scale, says Patel. A pension fund investing £100m into commercial property may access a few properties and a small number of institutional tenants with relatively long leases. The same investment in residential will produce a fragmented portfolio and having multiple units is not the same as having 200 units in a shopping centre.
“This makes it difficult to get scale and tenants will be on short two or three year contracts,” says Patel. “There could be a lot of reversing and leakage in income and pension funds need income.”
He accepts residential is attractive due to a structural undersupply, but while “the DNA of the residential sector is about getting on the property ladder”, the dynamics of the private rented sector (PRS) are not solely reliant on every Englishman wanting his own castle.
Comments