Investors take a trip up the risk curve and out into the regions


writes Jane Roberts

Jane editor cut out2 for webThe switch has been flicked on for regional property. Specialists like Manchester-based Bruntwood report massive interest and activity from yield-seeking pension funds, other institutions and private equity buyers coming out of London and from overseas.

They are moving beyond an over-heated capital to attractively priced cities such as Manchester and Leeds. Some are thinking of not just property, but regional businesses; local property firms and fund managers are frequently fronting for private equity.

Bruntwood is big enough and experienced enough to compete; it has just tied up a year-long, £600m refinancing to build a war chest (see p3). But one UK clearing bank senior manager says generally, the high- quality deals do not involve local buyers.

“There’s not anywhere near the quantum of local operators with the financial strength to compete against global funds for larger assets since 2008,” he says. “We can easily count the larger, £50m-plus net-worth local groups in each regional market.”

This means there are very few big deals where assets are traded local seller to local buyer, which traditionally was the heartland of the clearing banks’ regional business.

However, the banks’ advantage is their lower cost of capital. Competition is set to get fiercer with not just banks but insurers and debt funds climbing the risk curve, keen to lend. Then there are the bond markets, where a huge amount of money is trying to find a home, says CLS’s Richard Tice (p19).

One debt fund manager says his fund has written loans up to a 65% loan-to-value level to generate net 6% returns for investors by underwriting business plans for experienced borrowers in local sub-markets. But he admits that at some time next year even his model will need a cheaper cost of funds.

Real estate needs a new pension plan

A study of defined contribution pension schemes for the property industry says DC funds would benefit from including illiquid asset classes such as real estate – but finds a wide gap in understanding between real estate and DC professionals.

The latter think real estate asset managers over-engineer funds and focus too much on underlying properties; the property people see a disconnection between what DC people say they want from real estate and what their default funds need – daily liquidity being one example.

The Pensions Institute report, Returning to the Core: Rediscovering a Role for Real Estate in Defined Contribution Pension Schemes starts to bridge that gap, and we join in the debate in this issue (pp20-22, 23, 24-25).

Real assets need to be delivered in a DC friendly format, requiring a new approach, the report says. But third-party providers should bear in mind that, so far, the top DC providers that do include real estate use their in-house funds exclusively.

Jane Roberts, editor