Real estate has always been a non-homogeneous asset class, but never has the divergence in potential returns been as great as it is today, with the tenant markets going through significant structural changes.
With property income yields broadly flat over the last 18 months and likely to stay so over at least the next couple of years, as bank de-leveraging is offset by income hungry institutional investors, so returns will be solely dictated by rents.
In an on-going weak economic environment, to be able to sustain or grow rents requires the real estate to be either prime real estate in capital cities or destination shopping centres; or in previously mismanaged real estate, where active management specialists are able to re-develop what has become a secondary asset back to prime.
We are intensively focusing on a combination of both these core themes.
Firstly, we are targeting those major UK and northern European real estate investment trusts (Reits) with either high quality office buildings in capital cities or destination-type retail assets.
Within these capital cities, we are targeting niche segments, such as London’s West End or Berlin residential.
The dearth of development finance has resulted in historically low levels of development over the last five years and consequently limited availability for quality buildings, so rents (and therefore capital values) are on a healthy upward trajectory in northern and western European cities.
Alongside their capital city office assets, these major Reits’ retail assets are, in the main, high footfall, destination centres, where the major retailers want to be positioned in their structural shift towards multi-channel retailing (online and in-store).
However, we believe the most attractive returns will be achieved by old fashioned real estate active management, particularly in the UK, where amongst the widespread collapse of secondary real estate there are very selective opportunities to re-develop the secondary valued asset back to prime.
The valuation differential between prime and secondary, and hence profitability - is now at record levels. We are steadily increasing our exposure to some of the smaller companies in this segment that are trading at attractive discounts.
These proven experts are starting to re-rate as they deliver strong returns against a broadly flat market.