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The future of real estate
investment
Welcome
7 February 2019
© Simmons & Simmons LLP 2018. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
Chair
◼ Richard Hopkinson-Woolley, Partner, Real Estate, Simmons & Simmons LLP
Panellists
◼ Malcolm Frodsham, Founder Director, Real Estate Strategies
◼ Anthony Gahan, Chairman, IPSX
◼ Huw Stephens, Head of London Transactions at PATRIZIA
◼ Charlie Foster, Managing Director, RBC Capital Markets
◼ Isabella Roberts, Partner, Simmons & Simmons LLP
© Simmons & Simmons LLP 2018. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
Malcolm Frodsham, Director, Real Estate Strategies
Malcolm has 20 years of experience in real estate data, modelling and risk management techniques. He founded Real Estate Strategies in 2013, an
independent management owned business that provides high quality forecasts, research and strategic consulting on the European real estate market.
Prior to Real Estate Strategies, Malcolm was Director of Research at IPD and prior to that Head of Research and Strategy at Legal & General Property.
Anthony Gahan, Chairman, IPSX
Anthony is the Founder and Chairman of IPSX Group. Anthony has over 30 years of investment banking experience and is a Managing Partner of Wyvern,
a London based investment banking firm, which he co-founded in 2002. His banking career has included senior roles at Lehman Brothers and Flemings
(acquired by JP Morgan) together with early transaction experience at Charterhouse Bank and the NatWest Group. Throughout his career he has focused
on international M&A and Equity Capital Markets with a particular emphasis in recent years on disruptive technologies and services, fintech and data.
Huw Stephens, Head of London Transactions at PATRIZIA
During his tenure as Head of UK Transactions at AXA, where he worked for the past 24 years, Huw has been the strategic and tactical leader behind
AXA’s £5bn investment and development programme in London, particularly the £1.9bn, 1.25m sq ft, speculative development of 22 Bishopsgate. Huw
and his team were pioneers of the current trend for JV’s and club deals of which 22 Bishopsgate, Ropemaker Place and the Google building at Kings
Cross are examples where compatible capital is stitched together to acquire an asset and execute a specific business plan.
Charlie Foster, Managing Director, Head of Real Estate Investment Banking, RBC Capital Markets Europe
Charlie leads RBC Capital Markets Real Estate franchise within its Global Investment Banking activity in Europe. Foster joined RBC in September 2018,
bringing with him 20 years’ experience in the property sector, having worked across banking, research and consulting at some of the leading real estate
services and investment firms. Prior to RBC, Foster was Head of Real Estate at Canaccord Genuity, which he joined in 2014 and where he also worked in
their Research division. Previously, Foster was Head of Strategy & Research for the Real Estate Finance business at Royal Bank of Scotland and Partner
and Head of Real Estate Research at Oriel Securities, where the team was ranked top 3 team by Extel.
Isabella Roberts, Partner, Simmons & Simmons LLP
Isabella is a partner in Simmons & Simmons' corporate group. She has experience of both public and private fundraising and has advised a number of
clients in connection with the flotation of and fundraising for closed ended investment vehicles on the Official List, particularly those holding real assets.
Bios of speakers
© Simmons & Simmons LLP 2018. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
Asset Manager Outlook to 2025
The Asset Management industry is changing and we need to stay ahead of those
changes to continue to collaborate to develop smarter solutions.
Simmons & Simmons and Bloomberg Intelligence have produced a report intended to
help clients stay ahead of the curve in an industry facing significant change – both
structural and cyclical.
The survey received responses from 1,950 asset
managers globally:
• over 80% in Institutional Funds, Alternative
Funds (including real estate fund managers) or
Private Wealth Management
• 55% in Portfolio Management/ Research
• 48% in or around the C-suite
Geographically the respondents came:
• 27% UK
• 27% Europe ex UK
• 20% USA
• 14% APAC
• 12% Other Americas (Canada, LatAm,
MENA and SSA)
The Future of Real Estate
Investment
Malcolm Frodsham
Director
Real Estate Strategies
7 February 2019
www.realestatestrategies.com © Real Estate Strategies 2019
THE FUTURE OF REAL ESTATE INVESTMENT
Malcolm Frodsham, Director
IPSX, February 7th, 2019
WHAT IS COMMERCIAL REAL ESTATE (CRE)?
Value, £bn
Commercial real estate (CRE) 935
Other non-residential buildings 165
Private rented residential 1,190
Other residential 6,498
Total built environment 8,788
£bn % of
TotalRetail 175 34
Standard Retail – South East 51 10
Standard Retail – Rest of UK 21 4
Shopping Centre 57 11
Retail Warehouse 46 9
Office 215 45
City 63 12
West End, Mid Town 79 15
Rest of South East 53 10
Rest UK 20 4
Industrial 69 14
South East 44 9
Rest UK 25 5
Other Commercial 50 10
Total 509 100
A large investment market with risk / return characteristics between equities and bonds
Commercial real estate (CRE) includes office buildings, shops, hotels and industrial warehouses The long-term return from CRE has been 9.7% y/y
Investors hold real estate not just for return but also because of the diversification benefits against
equities and bonds
All Property Equities Gilts
All Property 100%
Equities 28% 100%
Gilts 12% 47% 100%
The predominant owners of this property are overseas investors,
investment funds, property companies,
pension funds and insurance companies
£509bn £426bn
Invested market Owner
occupied
The risk-return characteristics of CRE fit between those of equities
and bonds.
Source: The Size & Structure of the UK Property Market, end 2017, IPF
CRE & PRIVATE INVESTORS
Wealthy individuals often allocate a higher proportion of wealth to real estate
Attracted by sense of ownership… …that the key metrics are easily observed… …and that CRE properties can cater for all tastes
PROPERTY TYPES LOCATIONS
Shops Central London
Offices South east
Logistics Scotland
BUILDING
CONDITION
APPROACH
TO ASSET
MANAGEMENT
Grade A Redevelopment
Secondary Spec development
Maintain income
OCCUPANCY LEVERAGE
Vacant High
Fully-let Low
TANGIBLE
ASSET
CHANCE TO
ANTICIPATE
WHAT IS GOING
TO DO WELL
OWNERSHIP
✓
✓
✓
✓
✓ ✓
No 1 Poultry: Standard Office, City
Latest valuation: Latest research:
Net capital
value
Headline
rental
value
Net
Effective
rental
value
Equivalent
yield
Net Initial
Yield CV/sq ft
2018 Q3 £12,150,000 £607,500 £486,000 4.25% 4.12% £1,015 2018 The Knight Frank London Office Report
Key assumptions: Manager estimates:Irrecoverable costs: 2.50% Irrecoverable costs: 3.10%
New lease term: 8 years Lease renewal rate 45%
Period to break: 5 years Propensity to break 32%
Incentive period: 15 months Vacancy period 8 months
Letting period 6 months Tenant default pa 2.10%
Refurbishment costs: £240 per sq ft
Recent City office sales Recent lettingsPrice Area Yield Invt Qlty CV/sq ft
1 Plumtree Court £1.160 bn 826,008 4.10% 984 £1,404
50-54 Clerkenwell Road £11.400 m 8,954 4.64% 568 £1,273
2018 Q3 Savills City office investment watch
LOW QUALITYHIGH QUALITY
£14.00SQ. FT.
rising risk of vacancies, rising costs, increased active management opportunities
INVESTMENT QUALITY
SCORE
621
0
5
10
15
20
25
30
35
40
45
Vacant <2 2-4 4-6 6-8 8-10 10-12 12-14 14-16 16-18 18-20 >20
% o
f re
nta
l val
ue
years
Click to access full tenancy schedule
0
2
4
6
8
10
12
14
16
18
20
wei
ghte
d a
vera
ge u
nex
pir
ed l
ease
ter
m,
year
s
segment average
property
Click to access full property details
Click to download full valuation details
Click for historic trends for high quality
City offices
SEARCH COSTS
Large complex assets increases the information, skills and access to deal flow overhead
INVESTORSRequire ability to monitor performance and the sense of engagement which they would get by direct investment.
SEEK BUILDINGS, to meet specific investment goals.
SEEK ASSET MANAGER – for basic tasks like building management and rent collection, and also the “business plan” for the property - the selection of tenants, changing configuration, capital spending etc needed to maintain the value.
SEEKING INVESTORS to acquire and manage buildings.
CORE SKILLS in asset selection, building management, asset management.
SEEKING BUILDINGS AND ASSET MANAGERSConstructing vehicles to hold the assets and securing finance is time consuming and costly in fees.
PROBLEMS WITH INDIRECT FUNDS
Indirect funds dilute some of the attractions for individual investors…
Entry / exit queuing
Lack of information on
key metrics
Layers of fees
Cash drag
Two levels of due
diligence
… and creates principal-agent problems
RISK
EXPECTED
RETURN
STATED FUND OBJECTIVES
ACTUALPORTFOLIO
INVESTMENT CHARACTERISTICS
CRE shares the physical characteristics of residential property, but differs in that the value is dependent on the cash flow
RETURN PRESOMINANTLY
INCOME
RENTAL GROWTH RATE TENDS TO BE BELOW THE
RATE OF INFLATION
IRRECOVERABLE COSTS LOW BUT
RISING AS LEASES SHORTEN
CAPITAL COSTS
SIGNIFICANT
VACANCIES SIGNIFICANT IN A
DOWNSWING
ACTIVE MANAGEMENT
BOND CHARACTERISTICS
EQUITY CHARACTERISTICS
RETURN
LONG-TERM AVERAGE
Reduce irrecoverable costs
Maintain occupancy
Efficient maintenance / refurbishment
Spot opportunities through
active management
ASSET MANAGEMENT ESSENTIAL
RENT less IRRECOVERABL
E COSTS
GROWTH lessCAPITAL COSTS
5.9% y/y 3.7%y/y
DIVERSIFICATION ESSENTIAL
SOLUTION: THE APPLICATION OF FINTECH TO CRE INVESTMENT
NO TIME FRICTION
S
For investors who wish to choose, monitor and change their portfolios,
securitisation at the asset level:
The asset level marketplace
Timely and accurate transmission of
information from the asset level to investors
INFORMATION
FLOWS
A TRADING
PLATFORM
Asset managers are freed to
exercise, and be rewarded for, their
core skills in choosing and
running buildings
✓cuts out frictions;✓reduces costs, and;✓avoids conflicts
Quarter Rents received
Rents outstanding
Properties Q3 2018 £120,500 £10,500
Tenancies Q2 2018 £131,000 Nil
Financial Q1 2018 £131,000 Nil
Reports Q4 2017 £131,000 Nil
Documents Q3 2017 £127,500 Nil
ASSET LEVEL
SECURITISATION
The future of real estate investment
IPSX - Headlines
▪ The world’s first regulated securities exchange dedicated to real estate
▪ Recognised Investment Exchange and Recognised Stock Exchange
▪ Public market proxy for direct real estate investment
▪ IPO of operating companies owning “single” CRE assets
▪ Majority owned by institutions
▪ Management from major financial/market infrastructure groups
▪ IPSX Prime (IPO market)
▪ IPSX Wholesale (proposed professional JV REIT market)
▪ Initial market counterparties progressing early issuer discussions and wider IPSX members being
onboarded
IPSX – Segmentation and options
“INSTITUTIONAL GRADE” REAL ESTATE(with £50m+ lot size)
Public Securities - Direct▪ IPSX
Private Market - Direct▪ Specialist Investors (Institutions, SWFs, Closed and Open
Ended Funds)
Public Securities - Indirect▪ Funds on generalist Regulated Markets (i.e. traditional
REIT markets)
WIDER COMMERCIAL REAL ESTATE MARKET(typically up to £30m lot size)
Private Market - Direct▪ Specialist Investors (Institutions, SWFs, Closed and Open
Ended Funds)▪ Family Offices, UHNWIs▪ Digital Marketplaces/Syndication Platforms/
Crowdfunding/ICOs and application of DLT for “accredited” investors (e.g. Cadre, Property Partner) [note that some offers to investors may be for larger assets majority financed by specialist direct investors as above]
© Simmons & Simmons LLP 2018. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
Panel debate
Chair
◼ Richard Hopkinson-Woolley, Partner, Real Estate, Simmons & Simmons LLP
Panellists
◼ Malcolm Frodsham, Founder Director, Real Estate Strategies
◼ Anthony Gahan, Chairman, IPSX
◼ Huw Stephens, Head of London Transactions at PATRIZIA
◼ Charlie Foster, Managing Director, RBC Capital Markets
◼ Isabella Roberts, Partner, Simmons & Simmons LLP
© Simmons & Simmons LLP 2018. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
Asset Manager Outlook to 2025 - highlights
Real Estate/ Infrastructure highlights:
Real Estate: mixed picture – Neutral with Traditional; Funds, bias to the downside with Alternatives
• As seen by Traditional Funds (i.e. non-Alternative): pretty balanced two-way traffic
o Ranks 7th out of 12 asset classes where managers expect to Increase exposure by 2020
o Ranks 6th out of 12 asset classes where managers expect to Decrease exposure
• As seen by Alternative Fund Managers: bias to the downside
o Ranks 7th out of 13 asset classes where managers expect to Increase exposure by 2020
o Ranks 1st out of 13 asset classes where managers expect to Decrease exposure by 2020
Infrastructure: bias to the upside for both Traditional and Alternative Fund Managers
• As seen by Traditional Funds (i.e. non-Alternative): bias to the upside
o Ranks 6th out of 12 asset classes where managers expect to Increase exposure by 2020
o Ranks 12th out of 12 for asset classes where managers expect to Decrease exposure
• As seen by Alternative Fund Managers: bias to the upside
o Ranks 5th out of 13 asset classes where managers expect to Increase exposure by 2020
o Ranks 11th out of 13 asset classes where managers expect to Decrease exposure by 2020
The future of real estate
investment
Q&A
7 February 2019
The future of real estate
investment
Thank you for attending
7 February 2019