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LGPS: Taking a direct approach to real estate

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The Local Government Pension Scheme (LGPS) pooling process brings challenges for funds’ real estate allocations, but also clear opportunities.

Funds can work together through the pools to invest more capital directly into real estate via separate accounts, joint ventures and clubs.

Such direct investment, particularly if on a greater scale, can give access to a broader range of real estate assets, enable investment in larger assets and help create a more efficient investment model. It also grants more control over specific investment and divestment decisions.

Co-mingled real estate funds still have a role to play, particularly for more specialist property sectors, but a gradual increase in allocations to direct real estate is likely to be beneficial. In doing so, funds and their pools will be joining other large real estate investors, who in recent years have sought to tilt their portfolios in this direction.

Investing in high-quality, larger real estate assets can offer superior risk-adjusted returns potential, as commercial occupiers seek more modern, efficient accommodation with broad amenities to better attract and retain staff.

This means such assets have better rental growth potential, and experience in active asset management can help maximise total returns. Through participating in joint ventures or club deals, investors can access such opportunities alongside like-minded capital partners and managers, while still controlling asset-specific risk.

However, executing the strategy merits careful thought. Many investors have struggled to deploy capital efficiently into attractive direct investment opportunities, owing to either a lack of resources, an absence of relevant in-house expertise or by not having aligned themselves with the right managers.

Addressing the latter point can help alleviate internal resourcing concerns, particularly if a strategic relationship can be developed with managers with a proven track record of identifying, structuring and executing joint venture or club deals – and, importantly, experience in doing so on behalf of non-discretionary clients.

Selly Oak

An extensive global network is essential to not only match like-minded investors with similar investment objectives but to source superior investment opportunities. This gives investors the comfort of aligned interests.

A manager’s deal sourcing network is also of benefit to its clients. In the past three years, most of M&G Real Estate’s transactions were sourced off-market, avoiding competitive bidding situations. Taking more control over investment decisions enables a more tailored approach consistent with an investor’s risk-return preferences.

As well as through joint ventures and club deals, such control over specific real estate exposure can also be achieved through a separate account, giving investors their preferred level of control over key investment decisions.

This means they can be structured in accordance with individual needs – considering risk and leverage appetite – alongside sector and geographic preferences, to achieve a scheme’s specific objectives.

Delivering consistent outperformance requires relevant expertise throughout strategy formation, the entire transaction process and the complete asset life cycle. Scale and (off) market access is key to uncovering the best opportunities.

At M&G Real Estate, an in-house transaction management team allows us to place capital quickly, backing up the asset origination and creative deal making of our investment teams. Sector specialists in office, logistics, retail and alternatives seek out the best opportunities and add value throughout the investment period to maximise returns for our clients.

By partnering with a manager throughout the process, from strategy-setting to execution of investment opportunities and enhancement of value throughout the asset lifecycle, we believe this creates the best potential for delivering on specific risk-return objectives.

Case study: Selly Oak

We helped an LGPS scheme undertake its first ever direct investment through a joint venture, followed quickly by a second in under a year. This second deal was the acquisition in May of Selly Oak retail park, south west Birmingham, alongside another client separate account.

This major regeneration development is almost completely pre-let to national retailers and set to deliver a valuable economic boost for the area, offering quality retail, improved highways and canalside improvements.

This article presents the author’s present opinions reflecting current market conditions. It has been written for informational and educational purposes only and should not be considered as investment advice or as a recommendation of any particular security, strategy or investment product.

Martin Towns, head of UK commercial and Capital Solutions, M&G Real Estate

Column sponsored and supplied by M&G Real Estate

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