What is LGP involved in at the moment and what are its future plans?
With a good track record of outperformance across the platform, Legal & General Property (LGP) has continued to benefit from significant growth in recent years, expanding our funds under management to £11 billion (as at 30 June 2013), through raising new equity, winning major industry mandates and selectively launching new products. All of this has been achieved not only due to our strong investment returns, which we believe are driven by a combination of sophisticated market intelligence, careful stock selection and proactive asset management delivery, but also our focus on clients’ changing needs and appetites.
This includes striving to take an innovative approach to modernising our existing funds, but also continuing to develop new, market-leading products that enable investors to access real estate in ways aligned with their strategies. An example of the former includes the recent extension of our c.£780 million Industrial Property Investment Fund. Achieved by taking a new approach to best practice standards of corporate governance, this involved adding redemption provisions and introducing a number of initiatives designed to make it more flexible in terms of raising further equity and responding to market conditions.
Widening our investment universe and diversifying risk, we also believe that we have been at one of the earlier market movers in terms of increasing our allocation to emerging sectors, selectively investing non-traditional real estate markets where we see significant value. Furthermore, investing in our in-house transactional capabilities, we have continued to move quickly to take advantage of the on and off-market opportunities that exist in the UK for those who have capital available to invest and do not rely on debt, including creative forward fundings and sale-and-leaseback deals.
LGP was recently in the news for the acquisition of student accommodation. Are you generally focused on student accommodation and why? What are the opportunities and challenges in this market?
Our university-backed, student accommodation deals form part of our wider strategy to invest in alternative sectors where we see strong upside and which are underpinned by the right fundamentals. Indeed, our ambitions in the student accommodation sector are linked to our wider residential or social infrastructure investment agenda, and a belief that this should form one of the key areas of focus for the economy going forward due to its ability to create jobs and fuel growth.
Having invested nearly three quarters of a billion into student accommodation over the past two years, LGP continues to be one of the most active in this increasingly established sector of the property universe. Subject to the appropriate due diligence around individual university and property fundamentals, the investment case is compelling – the acquisition of long leases to strong covenants with index-linked income makes these transactions a particularly good fit for investors seeking to match long-term liabilities, whilst also providing portfolio diversification.
Examples of other sub-sectors that we have identified as being particularly attractive in recent years include trade parks, data centres and cinema-backed leisure schemes.
You are active in the UK. How would you characterize this period for the UK investment market and which property segment presents the best opportunities in your opinion?
The UK market is currently in the early stages of growth recovery. As a result of regulation, banks deleveraging and closed-ended fund expiries, we believe that there are currently a number of exciting opportunities that exist in the UK market for buyers with significant capital to deploy. Whilst a weight of overseas capital has driven up the prices for low risk assets, such as those located in central London, we believe that the positive yield premium offered by properties requiring asset management expertise is at an unprecedented level.
One of our investment products that best illustrates this is the UK Property Income Fund (UK PIF) suite, which looks to take advantage of an illiquidity discount on larger lot sized properties outside prime. Having successfully fully invested UK PIF I earlier this year, we have now launched UK PIF II, which is opportunity led, targeting assets across the UK and within sectors that the fund manager sees as offering the most compelling return prospects, with acquisitions centred upon large lot size assets that are underpinned by strong income streams.
With a first close expected by the end of Q2 this year, UKPIF II is targeting a GAV of up to £1 billion. A closed-ended English Limited Partnership, the Fund will feature off-shore feeder vehicles. It will retain the proven fund structure of UKPIF I, which offers investors to choose their preferred level of gearing of between 0% and 50% Loan to Value (LTV), providing a unique solution to wide ranging leverage appetites amongst an international investors.
Which trends will dominate the real estate market in the next few years?
Two trends that I believe will dominate the real estate market over the next few years include an expansion into alternative sectors that offer good value and support the growth of the economy, and the dominance of large, stable investment management platforms that can deploy deep property specialism in what has become a highly discerning market.