Becoming Real: Real Estate Assets and LGPS

How are real estate investments affected by inflation, revenue demand, strategic asset allocation and net zero goals? Room151 brought together a group of local government pension plan investors, advisers and asset managers to explore the issues.

As investors operate in an environment of soaring prices, huge economic uncertainties, geopolitical crises and worries about climate change, real assets are increasingly seen as a way to generate stable and adjusted returns to risk that act as a hedge against inflation.

The final roundtable debate in Room 151, which took place at The Gherkin in central London, looked at the role of property investments as part of a well-balanced Local Government Pension Scheme (LGPS) portfolio , from infrastructure to commercial real estate and everything in between.

The debate focused on four themes: inflation, income demand, strategic asset allocation and net zero goals. It began with introductory comments from roundtable sponsors Chad Brown of ICG and Simone Pozzato of Hines. Both ICG and Hines have extensive experience in real estate investing and offered their perspective on which of the four themes is driving demand today.

Download a PDF of the full Real Assets Roundtable discussion here

Real assets are increasingly seen as a way to generate stable, risk-adjusted returns that act as a hedge against inflation.

Chad Brown (ICG): We focus on critical real estate assets, meaning assets that are very important to the companies that operate there. Our due diligence focuses heavily on the role an asset plays within a particular business, but also its context within the broader real estate market.

We are actively fundraising across the world and, as you can imagine, investors are very concerned about inflation and rising interest rates and the impact this has on our strategy.

As a fund that typically buys long-term assets, say 15 or 20 years, investors want to know how that’s handled when rates rise and one of our strengths is identifying the quirks of asset management in rental structures that help us preserve and enhance.

We also like assets where the operational risk lies with the tenants rather than us, so we favor triple net leases, and we like leases where the tenant’s operational responsibilities are crystal clear.

Simone Pozzato (Hines): Since I took over the European Core Fund in 2017, we have evolved the fund from investing primarily in offices and retail to a fully diversified core portfolio focused on rental growth. We have identified 21 cities and decided to focus our energies on these geographies and on in-demand assets that attract the broadest group of tenants.

Real estate is all about supply and demand, and our strategy is to find assets that are limited in supply and in high demand. We’re pretty picky and currently love iconic buildings like the one we’re sitting in today (The Gherkin), creative office spaces, last mile logistics, rental and student housing, and retail luxury retail.

In terms of lease duration, we believe there is a sweet spot around five years. It offers good financing conditions with banks but also offers possibilities for rental growth.

Our investors want to see reliable and well-protected income streams and that is what we are focusing on. Sustainability is also at the forefront in the minds of investors and in ours as well. We are a global sustainability leader in GRESB [formerly known as the Global Real Estate Sustainability Benchmark] for five consecutive years and we are developing net zero asset plans for each of our assets. Until now, sustainability in real estate has mainly been about collecting data. We believe the next phase is to roll up your sleeves and work with the assets.

Attendees

  • Chad Brown, Mission Critical Real Estate Investment – Managing Director, ICG
  • Elizabeth Carey, Independent Advisor
  • Peter Findlay, Editor, Room151 (Chair)
  • Mike Hardwick, Chief Investment Officer, LGPS Central
  • Chris Hepburn, Director – Capital Markets, Hines
  • Adil Manzoor, Head of Private Markets, Merseyside Pension Fund
  • Damien Pantling, Pension Fund Manager, Berkshire Pension Fund
  • Simone Pozzato, Fund Manager, Hines
  • Malcom White, Head of UK and Irish Institutions, ICG

To access the full debate, download the PDF version here

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