Last week KFIM sponsored and spoke at a LGPS conference which focussed on the Government agenda for the reform of the LGPS, namely a wholesale switch to passive from active investment management and a greater number of common investment vehicles.
Some of the key note speakers were particularly interesting; Susan Martin, the CEO of the LPFA, for example, discussed the LPFA decision to establish joint venture partnerships with other like-minded schemes with a view to pooling resources and creating efficiencies of operation, including third party fees.
The question which struck me was “where does property fit into the Government agenda”; is it an asset class that suits the “big is beautiful” mantra? Is it an asset class that lends itself to passive rather than active management? Will larger portfolios lead to lower fees? How can real estate help improve the local community?
Whilst big in real estate terms may not always be beautiful (I am sure we can all think of numerous examples of hideously ugly buildings), one thing that size does bring is flexibility.
Even a relatively small allocation of say £100m provides the opportunity to create a balanced and diversified portfolio; however, what an investment of this size does not allow is the direct acquisition of larger assets such as shopping centres and central London offices (often leading to satellite portfolios of indirect investments which lack both liquidity and control relative to a directly held portfolio).
However, experience also suggests that for a relatively illiquid asset class like real estate, ensuring alignment with other investors can be notoriously difficult; the challenge is not about ensuring alignment at day one but being confident that you will still be aligned in three or five years’ time.
In terms of fees, there is no doubt that a larger portfolio will result in lower percentage point fees. However, fees are coming under more and more pressure and, at the risk of being too controversial, investors need to be aware that for a real asset such as property, the additional resource from an extra 10 bps fee should allow a good manager to create added value equating to far more than this; here at KFIM we believe that our ability to actively manage a portfolio should add, on average, between 50 and 100 bps to performance year on year - a 10 bps outlay for a minimum 50 bps return, strikes me as being a pretty good investment.
The answer to whether or not real estate is suited to be a “passive” asset is, in our opinion, a firm “no”. In contrast to the performance of equities and bonds, which is primarily dependant on the timing of buy and sell decisions, the performance of real estate is also impacted by the ability of the skilled manager to add value during the hold period; this can be through tenant engineering, extensions, change of planning use and so on.
Also, real estate can be significantly affected by external factors such as Health & safety legislation, planning, third party infrastructure proposals, energy legislation and so on and it is essential that the manager has the resources to respond to changes if they are to create or protect value within a portfolio.
Finally, in terms of local community / infrastructure, my own view is that property must be the most well placed to make the biggest difference. Be it in terms of redevelopment, constructing buildings to facilitate new company start-ups, regeneration or bringing obsolete buildings back into use, real estate investment can undoubtedly have a significant impact. However, beware the potential conflict between the pension trustees ultimate responsibility of generating returns for its pensioners versus the desire to improve the local environment; these two factors are not necessarily aligned!!
My conclusion from the conference? Real estate, yet again, seems to have it all – but there again I would say that wouldn’t I!!
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Knight Frank Investment Management LLP (KFIM) is a limited liability partnership registered in England with registered number OC311715. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names. Knight Frank Investment Management LLP is authorised and regulated by the Financial Conduct Authority. No part of this publication may be reproduced in any form without the written permission of KFIM. Data has been compiled from sources believed to be reliable however its accuracy and completeness is not guaranteed.