This week’s interview with Andrea Orlandi, head of real estate investment for Europe at the Canada Pension Plan Investment Board, reinforces the view that, perhaps more than ever, size matters.
CPPIB’s strategy is to look at large lot sizes where competition is less, major regeneration projects, uber prime shopping centres and student housing. Of course, for a fund worth £178bn, you would expect that to be the case. However, it represents something of a shift: Orlandi is more cautious about making further office investments – in London or the regions – and is scaling up in other sectors too. “When I joined we had interests in over 20 UK shopping malls,” he says. “Today we have four.”
It’s a wider phenomenon. A strong track record, sound business plan and entrepreneurial spirit still count, of course, but, more so than in previous cycles, many investors are taking decisions based on scale already achieved rather than promised.
And to paraphrase one banker, macro risk dictates that it is easier for an institutional investor to put £250m into a large corporate with momentum than into an early-stage business with strong prospects.
As ever, a problem for some is an opportunity for others. Global behemoth Amazon is why the retail sector worries many analysts in the UK, and increasingly in Europe too. And it is scale – and catchment – that is driving concerns about secondary shopping centres these days. Conversely, this shifting balance of power is what underpins the strength of the industrial market.
In the office sector, needle-moving transactions like the Cheesegrater’s £1.15bn sale have captured the headlines, but Q1 numbers will confirm that the number of smaller-value deals has slowed considerably.
This gravitation to prime, to sectors with strong fundamentals and to scale is not universally true. Proptech, where (smaller) bets are being made on ambition rather than track record, is a notable exception. But there does seem to be a direction of travel.
For many that will create opportunities in smaller value lots in less fashionable sectors. It just may be harder to persuade backers to share your vision.
A little-noticed legal case from 2015 is ringing alarm bells in the central London resi market and forcing some residential developers and lenders to seek legal advice. Deposits taken over the 10% threshold for new-build property could be deemed an illegal penalty and returned to defaulting buyers after the Supreme Court ruling in Cavendish v Makdessi.
No doubt a test case will follow, but the implications are significant, particularly for developers that use cash from deposits to progress schemes.
It perhaps wouldn’t matter in a rising market, but for buyers who believe the market has dropped since they agreed their purchase, it could offer a loophole.
A couple of years ago at an event in Tokyo I found myself sitting next to the real estate specialist from a sizeable Japanese public sector pension fund. He was keen to engage in conversation about the London market, and understandably coy about disclosing his fund’s intent.
He wasn’t from Japan’s £1tn Government Pension Investment Fund, which this week began its search for global alternative asset managers as it prepares to diversify into a range of sectors, including real estate. But his thinking and that of the GPIF was clearly similar. If the timing is too, it opens up a world of opportunity to advisers and capital-seekers.
The UK may be front of mind for GPIF too. Its new head of real estate, Hideto Yamada, led Mitsui Foundation’s UK and European business for eight years and was involved high-profile schemes such as BBC Television Centre, W12, and One Angel Court, EC2.
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