The nervousness, panic and fear that temporarily gripped the market after the EU referendum – the perception of not knowing where the market was going or what was happening in the wider financial world – precipitated considerable interest in the long-term defensive income-driven deals that tend to be produced in the specialist property arena.
We have had a particularly busy summer ensuring that this type of requirement was met and it was interesting to see that when the knee-jerk reaction for quick sales was triggered, it was the specialist property assets held by the retail funds that were targeted as the most saleable and liquid. However, despite the high demand for these assets, the funds were reluctant to sell them because they knew how valuable they would be to their portfolios.
It is easy to say that yield and covenant deals will always trade but, while there is truth behind this, I would suggest that there is more to this attraction than just those characteristics. There is a unifying factor in many of the specialist property markets that resonates with investors.
This first and foremost is their structural undersupply and thus a healthy occupier market.
As a society we are living longer. The recent above-inflation local care home fee increases, which have offset the national living wage issue, alongside Theresa May’s post-referendum hint that the government recognises the need to retain EU employees in healthcare has led to a booming care home market that is seeing significantly more investor demand than can be satisfied by the available stock.
Around £1bn of healthcare assets are under offer and Knight Frank alone has £300m under offer to overseas buyers.
It is the same structural undersupply that has been the major factor in the investment attraction of the student housing and automotive (car dealerships, petrol stations and motorway service areas) sectors over the past decade.
There are fewer than 80 motorway service areas on the UK network and new ones are rarely developed due to planning and highway regulations, hence profit streams are secure and investor appetite high.
So why are these areas so keenly sought after by so many investors? When you are buying specialist property stock, you are not just buying a property from which a business happens to operate out of. Lawyers, financial firms, estate agents et al can operate from a variety of locations and buildings, but for care homes, student accommodation and motorway service stations, the essence of their business is implicit within the bricks and mortar. You cannot turn a student accommodation block or care home into an online business.
Knowing that you hold the key to your tenant’s business, you then have the ability to analyse the attractiveness or otherwise of a property by establishing how a tenant can trade from it and what type of money it can make from doing so. Therefore, the underlying operational business and EBITDA that is generated from a property are the key metrics on which to base your appraisal of the investment proposition.
What’s more, tenants in this space like to take longer-term leases to secure their occupation as well as amortise down the capital expenditure that is needed to meet brand standards and regulations. This makes a compelling basis for investment.
If you can establish that the property will provide a tenant with a long-term, stable business platform, then the sustainability and durability of your income return should be fundamentally underwritten.
There is a significant weighting in the market to overseas investors. The types of investment that overseas equity is making tend to be at the operational end of the scale and these investors are buying direct-let student housing, management contract care homes and motorway service area businesses rather than the more vanilla fixed-income investments, which tend to be the preserve of UK fund managers and high-net-worth individuals.
In the past decade specialist property has trebled its IPD weighting from circa 3% to 10%. Last year alone we saw almost 20% of all volumes in this segment and this year we will see similar, if not slightly higher, percentages. And the more the weightings go up, the more the product is in demand and fund managers then see it as providing the bedrock to their portfolios.
It feels like business as usual, but perhaps this summer’s activity has reinforced the message for specialist property among investors. The structural undersupply and robust occupational markets continue to highlight the rationale behind investing in the property assets that are integral to these markets.
We have a broad spread of investors. What attracts a private equity house to buy into student accommodation or healthcare businesses but also attracts a pension fund to buy the resultant fixed-lease investment is fundamentally one and the same, a long-term durable, stable business that relies on its property assets. Occupier trends will come and go, but if your offering is fundamental to the fabric of society, it is a good long-term bet.
Shaun Roy is head of specialist property investment, Knight Frank
