Agenda item

The Committee considered a report of the Director of Corporate Resources, the purpose of which was to provide information on the Leicestershire Pension Fund (Fund) direct property investments and the performance of the UK direct property fund and market outlook. A copy of the report market ‘Agenda Item 10’ is filed with these minutes.

 

The Chair welcomed Mr. Chris Cooper, Ms. Sarah Bell, Mr. Sam Brice, (Ms. Andrea White (Online) and Ms. Jennifer Linacre (Online) from DTZ International (DTZ) to the meeting for the agenda item. They provided a presentation as part of this item. A copy of the presentation slides is filed with these minutes.

 

The Chair also welcomed Mr. Mike Hardwick from LGPS Central for the agenda item.

 

Arising from discussion, the following points were made:

 

i.          DTZ informed Members that there were four main risks in investing, namely, location, credit, obsolescence, and leasing. As investors, DTZ managed risks to minimise the impact of risk and to maximise returns. DTZ invested 85% of capital in the top six economic regions across the UK. In terms of economic output, the risk DTZ was most prepared to accept was leasing risk, where short term leases were taken into portfolios and relet on better terms.

 

ii.          In response to a Member’s question, DTZ viewed the East Midlands as one of the critical regions for investments. Historically focus would have been on retail warehousing, but more recently, light industrial and logistics had been the main focus for the benefit of the East Midlands region. When looking at investments, DTZ usually had a minimum 10-year hold period in mind, however, the length of time of the investment was dependant on the performance and profile of risk and returns that could change over time and therefore alter the view of the asset itself.

 

iii.          It was noted that real estate looked at the mix of value in the land, the amount of value in the building, and value in the tenant lease. Purpose built buildings tended to have been tailored to one particular user, which brought its own risk whereby too much focus was on the quality of the tenant’s credit rather than on a tenant’s core business and should, therefore, be avoided.

 

iv.          It was noted that in previous years, land and its value had been the most important factor in an investment, but focus had moved towards the value in a building and the credit it would yield, for example, with logistics as an asset class, there were now some highly mechanised buildings, and the nature of the asset class as an investment had changed from being a value investment to a growth investment and the risk parameter had shifted.

 

v.          DTZ informed Members that when looking at economic outlook, whilst the year had ended positively for the commercial property market, it had not been matched by developments in the UK economy. Since the start of the year there had been weaker GDP growth, weaker business sentiment, increased geopolitical pressures under the Trump administration, increases in bond yields following a global bond market selloff, and market unease around the policies announced in the autumn budget.

 

vi.          In terms of property prospects, DTZ advised that investments should be targeted towards alternative sectors such as the living sectors, primary health care and essential retail segments, namely, supermarkets and retail warehouses, plus industrial sectors. It was advised to avoid non-prime retail and non-prime offices, both of which were likely to be impacted by lower levels of demand, both in terms of investors and also occupiers over the forecast period. It was also advised to currently avoid care homes just because of the some of the increases in national insurance contributions and also the minimum wage which was likely to hit many operators in the short term. A Member had queried why the care sector had been picked out specifically and was informed that the risk could also be applied to the leisure industry which fitted the same dynamic.

 

vii.          DTZ’s ESG policy was focused on, at the point of acquisition, ensuring the right assets were purchased that could be transitioned in the future and that costs were built in. Tenant engagement was key to understanding tenants’ usage of energy, water and waste production, and to help tenants reach their own ESG targets by making improvements to buildings.

 

viii.          A Member noted that many industrial and retail warehousing buildings had space for photovoltaic (PV) panels and queried if it was an area DTZ would encourage and invest in. DTZ stated it did form a clear part of its ESG strategy and asset improvement plans, and acknowledged that those types of buildings lent themselves to PV installations, and that it was going through a process of looking at a number of assets within the portfolio, and specifically on the assets in Maidstone, to look at the feasibility of installing PV panels on roofs, either through landlord installation, and through tenants within the estate who had approached DTZ to install their own PV panels.

 

ix.          A Member questioned if, with regards to the returns of offices in the City West End and Southeast, there were plans to change the relative weightings in those areas to something more long term. DTZ responded that the weightings reflected the relatively early stage of investment of the portfolio, and the longer term aspirations of the fund were to build a balanced portfolio that would be invested across the various sectors.

 

x.          At the point of acquisition, a cash flow assessment of the asset was undertaken, which looked at current and future potential growth in income and current estimated rental values. DTZ had, on a number of occasions, outperformed performance targets and rents had been ahead of where assumed at acquisition on a number of assets.

 

xi.          The existing portfolio showed correlation in some sectors that were both overweight and forecast to deliver positive returns, namely retail warehouses, and industrials in both the Southeast and rest of the UK. A sector that was overweight but forecast not to perform and expected to deliver negative returns was Southeast offices.

 

xii.          In the round the portfolio was reasonably well placed at macro level with several sectors both overweight and forecast to perform well. The next stage would be to drill down into looking at individual properties and evaluate individual risk profiles within the portfolio, assessing each property against the four risk items.

 

xiii.          A member questioned when porting large warehouses, if a high performing company driving profits deteriorated over time and moved into administration with returns minimal, if anything at all, how it impacted reporting. DTZ explained that credit risk was difficult to control directly in terms of the tenant’s own business, but there were a few tactics that you could be applied, for example to secure a guarantor for that group, secure a rental deposit which could be called upon if the tenant had not paid rent, or consider insurance products in the event of tenant default.

 

RESOLVED:

 

That the report DTZ Investors UK Property Update report and presentation be noted.

 

 

Mrs Fryer left the meeting at this point and did not return.