This publication interviews a global player in the world of commercial property investment.

Real estate is of course one of the most basic but in some ways complex areas of investment. Many wealth management institutions such as family offices hold it as a core asset; the characteristics of rental income, yield and sometimes tax incentives (as witnessed in the recent enthusiasm about tax-advantaged Qualified Opportunity Zones in the US) all play a part. Many high net worth and ultra-HNW individuals have made their fortunes in property, so they like to stay close to what they know when it comes to investing.

The sector is also a global one, and sources of return can be diversified significantly (bearing in mind the vagaries of foreign exchange rates). In this interview, we spoke to Chris Nash, partner at Azimuth Global Partners, a real estate private equity house that spans what it says is the gap between “top-tier” institutional and corporate investors in Asia and the Middle East. It concentrates on commercial real estate.

The firm said it finds opportunities that are often “off-market” for its clients and uses technology and its research to find promising investments. Clients include family offices, ultra-high net worth individuals in Asia and the Middle East, sovereign wealth funds, pension funds, insurers, developers and Islamic institutions. The team has worked on a total of $25 billion in office, retail, residential, hotel, and industrial projects worldwide. The firm operates in Europe, Australia, Asia, the Middle East and North America with offices in London, New York, Sydney, Kuala Lumpur and Seoul.

What kind of property assets does it invest in and not invest in?
Azimuth sources and invests in opportunities across all the major property sectors - office, retail and industrial/logistics, in developed markets such as the UK, Europe, the US and Australia.

However, we’ve also been successful working with our clients to identify attractive opportunities in alternative property types, including healthcare, senior living and student accommodation. We work alongside our clients to help them diversify their institutional portfolios with real estate outside their home markets and produce long-term stable income.

Our investors often value investments that do social good and have good ESG characteristics – alternative real estate sectors such as healthcare and senior living allow our clients to do good, while doing well from a returns point of view.

In your experience what are wealth management clients seeking from real estate investing, whether it is commercial or residential? What are they asking for more of these days? What areas are they less interested in than before?
Whilst there is not a “one size fits all” when it comes to our clients’ aspirations, the globally depressed interest rates have maintained/increased appetite for income, and in particular the yield provision and security that traditional property sectors can provide. This is especially the case for assets with longer term leases let to high credit-worthy tenants.

We work alongside our clients to help them diversify their institutional portfolios with real estate outside their home markets and produce long-term stable income. In terms of geography, we invest in all the developed markets, but have found that the UK has become an increasingly attractive destination as real estate pricing is attractive compared with continental Europe – yields in the UK have remained pretty stable while European cities have seen yields continue to compress – the only way to get income return in Europe is with financing.

For investors in some jurisdictions, the decline of the pound, mainly due to Brexit, has also made the UK more attractive. Having said this, whilst the majority of our client focus in core/core-plus real estate and long-term income, we do work across the whole risk spectrum when appropriate for individual clients.

What do you see as the main trends of interest in real estate investing at the moment?
Globally depressed interest rates have maintained/increased the appetite of investors for the yield provision and security that traditional property sectors can provide. This is especially the case for assets with longer term leases let to high credit-worthy tenants.

However, evolution in modern working practices and tenants requirements has meant that investors’ portfolio weightings should now target increased allocation into newer, emerging business models and thematic investments.

Capital should be increasingly deployed to investments that are more aligned to the changing nature of work and tenant preferences – for example Wework style office spaces, or retail assets that are occupied by tenants on a turnover-only rental basis. Alongside this, there is also increasing interest for investing in non-traditional areas such as data centres, education (including student accommodation) and healthcare (including senior housing).

How is technology affecting the real estate investing that you do (the disintermediation impact of internet platforms, “tokenisation” of investment via blockchain, etc)?
The investment thesis is definitely leaning towards technology enabled assets that are flexible and able to emphasise tenant and employee experience. Legacy office and retail buildings could find themselves considered sub-optimal in the near future.

The impact of e-commerce has already been particularly and demonstrably felt by the traditional bricks and mortar sector of retail, and in particular high street shops and shopping centres have been very negatively affected. The retail industry has been experiencing disruption due to technological innovations that have pushed a growing number of consumers to mobile purchases and e-commerce transactions.

However, disruption in the retail market is also having a large impact in manufacturing. Warehousing and distribution markets have experienced an increasing demand due to the yearly growth in online purchases.

This has created one of the property sector’s beneficiaries from e-commerce, as this has caused huge demand for logistics units, both regional and increasingly, last mile, in order to meet the demand for all of these packages.  

We think that while there will be winners and losers, bricks and mortar retail will not only survive but thrive and currently, prices may have dislocated from long-term values. For example, we can see some value in retail for locations anchored by tenants that are resistant to e-commerce, experiential and dominant shopping centres, supermarkets and for sites where you can underwrite densification or alternative use.

Additionally, away from the actual physical assets, technology has had a marked effect on real estate. For example, across the commercial property board, access to information that was once limited to commercial real estate brokers and advisors who paid fees for such data, is now available to the general public for free. This has removed barriers between commercial real estate owners, prospective tenants and investors. Overall, we believe that this disruption will be a positive thing for the real estate sector and will bring about progressive and much needed change. Commercial real estate agents, advisors and investors who are open to new methods and who evolve alongside the latest disruptive technologies should thrive and benefit.  Innovation that is embraced will often produce good results. However, where this innovation is ignored, assets and investors are likely to be left behind.

Are you seeing significant cases of people investing directly in real estate and bypassing funds and other actors? Does this pose a threat to the sector or different types of opportunity?
Our investors generally invest directly into property. However, an individual investor’s decision to invest in commercial property can often be a choice between direct and indirect routes. This choice can be further split into either the listed and unlisted indirect property routes.

Each has distinct strengths and weaknesses. The optimal will depend on the individual investor’s preferences. No one route is perfect, as relative strengths and weaknesses of each exist. An optimal solution may in fact involve a blend of all three.

For example, while investing in the large listed UK property companies and REITS offers near perfect liquidity, it comes at the price of considerable exposure to short term volatility (often related to the volatility of the FTSE rather than actual property valuations) and a lack of control to fine tune strategic asset allocations and exposure to gearing throughout the property cycle. Likewise investing in an unlisted fund may provide no liquidity (perhaps a long lock in), plus expose an investor to much greater fund fees. At the same time, investing only directly may mean that you have a much larger exposure risk to a single asset/tenant than if you invested in a REIT.

We would need to fully understand an investor’s investment aspirations, expertise and risk appetite before we could advise on this.

All areas of investment these days carry compliance issues (KYC, anti-money laundering, etc) – what sort of approaches do you take to guard against problems?
Prior to engagement with any prospective client, we will require a detailed verification of the prospective client’s identity and the source of their funds as part of the client on larding process. We request and process all such information as is necessary to comply with our anti-money laundering policy and any other obligations required by UK law. We should stress that people do not have to answer all these questions if they don’t wish to do so.