According to Stuart Jenkin, Director of Fund Management at Frogmore, the UK-focused property fund manager, the state of the global economy coupled with reduced liquidity available from banks, tax rises (such as the VAT) and the reduction of public expenditure has created a more challenging environment for the UK real estate market. This environment works well for a locally based manager such as Frogmore as the supply of interesting opportunities is increasing and with their experience they are able to identify suitable transactions.
Frogmore notices however that some sub markets are showing positive growth, such as prime London residential properties, which is attracting wealthy international investors. This strength of demand is causing the rise in London residential property values in the right location. Jenkin notes there is a major contrast to overall UK house prices, which are down 3.9 percent over the past year, according to recently published figures.
In the commercial market, London real estate is also exhibiting similar positive demand from overseas purchasers so far this year. According to Frogmore, the Central London, West End and City office markets are being “propelled by international equity” seeking stable long-leased real estate. The shortage of supply of core investment product in these markets is causing some international and domestic investors to seek prime assets elsewhere in the capital, such as Victoria, Kings Cross and extending out towards the M25.
While analysing current investor confidence Frogmore is aware that many investors have been influenced by unsettling and spreading global economic issues. However, this is not necessarily a downside for the UK market, notes Stuart Jenkin: “The European debt crisis and the US budget deficit are affecting all of us.
Economies are suffering and getting them re-adjusted so that good sustainable growth can re-emerge can take a while. This backdrop of uncertainty is a material factor in how the investment communities are reacting,” he says, adding: “People’s reactions to these uncertainties are expected. Wealthy individuals seek out the safe havens like London because they are cautious and worried about their money. A good example of this is the influx from European investors, which began as soon as various member states started getting into trouble.
Large, good quality buildings in London currently have an international appeal as international investors consider the UK to be politically stable, the transfer of money in and out is tax efficient and we have a sound legal system with a competitive priced currency. It is this confidence and security that really appeals.”
The turnover in the UK property market according to The Property Investors Bulletin over the past 12 months has been just over £35bn but of that some £11.75bn has come from overseas investments. Frogmore has noticed that sovereign funds, international pension funds, private equity funds and numerous wealthy individuals from China and the Middle East, in addition to Europeans and North Americans, are buying residential properties and offices in London.
“Central London offices are by far the biggest category for investors and there are a lot of large, noteworthy transactions happening. Just take a look at the Crown Estate’s joint ventures with the Norwegian State fund in Regent Street and with a Canadian pension fund in the £100m St James gateway development,” Jenkin explained.
The UK market is currently characterised between London and the rest of the UK. In London there is strong investor demand for prime residential and commercial buildings. This is due to the UK and London being seen as a “safe haven” for capital as the occupation markets have started to recover, which has created tenant demand and an increase in rents. Outside of London in both residential and commercial, the market remains patchy with a lack of genuine tenant demand, which is having the reverse effect of undermining rental values.
This in turn has affected investors’ confidence to generally invest in this area. However, the UK market is not heterogeneous and as Frogmore has shown, identification of small sub markets with the right character is proving beneficial.
Moving with the market
Frogmore was founded in 1961 as Fairview Estates with a focus on residential and commercial real estate development. The company, which celebrated its 50th anniversary in April, has adjusted its ownership structure and investment strategy in response to shifting real estate and capital market conditions. It changed its name to Frogmore Estates in 1985 and began to concentrate mainly on commercial real estate investments.
Chairman and Chief Executive Paul White, who joined the company in 1995, together with four other directors, lead a £643m MBO to take the business private in 2001 and then formed Frogmore Property Company Limited. It closed its first private equity real estate fund in May 2006 with £330m committed equity and launched its second fund in July 2008, which successfully closed in December 2009 with committed equity of just over £195m. Frogmore Real Estate Partners Investment Managers forms part of the Frogmore Property Company group and is the investment adviser for the Frogmore Real Estate Partners Funds. The funds were set up to produce superior risk adjusted returns by investing across the UK in all property sectors in income producing assets and redevelopment opportunities with active asset management potential.
Frogmore’s investment professionals have acquired proficiency across the major asset sectors and geographical submarkets in the UK over the years. It is a fully integrated investment fund, offering in-house sourcing, investment, asset management, development, planning, administration, marketing and realisation capacity. As value-add managers with broad local expertise, Frogmore provides continuous access to a senior team of professionals which seeks out good investments for investors. Additionally, the management team encompasses 22 professionals who provide the fund with wide-ranging and varied knowledge in real estate investment, development, and finance.
Stuart Jenkin says: “The six directors are all UK specialists, with an average of 30 years experience in the property industry. All of us have done this job for a long time and built up experience about sub-markets and availability of products. Our style is to create value by our own activities and hard work to turn real estate around.”
Frogmore has a regimented and well-organised approach to managing its business, which is supported by its fundamental philosophy of teamwork and thorough risk evaluation and management. The team utilises a refined process of due diligence in the acquisition and development of real estate which entails a comprehensive assessment of market conditions, supply and demand factors, and a methodical value analysis.
Results and outcomes of this procedure are presented as part of the Company’s evaluation method to Frogmore’s investment committee for recommendation to the acquiring entities.
Commenting on risk assessment, Jenkin notes: “In a challenging market you need the experience to identify an opportunity. This is in addition to identifying risks associated with those opportunities and the ability to calculate subsequent rewards. It is all about getting the balance right between risk and reward for our investors and to meet the objectives set down by them for returns. We constantly strive to match those expectations and surpass them but it takes a lot of work and requires us to be selective in the opportunities we are offered.”
The company offers a consistent, sizeable flow of investment opportunities both on and off-market because of its all-inclusive network of connections with sellers, experienced real estate agents and joint venture partners. Frogmore has demonstrated extensive business dealings throughout the UK for numerous decades. This helped to extend its practised knowledge in various sectors and jurisdictions, permitting it to recognise off-market prospects, resourcefully appraise properties and measure potential returns.
Jenkin says: “Frogmore has been offered some £126 billion worth of deals in the last five years. In 2010 some £19bn worth of opportunities were introduced but we only completed on two transactions as these met our criteria and return expectations.”
Frogmore is certain that this is the era of the “one-offs” and it focuses on individual stocks that provide opportunities to investors. Capital continues to go to markets where people are confident they can invest and achieve a good return, and investors will lack assurance in the proposal if capital and debt are not readily available.
Most recently the company made an investment decision regarding a data centre transaction in Enfield. Jenkin says: “When the economic story is as complicated as it is at the moment we are not afraid to look at individual property transaction such as Enfield. It was a completely new sector, and through careful underwriting we identified that there was a shortage of new data centres and with rising demand for new high quality high specification data centres created the right environment for investment.”
In another one off, the company recently teamed up with The Mansion Group, a student housing specialist, to purchase a new high-end student accommodation scheme in East London. It paid over £26.5m for the freehold of the 203 studio scheme known as The Hive. The investment represents another new property asset class for Frogmore, whose second fund has already invested in alternative investments such as the data centre. Jenkin says: “The dynamics of the London student accommodation market, the high specification of this asset and the skills of specialists The Mansion Group made this an attractive investment which should provide the opportunity for growth in the future. There is good demand from overseas students who want to study particularly at London Universities and Colleges, so we decided to buy into that sector because of its strength of demand, shortage of “tailor made” student accommodation and its emergence as an investment sector.”
Watching the market, Jenkin observes: “There is currently a lack of senior debt due to the recent financial crisis, more stringent European regulations on capital adequacy for banks and because considerable amounts of real estate loans are still currently held by the banks. We think the banks will increase the pace of restructuring their distressed debt to rebuild their balance sheets, and this will prove an opportunity for investors. This will likely be done by selling them directly or through joint ventures. Because of this, we believe more transactions will be seen over the next 12 to 24 months. It is a large potential area of the market and we are monitoring the situation closely. It seems likely that banks will get nervous about dumping numerous properties onto the market as it could devalue prices. On the positive side we do expect to see new entrants into the UK real estate debt market such as some of the large insurance companies which will help the liquidity situation.”