Earlier this month, Yardi and Property Week brought together a panel of expert asset managers to discuss what the portfolio of tomorrow will look like and what that means for asset managers and investors, what is driving the shift to more diverse portfolios, and how technology and alternative skillsets are helping the sector.
Panel of experts
- Rachel McIsaac, managing director, AEW UK
- Stuart Wetherly, group finance director, Capital & Regional
- Greg Coffey, chief operating officer, Occu
- Fay Chester, regional director, Yardi
- Chair: Andrew Saunders, contributing editor, Property Week
What will the portfolio of tomorrow look like, and what will this mean for asset managers and investors?
Rachel McIsaac, managing director, AEW UK: Institutional portfolios used to be 40% or 50% retail, and no residential. When I started at AEW 15 years ago, our trustees did not want resi, but that whole pendulum has swung and now we have things like build-to-rent (BTR) and hundreds of units of student housing in our portfolios.
Meanwhile, we have had to completely rethink what retail is. We have launched a fund that repurposes end-of-life shopping centres, for example. We have also just converted a former office building by Uxbridge Station into 130 flats. It had permitted development rights (PDR) and so only took six months. It is all a massive change as asset managers – challenging but also very exciting.
What is driving that shift to more diverse portfolios?
Stuart Wetherly, group finance director, Capital & Regional: Ten years ago, our shopping centres would all have been pure retail. But across the UK, there is an oversupply of retail and for the past five or six years uses have been evolving. One of the earliest examples for us was when BHS went into administration [in 2016]. We converted the BHS store in Walthamstow into a Lidl food store; we put a restaurant and a gym over it and the first Pret a Manger in the area.
It is about keeping up with changing consumer demand, so we are always looking for new uses to bring into our centres. We are building a medical centre in our shopping centre in Ilford. Medical centres do not have to be in the best locations in the centre but they do drive footfall. We are also talking to pharmacists and dentists to complement the offer.
We have also partnered with Long Harbour to build 500 flats above the Walthamstow centre. We are not developers so we are not going to do it ourselves, but we got a £20m capital receipt essentially for purchasing the air rights, and it will be a big benefit to our centre having all those people living right on top of it.
Our client requests are now very much around building usage and lease conditions
Fay Chester
I would advise caution to anyone who thinks retail-to-resi is a silver bullet for old shopping centres though. It is hard work and the cost of conversion can be tricky.
Our experience is that it works well in the London commuter belt – the cost of construction is broadly similar across the country, so it is the land value that makes the difference and getting that to work in some of the regions is much trickier.
Greg Coffey, chief operating officer, Occu: As asset managers, we try to future-proof our schemes and that means feeding in more diversity – in the future, we will engage with architects to think about how the basements and rooftops of buildings can best be used, possibly allowing for last-mile logistics for example. On the more peripheral schemes, councils want more density and that means providing the community element – shops, restaurants etc – but not offices. The focus is very much on resi and complementary amenities in these locations. As Dublin is quite a dispersed city, the city centre is not hugely populated. Rent on a two-bed flat 10 minutes out of town can be around half the rent on a similar flat in the centre.
Can technology provide investors and asset managers with greater transparency around performance?
McIsaac: We have been quite late adopters of some technologies that might have helped our businesses, but that is picking up now, especially around the whole ESG area and the data on how buildings are used. That’s interesting to us and our investors. A significant proportion of the money that comes into the UK through AEW is from UK pension funds and they have active shareholder bases of people who ask questions about how their pension money is being spent.
Technology means that if they buy shares in a REIT or units in one of our funds, we can give them very detailed data around water and energy usage, and we are part of GRESB [the independent global ESG benchmark for real assets]. That requires a very high and ongoing technological input but feeds into a much more efficient platform for investors.
Wetherly: Technology is hugely important, especially around ESG, but also from an operational standpoint. We have always viewed running shopping centres as an operational business and that has become even more the case with greater churn. When tenants are coming in for only a few days or weeks, technology must be on hand to turn those agreements around quickly and efficiently.
I would advise caution to anyone who thinks retail-to-resi is a silver bullet for old shopping centres
Stuart Wetherly
The volatility we have seen over the past three to four years has also highlighted the value of being able to drill down – live – into key metrics. Four years ago, I doubt you would have been able to pick up a rent collection statistic from many listed property businesses. But then Covid-19 hit and the assumption that 80% of rent due would arrive on the first day no longer applied. It went down to 30% and rent collection became a key focus.
Being able to prepare reports at the flick of a switch, which would have taken half a day a few years ago, also helps because it enables us to shift from a preparing mindset to an analysing one. We have pivoted from having people preparing the data to them analysing the data, which is key, especially when you are assessing new opportunities.
Fay Chester, regional director, Yardi: Our client requests are now very much around building usage and lease conditions. In the workspace market, for example, short leases can be more tempting to tenants that operate a hybrid or flexible model, and our clients need a system that can accommodate that. Changing use is led partly by investors but also by tenants, who are saying: ‘This isn’t right for me anymore; I need to change it.’
In consumer-facing sectors, like the private rented sector, can technology help attract new tenants by appealing to the app generation?
Coffey: The average age of our tenants is around 35, so that is certainly true for our portfolio. From an experience perspective – whether it is the end user, our team or the reporting – it should always be a great experience. The real driver when it comes to investing in technology is that it should help us to communicate with our clients and residents, and deal with any issues in the most efficient manner. If we can see that as an outcome of investing in technology, then it is justified.
Property can be a great career for scientists, good problem-solvers and people who think in different ways
Rachel McIsaac
Ultimately, we want to tie all the separate technological elements – ESG, access control and day-to-day operation of the asset – into one central piece and platform.
Chester: We have adapted to client demand for portals, apps and dashboards that display all the key performance indicators in one place to provide visibility to executives. There is a need for seamless connections to things like credit-checking services on the resi side and valuations in commercial. We are always thinking about the future and how to support our clients’ needs. But there is still hesitation to adopt new technology in the industry. There is a desire to do so but, according to the Yardi x EPRA 2022 Proptech Survey, people remain hesitant because of the challenges they see around technology and transformation. It can look like a big risk.
What kind of skills will asset managers require to manage the portfolio of tomorrow?
McIsaac: It is about having a team with diverse skills. You need surveying skills in property and people who are good with numbers – you cannot go skating over the commercial realities of a potential project. But it can also be a great career for scientists, or English or history graduates who can write and communicate well, plus good problem-solvers and people who think in different ways. In the past, we have had too many people who all think in the same way.
Chester: It is about having a blend of younger people, who are tech-savvy, interested and curious about the industry but maybe do not have much property experience, and those who have been in the industry a while and have sector expertise.
Wetherly: There is still a role for the traditional surveyor, but the industry is much more dynamic now. Doing a deal with the NHS or the Department for Work and Pensions is very different from a deal with a high street retailer. You must be flexible. We are also recruiting analysts with data science backgrounds who might come from outside the industry.
Coffey: Covid-19 was good for us in a way in this area, the hospitality sector shut down and we managed to recruit some really top-class people from this industry. Having access to their people skills has been fantastic for our business.