Two recent high-profile investment deals have illustrated a growing interest in real assets. Both were cases of transactions between groups of large institutional investors, and point to a trend that is worth charities noting.
Australian infrastructure bank Macquarie in March sold its final 26 per cent stake in Thames Water for a figure estimated at around £1.35bn. OMERS, one of Canada’s largest pension funds, along with the infrastructure arm of the Kuwait Investment Office, formed a consortium to execute the deal.
Around six weeks later a consortium including insurer Allianz, and listed infrastructure funds HICL Infrastructure and DIF announced a move to acquire Affinity Water.
These deals sought to capture the long term, steady income that the assets can provide; a characteristic also appealing to many charities. Such large direct investments are likely to remain beyond the reach of all but very large investors, but infrastructure funds can provide a way in for charities.
“Infrastructure certainly has become the buzzword; all the pension funds are running after it,” says William Reid, head of charities at Quilter Cheviot. “What that signals to me is that it has arrived and it is now here for consideration. People broadly speaking understand it and how it works.”
Exposure to property, via investment trusts and/or pooled vehicles is perhaps a better-known model that offers similar but subtly different return characteristics to infrastructure assets.
The Charities Property Fund launched in 2000. A Common Investment Fund, the vehicle owns 110 properties around the UK.
Its growth demonstrates the increased awareness of the ways exposure to commercial property can help meet charities’ income requirements.
The fund has increased by around 600 per cent to £1.12bn over the past seven years, fund director Harry de Ferry Foster says.
“The primary driver would be the income return,” he says. “The Charities Property Fund is distributing about 5 per cent net of all fees. It’s quite hard to get that level of return anywhere else at the moment.”
Similarly, infrastructure can offer charities the opportunity to achieve their income targets in a period when years of low interest rates have left government bonds falling short in this area.
Funds with exposure to Private Finance Initiative infrastructure projects in particular offer long-term cash flows with the additional security of being effectively backed by the public sector and government.
“If you can’t get reasonable government debt, but you can get an annuity income stream from an infrastructure fund that’s yielding 4 per cent, the large part of which is backed by government contracts, why wouldn’t you go in that direction?” Reid says.
Diversification and risks
Whether through property, infrastructure, or other alternatives, the diversification benefits of broadening a portfolio’s base of investment income can be valuable also, Reid says, pointing out that just seven companies account for around half of the income of constituents in the FTSE 100.
Diversification within a fund is a key consideration, particularly in the commercial property space. Focusing on a carefully considered but diverse range of tenant profiles and locations helps mitigate risks to the portfolio.
“With property and alternatives it’s not that the capital value can’t go down. In property it certainly can and is very much tied to the cycle,” Reid says. “But depending on how well your properties are diversified you would expect a degree of the rent to hold up.”
The Charities Property Fund focuses closely on the quality of the properties it purchases, de Ferry Foster says, which means a vacancy can be good news as the fund is able to re-let the property at a higher rent than previously.
The acquisitions are focused on areas in which strong potential for rental growth has been identified. One such area is logistics, which the fund has targeted for some time.
“Internet retailing has been a real driver for the logistics sector. Other things play into that. Since 2008 banks haven’t wanted to lend to developers and commercial real estate operators. On top of that, the then government scrapped the business rates exemption on industrial property. So people don’t build things without tenants, so there’s actually a real shortage of that at the moment. About a quarter of our portfolio is in that now and rents are going up.”
Mayfair Capital’s Property Income Trust for Charities (PITCH) has also noted the appeal of logistics. Fund director James Thornton says the vehicle takes a thematic approach to identifying areas of the property market to target, and the demands of the emerging millennial generation is playing a role.
This younger generation have specific demands around their work/life balance, and particular services and amenities are valued more highly than they have been in the past.
“The younger generation want to cycle to work, have good shower provisions, they want excellent internet capacity and so forth,” Thornton says. “And we like the restaurant sector for instance, because this generation is eating out more than any other. They’re using their mobile phones, they’re using their vouchers and they’re being very canny. That sector of the market is relatively buoyant.”
Infrastructure development also plays a role. The Charities Property Fund is refurbishing a building in the City of London located near the soon-to-open Crossrail project, which will make the location one of the most appealing office spaces in London.
PITCH is tracking around 120 infrastructure projects around the country and monitoring their impact on the appeal of nearby property, and recently capitalised on Birmingham airport’s runway expansion and the HS2 development, which are expected to improve rents in the area.
“It’s not investing in infrastructure per se, in a pure sense; it is benefiting from money that is being spent on infrastructure and the impact that it has on property in the locality,” Thornton says.
As with all pooled investment vehicles, charities with very specific ethical considerations should pay attention to the composition of infrastructure and property fund portfolios.
Reid says that by definition the only way charities can be completely assured of the ethical suitability or social impact of their infrastructure or property investments would be to own them directly. But again, that option is probably only available to the very largest charities due to the resource required to manage the assets, and the associated risks.
Some infrastructure funds offer the opportunity to benefit from the development of clean energy projects, which can go beyond meeting exclusion criteria and actually contribute to meeting environmental charities’ objectives through carbon reduction.
In the property space the activities of tenants are a key consideration, and the environmental performance of the buildings owned plays a role.
Both PITCH and the Charities Property Fund prohibit investing in properties where the primary activities of tenants are in sectors that do not meet common ethical criteria such as production or sale of tobacco, pornography, or weapons.
“We’re completely transparent on all our investments and tenants,” de Ferry Foster says. “We list them all on our annual and interim report and accounts, and we’ve got a website that lists every tenant and gives all those reports as well.”
Investments’ sustainability is more than an ethical investment concern, de Ferry Foster says, as tenants themselves have expectations around the environmental performance of the buildings they occupy.
“It matters to everyone,” he says. “We’re seeing with the graduates coming out of university now that it’s at the top of their list. It’s becoming more and more important by the day.”
Matt Ritchie is the editor of Charity Times
Article produced in association with Quilter Cheviot