Fiera finds its niche in Europe’s mid-market real estate

Charles Allen, Head of European Real Estate recently spoke to Jason Mitchell at Real Assets about how Fiera Real Estate is scaling up its urban logistics, residential and debt businesses across the UK and Europe. 

Charles Allen, head of European real estate at Fiera Real Estate, is betting big on urban logistics and institutional rental housing. In this interview, he outlines how the firm has built more than one million sq m of UK logistics space and backed nine regional property companies to access local deals – a model he says gives Fiera a unique advantage as e-commerce and supply chain reshoring transform demand.

With more than $3 billion in European real estate AUM and a new office in Madrid, Fiera is positioning itself to scale its residential and debt strategies across the continent.

What are Fiera Real Estate’s core focus areas?

For our European real estate business, the main focus is beds, sheds and debt. Beds being residential, sheds being logistics, and debt being private real estate debt. Within those strands, we have a number of different funds and vehicles. We do everything, from buying land, securing planning, and exiting that land, through to forward-funding, development and asset management across different strategies and risk profiles.

What distinguishes your logistics  strategy – and how are you deploying capital in the UK market?

We have a UK logistics fund, which closed with £420 million investment capacity earlier this year. That fund is now almost fully deployed. It is a development fund, so we are buying brownfield land, in or on the edge of major urban conurbations. A lot of time it has an existing industrial or commercial use that is no longer viable, or the buildings on the land are too old. We’re going in and replacing them with Grade A logistics buildings, typically anything in the range of 9,300 to 23,200 sq m, also known as small-to-mid-box. We are then looking to lease them and exit. So, it’s more of an alpha-generating vehicle that’s targeting 15%+ net IRR.

Can you tell me about your property company network model?

It is a highly entrepreneurial model that provides us and our investors with full nationwide coverage and deeper access to local markets, where we can unlock off-market opportunities across a range of sectors.

It’s typically two people, for example, who have worked at a leading developer. They’re the guys doing all the deals and they want to run their own business and be entrepreneurial, so they come to us. We set up a new business and take a shareholding in that business.

We provide them with working capital and offer the support of our finance team, our legal team, and our marketing team – all the grey hairs from myself through to our chairman. And we say, ‘you focus on what you’re good at, go out and find deals’, and then we will look to fund them.  We provide an institutional wrapper, if you will.

What’s driving occupier demand for this kind of space – and who’s taking it?

Some of the demand will be from major household names and others will be more local businesses. Occupiers could include light manufacturers through to third party logistics providers like DPD or local businesses that you would expect to see. The tenant mix is really varied for urban logistics space.

[Online retail penetration] in the UK is currently at around 30%, but a lot of forecasters believe it will end up plateauing at about 50%. In the UK, for every additional £1 billion that’s spent online, we need roughly an additional 72,000 sq m. So if we go from 30% to 50%, that alone is going to equate to an additional 8.4 million sq m of logistics space needed.

You’ve recently opened in Madrid. What’s your strategy for Spain and wider European growth?

At the moment, our business does equity investing in the UK only, but it does real estate debt investing across Europe. We have an ambition to expand into Europe on the equity side.

Our debt strategy is to target geographies across Europe, but we currently see a particular opportunity in Spain. What we’re seeing is a huge wave of lenders pulling out of the market, which is a result of both the market downturn a couple of years ago, and also increased regulation. At the same time, there is a huge amount of refinancing taking place. There is a very compelling opportunity for private real estate debt funds to finance these high-quality sponsors.

Our real thesis is around mid-market. We want to work with sophisticated midmarket sponsors on the type of asset classes that we think have got good tailwinds. So typically, we’re lending on assets secured in either the logistics or the residential sectors.

Let’s talk about the residential side – what’s your strategy across the UK and Spain?

Within Spain, we would look pretty much across the board. Obviously, it will be slightly nuanced between locations. One city’s outlook may be very different from another’s. But generally, the areas we’re focusing on are build-to-rent, flexible living and purpose-built student accommodation.

In the UK, our primary focus is on residential-for-rent and residential land partnerships. There’s a huge undersupply of housing at the moment. The Labour government has pledged to build 1.5 million houses in this Parliament. But the UK population is set to rise from 68 million to 73 million in the next seven years. Housing is becoming more and more unaffordable, so there needs to be new stock across a range of types and tenures.

The UK has a £9 trillion residential market, which compares to a commercial market of roughly £1 trillion. Of this £9 trillion, only 11% is rental stock, the rest is for ownership. That compares with 33% in the US and 52% in Germany.

The problem is that too much of that rental stock is not of the quality it should be in terms of build quality, management standards and customer service. This is where institutional capital plays a critical role, providing much-needed additionality and a professional service. This includes family housing (also known as single-family housing in the UK), where institutional investors are revolutionising the offer.

Are you building new, converting older stock, or both?

Over the last 10 years, we have done [conversions] selectively, but that’s not our focus at the moment. There are challenges with that market that can really slow down the delivery of product. For example, do they have two stairwells to meet current building regulations? If buildings are over a certain height, is the floor to ceiling height sufficient?

When we are delivering new stock, we would rather build a ground up development because we can make the building much more futureproofed and designed in a more efficient way, both from an operational and environmental perspective. This is where a lot of our value lies, as a manager that can invest in, develop and operate best-in-class assets in sectors with the strongest structural tailwinds.