Q+A: Fiera on “alpha” returns and building a Northern portfolio

Chris Button and Charles Allen caught up with Charlie Schouten of REACT News to discuss building a Northern portfolio. 

Originally published by REACT News in November 2020

Fiera’s £250m Real Estate Opportunity Fund V – the latest in the investor’s series of value-add funds – launched 12 months ago, and since then has started to build a portfolio of residential, office, and logistics properties across the country, with investments so far being primarily pumped into the North of England.

Assets acquired so far include 12 King Street in Leeds, a vacant office bought for £12m with Opus North and currently being overhauled into a tech enabled workspace, and a plot at Heyrod Street in Manchester, purchased off-market for £6m and now set to host a 25-storey development of 352 build-to-rent apartments, with its residential business Packaged Living.

Fiera has leveraged its local expertise with associated property companies including Opus North in Leeds and Harlex in Manchester to build a pipeline of opportunities with the company bidding on £200m of opportunities around the country in the last month alone.

React News caught up with head of transactions Charles Allen and head of value add REIM Chris Button to hear about the fund’s progress in the last 12 months and their view on where the fund would look to target in the coming year.

How has the fund progressed since launching last year?

Chris Button: The fund is the latest in the series of value-add funds we’ve brought forward. It launched in November 2019, and is a six-year fund with a two-year investment window and is targeting projects with a two to four-year business plan.

Our target returns are between 12 and 15% IRR so we’re very much investing in the space of generating “alpha” returns from being project specific, rather than “beta” returns from the existing market; that means we’re having to buy projects where we shake up the property, whether that’s by developing new space or getting revised or new planning consents, to develop a product that we can then sell back to the institutional market.

We very much prefer to focus on new development wherever possible so we are developing product that suits today’s occupier and investor requirements, with a focus on technology and sustainability, rather than secondary assets which are becoming increasingly obsolete.

The target fund size is £250m of equity; we can leverage up to 50%, but our target level is between 30% and 40%, so that gives us a potential fund size of £350m.

Why has Fiera taken an approach to support ‘local’ property companies?

CB: We have a network of 10 regional companies – in the North, Harlex in Manchester, Opus North in Leeds, Manse in Edinburgh who sometimes cross the border, and we have Opus Land in Birmingham, which gives us that regional coverage that some of our competitors don’t have.

Sitting in London, we can’t hope to focus on and understand [those markets] in the same way that people working there can, so we leverage that local knowledge not only from an occupational and investment side, but they know who the best QSs are to price up construction projects, they know the right planners, and have the right contacts. To do that from London would be challenging.

We like be entrepreneurial and flexible in terms of what we focus on to support our local property companies to find deals that are of interest rather than trying to tell them exactly what we want to fund.

Charles Allen: Location-wise we are open, where we have a bottom-up approach through our local property companies, who are our eyes and ears on the ground, as well as a top-down thematic approach to investing.

You’ve recently received planning consent for 12 King Street in Leeds, an office conversion – would you say this is a typical project for the Opportunity Fund?

CB: Yes. The fund really focusses on three main themes: one is city-centre offices and mixed-use with up-to-date space for modern occupiers, and Leeds is a great example of that; the building was built in 1989, the tenants had moved out, and we bought it on a speculative basis to effectively create a new property.

We’ve also adjusted the design to the COVID situation with fully automated smart access controls and occupational management systems and an air conditioning system.

It’s a very good example of what we want to do in regional cities: create new buildings from old, and we expect this sort of product [in Leeds] will attract prime rents in the order of what’s been achieved at Rushbond’s The Majestic, just down the road.

There is very limited office supply coming forward in Leeds over the next 12 to 18 months so we will look to take advantage of that in particular. Once we’ve finished it, we’ll be looking to fill it up and then sell it on to the institutional market.

What about the fund’s residential ambitions?

CB: There’s a twofold approach: it can be single-family housing, where generally we will buy without planning consent, albeit with some planning history – for example, brownfield, allocation in the local plan, or a lapsed planning consent.

We have seen over the last decade that there has been a reduced demand from housebuilders to landbank on sites without consent; they are less willing to buy those sites and take on the risk, so we see our role as bridging the gap and selling consented sites to housebuilders.

The other aspect is multi-family housing. We have Packaged Living, one of the propcos we back, which is more geographically agnostic and is looking across the UK.

One of the schemes is Heyrod Street in Manchester (pictured above) where we bought the site off-market without planning consent.  As well as 352 build-to-rent apartments, there will also be 5,000 sq ft of commercial space at ground floor that we will look to rent as incubator space for local businesses.

The business plan is to obtain planning consent at the end of the year, procure a building contractor and then market the project for sale via a site sale and full forward funding in the New Year, with Packaged Living and Fiera acting as the delivery partner and handing over the keys on completion in Q2 2023. Total GDV will be around £80m.

Will the fund look to build its presence in the logistics sector?

CA: We have seen a huge shift online that’s been driven by COVID; the UK is one of the largest e-commerce markets in the world and before this year, around 20% of products were sold online but this year it looks like it will grow by 50%. This is moving traditional supply chains away from the high street, particularly in urban areas.

We want to capture that so we’re looking at either new sites where we can speculatively develop, or old, redundant buildings that we can either refurbish comprehensively or demolish to build new. On all of our buildings, we’re targeting the highest BREAAM rating we can, and are looking at the mid to small-box market.

We’ve bid on over £200m GDV of opportunities in the North in the last three weeks, so we are actively looking in the region. Of that £200m, that’s split across sheds and beds with selected mixed-use development.

Chris: We’re not trying to compete with the big-box guys; the focus is single or multi-let schemes, and we have been looking around the M62 corridor and around Manchester and Leeds. Within our deal pipeline, and things we have under offer, it’s about a 40-40-20 split between residential, logistics, and offices. Those are the themes we’re going to continue pushing for the remainder of the year and into 2021.

Last-mile logistics and retail parks are attracting strong interest – will these be target areas for the fund?

CA: Those opportunities have 100% crossed our desk, where we would expect to see sites going from pure retail warehousing to something like a 50/50 split between retail and last-mile logistics.

We are definitely looking at those opportunities, but generally those are more income plays rather than redevelopment; you’re not necessarily looking to knock down to redevelop unless they’re at the end of their lifespan.