React News Q&A: Fiera’s Allen on debt launch, expansion plans and looming distress

Written by Guy Montague-Jones at React News in November 2022.

Charles Allen took over from Alex Price as head of UK at Fiera Real Estate in July – an inauspicious time for the UK market.

A downturn was already on the cards and the outlook has deteriorated since. In an interview with React News, Allen is candid about the challenges ahead, predicting that the next 12 months are going to be “extremely hard”.

But in the same breath, he outlines ambitious growth plans for the business, which was formerly known as Palmer Capital. With support from parent company Fiera Capital, which acquired Palmer Capital in 2019, the firm has just launched a debt platform that Allen wants to grow to £1bn in the next couple of years. Plans are also afoot to rapidly expand the equity side of the business.

What was the thinking behind the new debt platform?

It was a natural bolt-on for our business because we’ve got real estate debt strategies across Asia and North America, but we didn’t have any in Europe. We’ve got lots of different equity strategies in the UK, but we didn’t have any debt strategies.

We thought the timing of the launch of the business was good when we were getting into the nitty gritty earlier this year, but with what’s happened over the last few months, it probably couldn’t be better. The chance now to offer our investors some really attractive risk adjusted returns is fantastic. With all in cost of finance on a core asset at the moment at around 7%, you’re not even having to take development risk or significant asset repositioning risk to achieve returns of 8-10%.

How long did it take to come together?

It probably took us about two years to piece together. The big challenge for us really was finding the right team. We made a strategic decision not to buy a business. We wanted to lift a team because we felt that would be a better way to organically grow. We met and spoke to a lot of people over a two-year period, and felt that Richard and David were the perfect fit. They have fantastic sponsor contacts and a track record from their time at Cheyne of delivering on deals. We’re really excited and think 2023 is going to be a really busy year for us.

Where are you looking to expand next? Continental Europe?

There’s a lot of scope to grow in the UK market, both across equity and debt. With the support of the wider Fiera Capital machine, we see a great opportunity to scale the business in the UK. We will be looking to grow our assets under management on the investment management side quite significantly over the next two to three years.

That will be our principal focus for the next couple of years, but certainly in the medium term, the aim will be to grow into Europe, whether that’s organically by lifting a team or whether it’s through a corporate acquisition. All options will be considered.

What investment strategies will you focus on?

We’ll be looking to scale the debt platform to over £1bn in a couple of years, and on the equity side, it will probably be across the board. We’re pretty evenly split as a business, roughly 50:50 between core and value add strategies. We probably see the core side of the business being the area that we’ll grow more, but we’ll continually to look to bolt on new investment strategies where we see opportunities, in the UK market.

Do you remain committed to your venture capital-style model of investing in property companies?

Absolutely. Our propco model is our real USP, it’s what sets us apart from lots of other investment managers. Our property companies are super entrepreneurial and they give us access to deal flow that we believe no one else in the market gets exposure to. We currently have eight property companies and we will be adding more. We want them all to be best in class within their geographic or sector focus and complement the funds that we are raising at Fiera Real Estate.

What’s your take on the state of the market?

There’s no hiding from it. We’re witnessing a complete repricing across the whole of the market and we’re going into a recession next year. I think the next 12 months in particular are going to be extremely hard. The most important thing is getting inflation under control. For as long as that stays high, interest rates will continue to be forced to rise.

“We’re witnessing a complete repricing across the whole of the market”

Once inflation is under control, then the market will be able to price in where interest rates are at. I think we’re in for continual bad news probably at least another six months. I think pricing has fallen significantly ahead of where it’s reported by valuers. There’ll be some blood on the street in the December quarterly valuation round and that will continue to flow into next year.

Is your focus on industrial and residential likely to change at all?

Our key themes remain unchanged and are driven by macro mega trends. These trends of population growth, lack of housing, and disruption from digitisation are still very much there. We still have an acute lack of housing in the UK and we need more logistics space to take into account the growing shift to online and e-commerce. And if you look, for example, in that market, supply is at an absolute record low. What we hear on the ground from our property companies is that people are still going nuts for space and top rents are still being achieved.

We’re probably going to see a slowdown in speculative development and that’s going to exacerbate the shortage. What’s we’re seeing is really just a repricing and once there’s some price certainty, investors will be back into the market. We are already seeing some interesting deals at the moment in both the residential and the logistics space where vendors are under more pressure to sell.

When do you think you’ll be out buying in earnest again?

That’s obviously the million dollar question because everyone wants to be buying at the bottom of the market. I think that that opportunity will surface at some point next year, but when will depend on inflation. As a business we’ve got circa £400m of dry powder, which is a great position to be in. Trying to raise new vehicles now is extremely challenging. Our message to our investors is we’re going to be patient, we’re going to be prudent, and when the time is right, we’ll be getting extremely busy. We think there’ll be some really good opportunities.