The Tools of the Trade

To achieve above Beta / market level of returns, the real estate investor has several tools in their toolbox.

From a structuring perspective, debt is a common tool, reducing the amount of equity that needs to be deployed towards any particular strategy and benefitting from the gearing impact. However, this tool only enhances returns when the cost of debt is less than the return from the underlying asset and so there are downside risks too.

So, perhaps a more desirable route for a conviction manager is to gain access to their own capital value accretion strategies through deploying equity into development or planning entitlement opportunities. This may be done directly or through forward funding others.

For Fiera Real Estate UK’s internally managed funds, this access is provided directly through its 33% shareholding stakes in eight property companies (“operating partners”) who operate across the UK. These businesses are experts in planning and development, accessing the Alpha style risk that is created through the capital return.

Fiera Real Estate UK’s eight operating partners enable it to acquire projects off-market, owning to their strong local presence and long-standing relationships with local occupiers, agents and corporates.

Fiera Real Estate UK creates these relationships with the goal to be a long-term partnership, relying on maintaining a mutual open and trusting relationship to the benefit of both parties. This relationship is vital when undertaking development projects.

Whilst development is undertaken to access upside returns, the expert developers’ role is vital to mitigate against the downside risk. This is done through understanding:

  • What the planning considerations are, and will the use, scale and appearance be deliverable?
  • What the likely market considerations are regarding letting and sale? How likely are these to change during planning and construction?
  • What the construction costs are and when can these be locked in? Especially important in the current inflationary markets;
  • How might ground conditions affect the overall build cost and timescales? Where does the risk sit – with contractor or employer?
  • Could the contractor fail during construction and how can this be guarded against?
  • What is the sequence of events and how might these affect the outcome? For instance, are their pre-occupation planning conditions which may delay a deal completing even though the physical building is finished?

Whilst the above examples highlight just some insights into the challenges that could be faced during development, the reality is that there will be individual challenges in almost every development.

With that in mind, for Fiera Real Estate UK, this risk is mitigated by the investment it has through its unique operating partner network. Each operating partner is highly experienced in its own field and Fiera Real Estate has a strong track record of delivering projects in partnership with each of them.

Written by Steven Wright, Director.