LGIM Real Assets’ Industrial Property Investment Fund (IPIF) manages more than £2.3bn worth of assets and is one of the largest industrial funds in the UK. As of June 2020, it had delivered the highest returns of the AREF index over three, five and 10 years, according to LGIM. Over the past three years, the fund delivered a return of 16.2% per year compared to the PFI all-property return of 3.9%.
Property Week caught up with Jonathan Holland, who runs the fund, to find out how he and his colleagues have coped during lockdown and what he thinks the future holds for the industrial property market.
How have you found the past six months personally and professionally?
Personally, it’s been challenging – getting used to new working patterns, which most people thought wouldn’t work but have. I miss overhearing snippets of conversations in the office, which may help identify new opportunities or in managing the portfolio. Professionally, we have adapted, and our major focus has been on helping our occupier base get through this crisis.
What sort of assets are you looking for at the moment?
There has been no real change. We are after assets that offer long-term growth, or assets we can make a difference to through our management platform. We are also looking to develop carbon-neutral buildings and to cater for future changes in occupier requirements, such as the move to electric vehicles.
Given the growing competition for assets, how difficult has it been to acquire new stock?
It’s challenging, not least because few quality assets have been marketed. When they have, they have been fiercely fought for, which often takes away a lot of the upside. We believe that selective development can offer attractive returns at the moment given the prevailing occupational demand/supply imbalance.
Has the fund sold any assets recently and, if so, what sort of pricing have you achieved?
We sold two portfolios at the end of 2018, each including assets we thought had limited upside. Generally, we are very happy with the quality of our portfolio.
Is the current pricing level for industrial and logistics stock sustainable?
Industrial, particularly multi-lets, offers growth potential and has still generated positive returns throughout this crisis. This is underpinned by an almost perfect storm of strong occupier demand set against a diminishing supply of quality accommodation, which has driven rental growth in recent years (supply has largely decreased through continued take-up and limited speculative development). Even if demand should weaken, supply issues will remain in most key areas.
What’s been the secret of the fund delivering the highest returns in the AREF index over the past decade?
There are four key reasons: the fund’s strategy of investing highly in South East multi-lets and our prudent gearing policy; very good asset management, delivering high levels of added value and rental growth; staff retention, as our ability to retain key staff for long periods has been beneficial; and corporate governance – everything we do places the investor at the heart of our decision-making.
How has investor sentiment changed towards the industrial sector over the past six months?
Is it now perceived as the preferred asset class. There are very few sellers, even from the retail funds. It is seen as offering both stability and stronger returns. Our Industrial Property Investment Fund, for example, which holds £2.3bn in assets, was able to remain ‘open’ throughout the crisis and received no redemption requests.
How has investor and occupier demand for industrial space changed as a result of the Covid-19 pandemic?
On the whole, I would say that investment demand has remained resilient, as has industrial pricing; capital from many different sources still needs to be placed. One positive aspect is that if demand from one sector drops, there remain many other sources of capital.
From an occupational perspective, occupational demand has now returned to pre-Covid levels and there has been no significant impact on rents being achieved. Ironically, this sector has seen a significant occupational boost over the crisis as we, as consumers, are ordering so much more online that needs to be delivered to our front doors. Subsequently, there has been a surge in demand from e-retailers and parcel carriers for accommodation.
How has the pandemic affected the daily working practices of your team?
It doesn’t seem like six months since we were seated in central London together, as my team have been talking on Microsoft Teams at least twice a day. A handful of people across the business are now working one or two days a week in the office and we’re trialling a wider roll-out to help introduce staff back to the workplace in a responsible way. Those people that have been back in the office have reported it as being a very positive experience.
What’s the key lesson the property sector can learn from the pandemic?
To remain flexible and work with your customers (occupiers) to help them through this crisis.
How important is ESG to the fund?
ESG is a key part of the fund strategy. We are looking to future-proof our assets as much as we can; for example, thinking about the future move to electric vehicles and how this will affect the sector.
In line with Legal & General’s commitment to sustainable investment, we are also looking to drive down emissions across our existing assets and working to meet carbon neutrality across our industrial and wider commercial real estate equity platform by 2050.
What is the outlook for the industrial sector over the next 12 to 18 months?
The sector is one of the few that will offer stable, if not positive, returns. We expect stronger relative performance in the near term from logistics supported by occupiers’ response to Covid (such as future-proofing supply chains), investor capital and the continuing occupational demand/supply imbalance. I anticipate that in line with the general trend towards greater ESG awareness among investors, we will also see investors look to assets that can support electric vehicle fleets and provide a more efficient building fabric.