Earlier this year, the Canada Pension Plan Investment Board (CPPIB) and developer Lendlease agreed a major partnership to invest in build-to-rent (BTR) in the UK, with a hefty initial commitment of £1.5bn.
The joint venture will initially focus on Lendlease’s Elephant Park development in Elephant and Castle, London, where CPPIB will invest £350m in the scheme’s next phase, which consists of homes for private rent. After that, the pair intend to pursue more opportunities together.
Seven months on, Property Week spoke to CPPIB’s managing director and head of real estate investments for Europe, Andrea Orlandi, to find out how the partnership – its first UK BTR investment – is progressing so far and why CPPIB is adding more residential to its UK portfolio.
What attracted you to the BTR market?
In the UK, we have traditionally had office exposure, but in the past few years, returns have become thinner so we moved out of investing in the London office sector a few years ago. After London, we invested in two office developments with Hermes in Leeds and Birmingham and we also saw that more opportunities were arising from the residential sector. It became a little more institutional, which gave us the opportunity to access it.
We gravitate to where we see the partners and the opportunities to invest. The BTR sector as a whole has shown very good rental growth – especially in London; anybody who rents an apartment knows how difficult it is to find anything of quality at a reasonable price. We are not a short-term trading play investor, so we are very much looking for themes that will continue for the foreseeable future.
Why did you partner with Lendlease specifically?
We were approached by Lendlease, which is an existing partner of ours, as we have a successful joint venture in Australia. What we found attractive about Lendlease is that it has the ability to source a pipeline. We would be disappointed if we fast-forwarded three or five years from now and [Elephant Park] was all we did. We want opportunities to scale up and take a large position in the market that justifies the resources we are going to commit to it.
What stage is the Elephant and Castle project at and what will the partnership do next?
At Elephant and Castle, I would describe the arrangement as a forward-purchase – we have agreed to buy the buildings once they are delivered, and we are still a couple of years away from delivery. That basically seeds the programme and we are then looking to do more. We have looked at additional sites with Lendlease and had discussions, but there is nothing I can comment on regarding the future execution.
CPPIB acquired student operator Liberty Living in 2015 and has since acquired additional portfolios from Student Castle and Union State. Will you acquire more in student housing?
I think the larger portfolios [that have come to the market recently] have been sold, so I don’t think it’s a sector where you are going to see any more large transactions or quantum leaps in portfolios. We are looking to add, but I suspect it will be more asset-by-asset now.
Could the balance of your portfolio shift towards BTR or student housing?
I think we could do more and I think there is appetite to do more. The underlying thesis is there from a demographics point of view and we have to see where the opportunities lie. I suspect that staying in the main asset classes of offices and retail will be tougher because of Brexit. Right now, there is plenty of capital in the market and the mainstream asset classes are always the ones that the new investors will gravitate to, so I wouldn’t be surprised if we continue to gravitate to the alternatives.
What is your take on the UK property market as a whole?
The UK market has been surprisingly resilient in the last few years despite the political volatility. I suspect that is partly driven by the fact that supply has not come on board, so that existing product – if it is a quality product – is being rewarded. The UK is by far our largest exposure from a real estate point of view in Europe and it will probably remain our largest exposure.