Ribston: a year (and three quarters) in the life - AKA ‘what we have learnt’
Measured, deliberate and considered versus indiscriminate asset accumulation
Heavy due diligence and approach focussed on individual assets
Aversion of barriers to exit
Income – must have dual characteristics: sustainable and progressive but also defensive
Capex must be accretive and not simply shoring up existing value
Looking back, launching our fund in 2016 ‘the year of the Brexit Referendum’ probably had a more profound impact on our approach to asset selection than we might first recognise. There is no doubt we have been choosy, a reputation we probably now have amongst the agency community, but one which we are not embarrassed about.
2016 turned out to be a year of ebbing and flowing of fundraising momentum. The introduction of the BREXIT concept in February and then the surprise outcome in June both impacted on progress, but the year was a success as we launched with £75m of equity provided by Real Estate Multi-Manager accounts run by Indirect Fund Managers Alistair Dryer and Catriona Allen at Aviva in the December. Having now invested that capital together with subsequent allocations of £42m from the same investment house the fund is in a good place – of a size that can still benefit from management influence; but also of the scale that has repeatedly proven attractive to portfolio purchasers. A debt facility with Barclays has been entered into and will allow the fund to release equity from our existing portfolio to make further acquisitions and enhance returns through a moderate level of gearing.
The measured approach we have taken to deploying our equity is entirely consistent with what we intended to do, however the 30 properties have been acquired to date in 29 transactions which is even more granular than we might have anticipated. The nearest we have got to acquiring something that resembles a portfolio is buying two properties at the same time from the same vendor. A further five properties currently in legals across four deals continues the theme.
Received wisdom at the time concluded that the surprise outcome of the Referendum would lead to a softening of pricing. Instead, whilst there was an immediate negative reaction in Q3 of 2016 (prior to our fund launch) it proved to be short lived. Retail funds led the sell-off which moved pricing out for a period but by the turn of the year ‘normal service’ had resumed.
The well documented issues of the retail sector, investor appetite for "sheds and beds", and the genuine prospects for rental growth in the industrial sector has maintained pricing and in fact seen yields hardening, and the general trend for industrial assets in terms of sentiment and pricing remains positive.
In spite of this we have chosen to continually challenge these macro-headlines and opted to be selective. Whilst rental growth is real; and investor appetite appears to be sustainable; and the continued absence of material development in the multi let space does nothing to meet demand; the paradox of prices increasing on all industrials in what should be a confused state (Brexit) leads us to be conservative in asset selection.
We do not subscribe to the widely publicised rhetoric that seems to be now enshrined as fact. We do not believe there is a single rule for industrial. Unlike a growing number of commentators, we still refer to industrial estates as ‘industrial estates’ notwithstanding the fact what businesses are carried out on them is eclectic (it always was!). At the risk of being controversial we would say:
That not all industrial is ‘urban logistics’…and it doesn’t matter that it isn’t…and even if something is that does not define its prospects in isolation.
Not all urban industrial is ‘last mile’…and again it does not matter that it isn’t…and again whether an asset actually is or not will not definitively shape its prospects.
It may well be the case that we have entered a new paradigm in the way property is used (most notably the metamorphosis of retail and industrial property), who will use it, the way we act as consumers etc. Time will tell whether it has changed forever but in any event, our view is that not all industrial property will permanently benefit from this trend or shift. Some inevitably will, but our view is that poor property, be that in any sector, is poor property and the best prospect for long and sustainable performance is to avoid it.
In spite of any new and ostensible permanent shift in the sector’s occupational and capital role, property has always been cyclical and we expect that trend to continue. We believe that in the event of any softening in occupational demand or investor sentiment then those poorer assets are less well positioned to defend against capital decline.
The Ribston Property Unit Trust (RPUT) was launched as a nimble and dynamic vehicle – big enough at full investment to have scale; but small enough for each asset to contribute to performance, and manageable enough to be properly diligenced by an onward purchaser down life’s road (whenever and whatever route(s) that takes).
This over-arching philosophy has driven the approach and attitude to stock selection and the economic and political backdrop has generated even more focus. We have not sought to price-up every opportunity that we have reviewed. Ours is not a strategy of aggressive asset accumulation where every property has its price; it is a strategy of assembling a portfolio of properties that complement each other and which in any permutation presents opportunity for performance and efficient, straightforward and profitable exit when the business imperative arises.
From launch of the fund we have sought properties that have, or are capable of quickly having, strong running yields. Income, and the ability to grow that income, is crucially important to pension funds, the mainstay of our investor base; and in assessing all opportunities we have applied what we consider as being two equally important tests:
Is the asset well placed to capture rental growth already inherent, and is it set fair to capture future rental growth in a world that keeps performing? AND
Does the asset have sufficient defensive qualities to prove resilient to any change in the economy, sentiment towards the property sector generally and any future downward trend of the industrial occupational market?
If an asset fails either of these tests it has been immediately dismissed. If it passes both tests it has had a further test applied to it:
Barriers to exit
3. What are the barriers to a clean, efficient and profitable exit in a full range of future market conditions in due course?
The answer to this third question for any particular asset might conclude there to be fundamental barriers. Alternatively, there might be issues that can be addressed and rectified during the ownership period.
For example, we would regard a short geared leasehold as a fundamental issue. Addressing it, or purifying it, is outside the long leaseholder's control and the prevailing market conditions at any given time would naturally narrow one's exit options to a very small pool of buyers or, in certain markets, perhaps no buyers at all.
Conversely, some 'barriers' (using our definition for the word) can be addressed through the life of the hold period, for example through undertaking capex. A barrier as we see it is something that limits the range of prospective buyers at exit. Our aim has been to establish a portfolio that is as attractive as possible at any given time to as wide a pool of investors as possible - institutions, PE houses, property companies using debt, and privates; both on a portfolio, or sub-portfolio, or individual asset sale basis.
An example of this sort of barrier might be asbestos-clad buildings. Whilst fundamentally a property's characteristics might be strong, we believe that institutions and banks might become increasingly averse to owning/lending on assets that are clad with asbestos. To that end, a well located and well configured property may prove to be of no interest/less interest to a large tranche of the prospective purchaser pool in the future and in turn might impact on pricing, profitability and efficiency of exit. In this example, a programme of capex through the ownership period might be planned to be undertaken.
A fair proportion of the stock we have seen over the last 18 months has been in need of capital expenditure; costs which arguably should have been addressed earlier and probably would have had the general market not provided performance to even passively held assets. In the current environment where it is debateable whether yields can harden much more, the need for inherent deficiencies to be dealt with becomes more pronounced. Whilst a strong occupational market can carry a property’s shortcomings, a less strong market might not. This has led to us dismissing some opportunities and only pursuing those in need of capex that both (a) can be dealt with quickly within business plan, and (b) add value rather than simply maintain value.
Having addressed this third (barrier to exit) 'test', anything that has a fundamental or economically insurmountable issue has been dismissed. Anything with a barrier that can be despatched through the life of ownership has continued to be due diligenced prior to making a decision whether to ultimately pursue or not.
The upshot of applying these tests as a discipline is that:-
Many more 'opportunities' have been dismissed than pursued since launch.
Our acquisition profile has been very granular. We have not acquired any portfolios because we have not wanted to own any properties we fundamentally do not like, nor pay a premium for doing so. Instead we have chosen to deploy capital in a piecemeal manner acquiring assets on an individual basis.
A function of not being seduced into acquiring portfolios is that we now have a portfolio of assets, all of which we genuinely wanted to own!
What we have bought:
Properties that we believe are capable of making the most of the strong occupational market that the sector has experienced during RPUT’s life to date; BUT that are also defensive in nature and well placed to guard against any shift in sentiment or demand from occupiers.
Locations that everyone has heard of. Our portfolio is characterised by city centre properties in Leeds, Glasgow, Birmingham, Bristol, Cardiff etc and in established locations like Trafford Park and near motorway junctions.
Properties that have been diligenced on a site specific basis ie we have not simply acquired in a particular location for pure bulking-up reasons. Each asset must bring something to the table both as a stand alone investment and as a component of the fund.
Where a capex requirement has been identified pre-bidding then that investment must be value enhancing and not merely shoring up value or seeking to defend against value decline.
Properties across all lot sizes up to £20m and where 24 properties are under £5m and six are over £5m.
Properties at gross acquistion prices substantially below their replacement costs.
Properties that as a fund at full investment are projected to deliver an annual income distribution in excess of 5%.
What we have not bought:
Portfolios. We do not need to acquire every property we see nor has our strategy been a race to launch Fund 2. We have resisted the temptation to deploy large amounts of equity in a single slug, preferring to create our own portfolio of properties that are all assets that we have wanted to own. This piecemeal effort means we have not acquired make-weight properties within portfolios or assets that are incapable of making the return objectives.
Tertiary property, save for one example which is single let on a long unexpired term to a financially very strong tenant who has been in occupation for many years, and which has annual fixed rent increases and, crucially, alternative use prospects in the future.
Short or geared long leasehold interests.
Properties in locations with swathes of homogenous stock in terms of age, specification, layout and more often than not with components of construction that are approaching the end of their economic life. Experience tells us that whilst we currently have a strong occupational market if/when that softens then these sort of locations generally regress quickly. Where the only differentiating factor between properties is price, then it can be a race to the bottom on rents and where there is at least one competing owner under duress then the general downward spiral is exacerbated.
Time will tell if our very selective and prudent approach turns out to be especially rewarded but we remain of the view it is the best way ahead.