The EG interview: Schroders property bosses on picking winners

Ever the diplomat, Duncan Owen pauses to choose his words when describing the Bracknell town centre of yesteryear. After careful consideration, the global head of real estate at asset manager Schroders opts to say the Berkshire town’s “light had dimmed slightly”. But over recent years, Schroders has worked to change that. The firm’s Bracknell Regeneration Partnership – a joint venture between the Schroder UK Property Fund and Legal & General – has been busy alongside the local council to oversee a multi-phased revamp of the town centre, spanning leisure and retail space as well as offices. Today, Owen says, “it’s a different place”. Owen (pictured left) points to Bracknell as an example of the hands-on, active style of management that the Schroders team has introduced across its funds. As high streets and workplaces change, there has been much learning on the job. “We’ve constantly been learning as we go,” Owen says. “It does make it a lot of fun. But you’ve got to have an open mind.” That’s arguably true now more than ever, as the team works through challenges the likes of which most will not have faced before. Together with Nick Montgomery, Schroders’ head of UK real estate, Owen sits down with EG days before the spread of the coronavirus leads to the cancellation of annual property conference MIPIM. Within weeks, the pandemic’s effect will be felt even more keenly in the industry. Schroders will suspend trading in its Schroder UK Real Estate Fund given the uncertainty the virus has caused in property values. Its REIT, Schroder Real Estate Investment Trust, meanwhile, will issue a statement saying its strategy remains “robust and unchanged” and that it has capital ready for “opportunistic reinvestment”. Given Owen and Montgomery’s focus on the long term as well as near-term tests, that isn’t surprising. Build it yourself The pair joined Schroders in 2012 as the group took on Invista Foundation Property Trust. They have worked together since the late 1990s and have the easy rapport of people used to popping unannounced into each other’s offices (“My wife says I spend more time with Duncan than I do with her,” says Montgomery, to which Owen replies: “Mine says thank God Nick spends more time with you than I do.”) The firm has about £16.3bn of assets under management in real estate today across various funds, compared to roughly £10bn when Owen and Montgomery joined. Staff numbers working in property have leapt from roughly 60 to more than 200 over the same period, Owen says. Although the UK business has grown and still accounts for the largest percentage of assets by region, the international business has grown too. And across the group, there is more of a spotlight on core-plus and value-add assets than once was the case. “We’re averaging about 85% of assets outperforming their peers or their absolute target return,” Owen says. “And whether that’s one year, three years, five years, that stat is always around the mid-80s.” We had a real conviction five years ago that Manchester was going to capture a disproportionate share of human and financial capital – Nick Montgomery He points to Schroder Real Estate Investment Trust, the REIT that he and Montgomery co-manage. “We IPOed that in 2004 and that moved with us [to Schroders] and that’s now outperformed amazingly. Annualised over 15 years, for example, it’s outperformed by 110 basis points per annum.” The group has benefited from a new push into alternative asset classes, teaming up with Civitas Housing Advisors to develop a portfolio of new supported living properties, and has worked with Audley Group and Octopus Real Estate to finance four new retirement villages. “We find we get the best performance from creating assets,” Owen says. “People first went to alternatives because they either had long leases and looked like a bond or they were cheaper than an office or shop. They’re not cheaper now. Often the reverse is true. But you can create them. We’re developing and building with our partners in retirement living, where the same [supply and demand theme] is happening with social supported housing. And that is a good cause.” [gallery type="slideshow" link="none" columns="1" size="full" ids="1027689,1027688,1027686,1027684,1027685,1027687,1027683"] Portraits by Tom Campbell City boys Across its funds – and indeed around the world – the group is pushing its “winning cities” strategy, launched back in 2013 to identify the locations best placed to benefit from big social and economic changes. “We said there were five key mega themes,” Owen says. “Urbanisation; changing demographics – ageing population, people living longer; the technological revolution – what it was going to do to retail and logistics and so forth; the huge growth in demand for power and resource and infrastructure; and the shift to emerging markets. And now we’ve added positive impacts.” The group has set out to identify the towns and cities that could benefit the most from these trends. Owen says: “If you look at the first big acquisitions that we did in parts of London and outside of London – particularly Manchester in 2013-14 when we bought City Tower – it was all about picking winning cities.” Owen and Montgomery return to Manchester regularly in conversation. “We had a real conviction five years ago that Manchester was going to capture a disproportionate share of human and financial capital,” Montgomery says. “And we’re now not only amongst the biggest owners of real estate in Manchester, we also have a Manchester office.” The group believed that by buying sites like the mixed-use City Tower development and, later, No. 1 Spinningfields, it could attract the kinds of fast-growing, often tech-focused tenants keen to attract young graduates in the city. It’s an investment thesis the firm has since used in Leeds, where it is revamping the office block at One East Parade. I don’t think [Brexit is] anything like as important an economic decision as people thought –  it’s probably a bigger social decision. – Duncan Owen Owen estimates that the locations Schroders labels winning cities have GDP per capita up to 30% higher than the UK average. “That’s a massive head start,” he adds. “If the GDP per capita is higher, the job growth is faster and there’s greater demand for real estate.” The list has changed over time – it’s a “dynamic” entity, in Montgomery’s words. “18 months ago, I think we’d have been cautious, for example, about Birmingham versus Manchester or Leeds because it hadn’t had the same sort of diverse occupier base that has driven demand in those cities,” he says, adding that the confirmation of HS2 and redevelopment of Paradise has changed that. And beyond the bigger cities, the group is eyeing locations such as Cheltenham, Exeter and, in London, Croydon. “Some are obvious: Leeds, Manchester, locations in London,” Owen says. “What is interesting – and, when you think about it, completely irrational – is that people don’t often think of the Brightons. “Brighton is a nice environment, it has a high-speed train link, it’s close to Gatwick Airport, it’s the HQ for obvious reasons in the UK for companies like American Express, so has good jobs. It fits those themes for just the same reason if you overlay it as a big city like Manchester.” Back to the core In the capital, Schroders has made notable investments in Wenlock Works, a Shoreditch office development with tenants including payments firm Checkout.com. Bloomsbury is also in favour, with the group owning several assets in the area and actively hunting for more. “Bloomsbury is now really good compared to where it was perhaps four or five years ago, but I think it could be twice as good in another four or five years,” Owen says. “People want to live there and work there and go to university there. They want to go to eat there. It’s got all the right dynamics. As long as you’re prepared to do some management, refurbishment, repositioning of assets, it’s got all of those benefits and multiple uses competing with each other for the same bit of real estate.” Owen is also excited by redevelopment opportunities around Waterloo and its train station as well as the South Bank. And don’t think the traditional office hotspots have been shunned by the group. Given the resilience of the occupier market in the Square Mile, Montgomery says the City core submarket is back in play, and the group is currently working up plans for developing 55 Bishopsgate as well as looking for other acquisitions. Owen is optimistic about the capital’s future post-Brexit, although he admits to being “slightly heartbroken” about the country’s exit from the European Union on a personal level. “I don’t think [Brexit is] anything like as important an economic decision as people thought –  it’s probably a bigger social decision,” he says, pointing out that his soon-to-graduate daughter will likely find it easier to travel to and work in Hong Kong than Germany. “Is that an unintended consequence? I don’t know. But it’s not very open or international.” The group is prioritising international expansion, with Asia next in its sights. Schroders is “still in its formative stage in growing outside of Europe”, Owen says, but with four real estate offices in Asia now, the continent is an obvious target. “Core-plus and value-add activity in some of those large Asian markets is a fantastic opportunity,” Owen says. “Ten years ago, Asia was 18% of the global investable universe in total. At the end of last year, it’s estimated at 42%. Expect the winning cities strategy to define Schroders’ approach as it enters new geographies, even as the team works through nearer-term challenges in a changing world. “What we’re aiming to do is look in Asia in the way that we’ve looked in Europe,” Owen says. “Good, CBD locations, but locations that are capable of being actively managed – and the best active management opportunities are where you can attract multiple uses, so residential uses, hotel uses, office uses, retail uses, competing for the same real estate. That gives us sustainable demand.” To send feedback, e-mail tim.burke@egi.co.uk or tweet @_tim_burke or @estatesgazette