The UK property investment manager traded £580m worth of assets and won a major new mandate in 2011. Richard Lowe discusses a busy 12 months with Chris Bartram and John Humberstone

The real estate market in the UK - or more specifically London - has, in one sense, benefited from the financial uncertainty of recent years, attracting large numbers of global investors on the hunt for capital preservation. Such is the international appeal of London that the influence of global capital flows should never be underestimated by domestic property investors.

Chris Bartram, the former CEO of Haslemere and chairman at Orchard Street Investment Management, knows this truth all too well. Orchard Street had a busy 2011, acquiring close to 20 assets with a combined value of £414m (€496m), and the intention is to maintain this level activity throughout this year. But an escalating sovereign debt crisis has thickened the plot somewhat.

“The influence of overseas investors on this market is critical,” Bartram says. “It will be interesting to see if the euro crisis is making European investors more interested in the UK or less interested.”

The initial signs are positive. Orchard Street sold a real estate asset for more than £40m to an overseas buyer in December. “That was after the euro crisis reached its December crescendo, and we did wonder whether they’d go through - and they did. We’ve had overtures from other European investors since that time, with quite large investment potential and targets into sterling.”

Ongoing liquidity in the UK commercial property market will prove to be important for Orchard Street in 2012. The fund manager, which was formed in 2004, has equity to deploy on behalf of its large institutional clients including the Railways Pension Scheme, GIC Real Estate, and more recently, St James’s Place Wealth Management.

Orchard Street took on the mandate to manage the St James’s Place UK Life and Pension Property Fund and the St James’s Place Authorised Property Unit Trust - two funds worth more than £800m combined - in September. The fund manager has already deployed close to £100m for the new client. “It is an example of how we can move quickly,” Bartram says.

But Orchard Street was not only active in 2011; it was also investing in 2010 and was in the market as far back as 2009. Bartram remembers that there was effectively a handful of buyers in the market in 2009, all looking at the same deals. “We had the market to ourselves,” he says.

Orchard Street had raised £300m from GIC Real Estate, the property investment arm of the Government of Singapore Investment Corporation, for its UK Special Situations Fund in 2008 but held back from investing for almost a year; 2009 was seen as the time to begin investing. “We thought, in early 2009, this market is really cheap but it could get cheaper. The Special Situations Fund hadn’t bought anything, so it makes sense to put a third of it into the market; and if we’re wrong and it gets cheaper, we’ve got two-thirds to average down.”

The picture was slightly different for the Railways Pension Scheme, whose mandate with Orchard Street started in 2005 and became fully discretionary in 2008. The pension fund was already underweighting UK real estate by holding 20% of its property allocation in cash. “We had seen the crash coming and we have a tactical cash allocation within the mandate,” Bartram says. “We thought, ‘well, we’re still 80% in the market’, so we were more cautious with Railways.”

The decision to begin investing in 2009 turned out to be the correct one, with hindsight. “In the event, we did not think 2010 would be as strong as it was,” Bartram says. “The second half of 2009 we thought was a bit of a dead-cat-bounce - and it kept going up through 2010. And the reason we were so active in 2011 was because we stopped believing in a double-dip and thought we had better get our funds invested.”

The firm was also an active seller 2011, including the disposal of Marble Arch Tower to Almacantar for £80m. “For all funds, we actually sold quite opportunistically,” Bartram says. “It is sometimes the sales that are more important, in terms of locking in the performance.”

Bartram is confident that Orchard Street’s strong level of investment activity can be maintained this year, but it will be necessary to look outside the prime end of the market. “We think the prime end of the market is fairly priced, but where various features of prime don’t exist - in terms of income or standard of accommodation - and you can put those things right, we think there could be big opportunities opening up,” he says.

The activity of the banks is an essential factor in bringing such assets to the market.John Humberstone, partner at Orchard Street, is confident that the pressure to offload assets over the next 12 to 24 months will produce sales. Humberstone, who worked previously at Brookfield Asset Management and GE Real Estate before joining Orchard Street in 2010, says: “There have been some very well publicised loan sales - Isobel, etc. That doesn’t get the debt off the property balance sheet, it just moves it from one balance sheet to another, albeit, hopefully, somewhere closer to a market clearing price. So we are looking forward to some interesting investment opportunities, which will play into what we do well.”

Bartram observes that a significant volume of capital has been raised relatively recently for real estate investment strategies targeting secondary property but also promising 20%-plus return targets. Such investment performance is predicated on “banks selling at a price that would give a 20%-plus to an incoming investor”. He adds: “We think the banks are wiser than that and are not going to be sellers at that level. However, if you put your sights at 15%, which is more where we operate - and where our clients want us to operate - there is an accommodation between seller and our aspirations. They are achievable returns.”

Orchard Street’s visibility in the market in recent months will help, in itself, according to Humberstone. “People come and talk to us. We get significant inbound traffic,” he says.
Bartram adds: “All our money is discretionary and that means we are quite an attractive place to come to because we can make the decision.”

The St James’s Place win has taken Orchard Street’s total assets under management to £2.5bn. Such large mandates are not up for grabs very often and, in this case, it was made available due to the break-up of incumbent manager Invista Real Estate Investment Management. St James’s Place served notice to terminate the investment management agreements in the first half of 2011.

“The St James’s Place mandate was a big win, but it didn’t come out of thin air,” Humberstone says. “It came out of a lot of hard graft - being able to demonstrate consistent outperformance and having all the ingredients required to take on a mandate of that ilk.”

The selection process was run by one of the major investment consultants, and both Bartram and Humberstone are candid about the importance of understanding and working with the ‘gatekeepers’ of the UK’s pension fund community to ensure a place on the roster of favoured investment managers.

“Mandates don’t change hands that often,” Humberstone says. “We can’t go and knock on X pension fund’s door and say: ‘Can we be your property manager, because we are better than your incumbent?’ It doesn’t work like that. So you really have to be understood by the investment consultants.”

“If you want to make a business in the segregated fund market in property, you have to get rated by them,” Bartram adds. “Due to work done previously we were on their list. It is important for us to be rated, and it is important to maintain it too.”

Orchard Street’s main priority for 2012 is to buy and sell real estate assets on behalf of its current clients, although it does not rule out further expansion of its business (the St James’s Place mandate precipitated the migration of six-strong real estate team from Invista to Orchard Street). “But we look forward the whole time to what should happen next,” Bartram says. “Although we don’t anticipate major growth this year, because we want to consolidate, we think the business is scaleable from this level. We will be looking to increase the size of the business in the years ahead, but consolidation comes first.”

Orchard Street’s growth and investment activity looks impressive at a time when many real estate fund management firms are struggling to raise new business or are targets of industry consolidation. Humberstone points to the fact that the firm has no debt at the corporate level.

“We have not funds that are in trouble, so we are not diverting management time,” he says. “We have no legacy issues.” He adds: “There aren’t that many unencumbered - by which I mean non-distracted - experienced property investment management businesses in the market. The choice is not that
broad really.”