The strategy followed by the Charities Property Fund can be broadly summarised as follows:
• Maintenance and enhancement of income
• Maintain the strategy of ‘pushing away’ income risk – strong focus on lease extensions (re-gears etc). Having longer dated lease expiry dates (particularly with indexation and fixed rental uplifts) helps to insulate investors from the vagaries and uncertainties that beset the economic and political environment
• Maintain a strong focus on letting empty space, and maintaining lower than average void position
• Maintain strong dialogue and good relationships with tenants - this proved extremely beneficial during the pandemic
• Focus on maintenance of above average covenant quality – to be measured through peer group service (MSCI/IRIS etc)
• Retain some smaller assets for liquidity
• Hold property for the long term
• Buy good quality property in prime locations that offer growing and sustainable income generation
• Priority to achieve returns through a combination of income and active management to support that income and produce at least the required income objective for the fund
• Focus on growth locations/sectors to include supply constrained towns with good tenant demand e.g. Brighton, Bath, Bristol, Oxford, Cambridge, parts of Greater London etc.
• Target buildings with multiple alternative uses to insulate them from technological obsolescence (i.e. offices that can be adapted to hotel/residential) and target buildings less prone to obsolescence (whether structural or physical) i.e. heritage buildings and smaller industrial units (50k -100k sq ft)
• Target well located, well specified buildings with shorter leases – the compromise we may make with regard to ‘prime’ being lease length or tenant quality in exchange for superior quality buildings (which we can then actively manage)
• Or target lease and covenant deals with lower rents (i.e. where priced attractively)
• Invest counter cyclically
• Target index linked / fixed uplift leases
• Target unfashionable lot sizes (i.e. £5-£10 million is too small for institutions and too large for private investors)
• Piece together valuable holdings in major cities by acquiring adjoining ownerships over time where the value of the whole exceeds the sum of the parts (i.e. Oxford, Bath and Brighton)
• Whilst we will fund the construction of pre-let assets, particularly in very strong locations that are difficult to otherwise acquire (i.e. Cambridge, Greenwich), we remain opposed to and prohibited from, undertaking speculative developments
• We have always had a social purpose of providing a high and secure income to our charity investors. As a Common Investment Fund and a charity, since inception in 2000 we have taken ethical considerations very seriously with a policy not to invest in properties whose tenants could potentially cause embarrassment to our unitholders
• From a governance perspective we are committed to integrating ESG into our investment and portfolio management decision-making. As a sign of our commitment to embed responsible investment into our business we have been a signatory of the UN aligned PRI since 2014.
• ESG has been a major consideration for us since the launch of the Fund. We have made environmental interventions in over 40% of our portfolio. We have approximately 5,000 solar panels, electric car charging points at 10% of all assets and total LED lighting coverage across all of our retail parks. In addition we have recycled on average 95% of all waste during recent office refurbishments and championed biodiversity at five sites.
Location
• We prefer a continued focus on South East (including London) exploiting the land constraints that ultimately support values
• Regional markets are most likely to be supported by the scale and quality of income, less risk will be tolerated in the asset and lease
Sectoral – the fund is a balanced fund and therefore we seek to diversify
We set target weightings that are reviewed annually and our current weightings are displayed in the chart in Section 4.2:
Current Weightings
• Retail (high street and shopping centres) – CPF owns no shopping centres and has consistently eschewed the High Street
• Retail warehouses – we continue to see value in certain locations that are not over supplied (primarily the South East) and generally in convenience, discount and food operators let off low rents, on large sites on the edge of urban areas
• Offices – we have targeted good quality buildings in growth locations, where rental levels are low. The Fund has exposure to the South East and regional offices on an asset by asset basis, where good growth opportunities exist, in locations such as Brighton, Bath and Bristol
• Industrial & distribution – we are positive about urban logistics – there has been a net loss of industrial accommodation and continued urban migration leading to upward pressure on rents. We also favour properties where tenants are wedded to the location as a result of high investment in the property (many manufacturing businesses). The team has continued to focus on industrial acquisitions and whilst this has become increasingly challenging as yields have dropped considerably over the last few years, we have still managed to find value in this market through off market acquisitions.
• Residential – we will consider long leases with indexation to good covenants
• Alternatives – we have significantly increased our exposure to this sector over the last 10 years. Yields remain attractive for long leases with fixed rental increases
Quality, obsolescence and technological adaptability
• The majority of the assets within the portfolio benefit from potential alternative uses. There is a theme of good quality city centres where demand is strong and land supply restricted i.e. London, Bath, Brighton, Bristol, Cambridge and Oxford providing a multiplicity of alternative uses; to individual asset specifics i.e. enhanced rail communications – Elizabeth Line in London, HS2, electrification of the GWR; and improvement of cities from inward investment i.e. Manchester, Bristol
• Where uses are under threat from new technology i.e. supermarkets and retail from the internet, the focus is on supply restricted locations - Greenwich, Twickenham etc and the ability to therefore benefit from technological improvements i.e. click and collect, electric car charging points as well as strong alternative underlying land values
• The average lot size is lower than comparable funds, partly because we hold a larger number of small lots for liquidity, but also because it can help us when directly competing with other institutions to drop under £10 million in size (which is normally their stated minimum). In addition, the pool of potential occupiers for smaller buildings tends to be larger and they are less complicated from an M&E perspective (particularly offices) resulting in less requirement for capital expenditure
• In terms of obsolescence, approximately 60% of the portfolio has very obvious alternative uses. And in terms of sectors, we have generally chosen sectors where there is limited obsolescence (retail warehouses and distribution warehouses for example) and sectors where the tenants invest significantly themselves (hotels and car dealerships)
• Outside of this, many of the industrial units (where alternative use is limited) are small unit sizes, meaning the risk is widely diversified and they benefit from a larger pool of occupiers (appealing to SME’s) in the event of vacancy. They are also more expensive to build than larger units, meaning fewer are built and generally cater for the move to last mile delivery.
• In terms of physical obsolescence mainly seen in offices, the majority tend to be small in size, reducing the need for considerable M&E and tend to be brick built so capable of conversion. Many of the London buildings have already changed use several times over the years demonstrating enduring relevance. We own very few out of town business park style offices which suffer most from obsolescence and a lack of alternative use
