Insider newsletter blog, Will Church, Senior Director, CBRE
As I sit here at my desk at home typing, the state of the world has changed quite considerably in a matter of weeks. I was expecting to have been freshly back from Cannes after the launch of a new Impact Fund at my fifth MIPIM. However, the global property conference was postponed in response to the Covid-19 outbreak which is now dominating the global news agenda. Countries across Europe are in lockdown, equity markets have seen the biggest falls since the GFC and a series of real estate funds have announced a suspension on redemptions. Covid-19 has presented the market with a series of unprecedented circumstances and it seems that we are going to see some market correction, at least in the short-to-medium-term.
This brings me sharply back to the market conditions that existed when we first conceived the Impact Funds that we have now been successfully running for eight years. Put simply, Funds providing debt for good quality development projects that can’t access it from traditional sources. These Funds are typically capitalised by public sector investment and fill the gap that has left many cities without good quality, energy efficient occupational space to support inward investment by employers. CBRE’s Investment Advisory team, part of CBRE Capital Advisors, now manages seven of these Funds around the UK, including the North West Evergreen Fund, the Northern Ireland Investment Fund and the SCR Jessica Fund which have been vital in delivering regional development projects. Last week we launched the Cheshire and Warrington Urban Development Fund which will help build facilities that will unlock opportunities around research and development and support energy efficiency.
The types of projects we have seen over this period include large, speculative offices in regionally prime locations, essential infrastructure on strategic sites to make plots development ready, groups of smaller SME type manufacturing units and heavy refurbishment of obsolete office buildings into modern space. To date, this amounts to over £500m of investment, and none of these projects were able to obtain debt from traditional sources.
This could be a time in the market when such Funds are critical to the country’s growth.
Despite fiscal measures announced in the last few days, which should provide more debt liquidity I still believe that debt for these types of projects will be in short supply. This will impact development that is essential to economic growth outside of the South East of the UK. There won’t be a sudden lack of viable development projects ready to fund; if anything, we have seen an increase over the past year or two, with developers confident to invest equity but these schemes must be started to provide the occupational space two or more years hence that will no doubt be in short supply otherwise.
Recognition of this has led to a number of local authorities and local pension funds working with us to set up these Impact Funds. Superficially it may seem high risk to provide debt to development projects that can’t source it in the traditional lending market, however we can now point to 58 impact loans, all repaid or with full expectation of repayment, and a healthy project level IRR of around 5%. Considering none of these loans were made targeting a return, but rather focussed on other outputs such as new occupational space, local regeneration or employment growth, the risk adjusted return is comforting for those public sector entities setting out on such a venture.
Aside from now being able to point to a track record for Impact Funds, the creation of new business rates income streams that wouldn’t have been received otherwise is also attractive. Funding infrastructure on large strategic schemes to enable the market to develop them out is particularly accretive to the business rates take. We estimate that we have accelerated more than £30m of annual business rates and have supported the development of 850,000 sqm of employment space, which in itself should indicate how important this is for the economy and local communities.
If you are looking to receive funding for a local development project or are a local authority interested in creating such a fund, please get in touch with Andrew Antoniades (firstname.lastname@example.org) or Will Church (email@example.com) in CBRE’s Investment Advisory team.
Senior Director, Investment Advisory
CBRE Capital Advisors, July 2020