The Multi-Manager People's View

Adam NorrisInvestment Analyst

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Opportunities in UK real estate

Barely a week goes by without the UK property market making headlines for all the wrong reasons, be it falling retail property values or flatlining house price growth. This broad-brush coverage paints a picture of a market tired and out of favour.

However, we think there are still some extremely interesting opportunities in structurally growing areas of the economy. Over the past few years, we have taken a relatively different tack with our property exposure, steering away from the well-owned commercial real estate vehicles, especially those focusing on central London. Instead, we have channelled our efforts into determining long-term social or economic demand trends in relatively niche areas of this market.

Politicians continue to squabble over the future of the UK’s relationship with EU and may do so for some time yet. We believe we have selected a combination of property funds which should remain relatively insulated from whatever way Brexit swings or the political winds blow.

October 2019

Key risks

The value of investments and any income from them can go down as well as up and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

The Multi-Manager People

For Professional Clients and/or Qualified Investors only

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Student accommodation

Healthcare

GCP Student Living (Ticker: DIGS) IPO date: 20 May 2013 Multi-Manager original purchase date: May 2013 (at IPO)

Target Healthcare REIT (Ticker: THRL) IPO date: 7 March 2013 Multi-Manager original purchase date: February 2018

University halls are commonly thought of as dark and dingey areas, where pizza boxes are stacked to the ceiling and mould grows in the fridge. Not the assets held within GCP Student Living – the first UK REIT traded on the London Stock Exchange that invests in student accommodation assets in and around London. Managed primarily through the Scape brand, the fund focuses on high-quality accommodation and teaching facilities for students studying at leading academic institutions.

Much of the commercial usage of property may be under pressure from new entrants to the market, such as flexible landlords WeWork and WorkSpace, but the case for individuals’ attendance at global universities remains stronger than

There is one trend which is irrefutable: we are all living longer. The fastest-growing demographic group within this shift is those of 85 years and over, with the population expected to double from 1.6 million in 2016, to an estimated 3.2 million by 20411.

Moreover, NHS England have prioritised the need to reduce delayed transfers of care, otherwise known as ‘Bed Blocking’, an extremely expensive method to treat patients who would be equally comfortable in a care home.

The REIT only purchases modern, purpose-built care homes, which astoundingly accounts for only 21% of the entire industry.

Held in portfolio:

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Held in portfolio:

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ever. We cannot predict with certainty what will happen with Brexit, but London remains home to 23 universities, with more universities ranked in the Top 40 by The Times Higher Education World University Rankings than any other city in the world. The burgeoning middle class in emerging markets will continue to send their children to these leading academic institutions; one in four students renting from GCP Student Living are from China, for instance.

We have taken various tours round a number of these facilities in the past few years and continue to see high specification finishes in each of the buildings, clever use of space and high levels of pastoral care from the staff.

The vast remainder of the market consists of older, converted buildings which are, on average, less efficient for residents to navigate and for staff to maintain.

The portfolio’s income stream is diversified across 20 different operators who are a mix of large groups and smaller care providers, but all of whom have long-standing experience of providing high-quality care.

We recently visited De Brook Lodge in Greater Manchester to meet operator of the home and learn about their methods of care to keep residents happy and mentally stimulated.

Source: Gravis Capital Management, as at May 2019

1 Office of National Statistics – Living Longer: how population is changing and why it matters

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The private rented sector

The PRS REIT (Ticker: PRSR) IPO date: 31 May 2015 Multi-Manager original purchase date: February 2018

The current private rental market is highly fragmented – 78% of all landlords own just a single dwelling and only 8% are full-time landlords.2 The PRS REIT is the first real estate investment trust focusing purely on the private rented sector. It aims to bring institutional efficiencies to the market, only invests in newly built houses (mostly through their principal partner Countryside) and targets middle-income families at affordable rents.

The current portfolio is primarily invested in the North West, where the needs for housing are large. However, through time this is likely to be less regionally concentrated. Sigma Capital, the investment adviser to the REIT, is currently helping local authorities release land for development and to meet their housing goals.

The REIT prides itself in providing ‘Forever Homes’, marketing

Held in portfolio:

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its homes through its ‘Simple Life’ brand. Key to its success is providing customers with a range of house styles, which accord with their current life stages, allowing both couples and families to grow and retirees to downsize, without the hassle of buying and selling. They will not agree to a site if there is not a local school within a one-mile radius rated ‘good’ or ‘outstanding’ and or with strong transport links to major conurbations – perfect for families.

The fund also got the backing of Homes England, the non-departmental public body tasked with accelerating the delivery of housing, who took a 10% equity stake at IPO.

We furthered our due diligence in November 2018 by visiting both developed and developing sites in and around Greater Manchester.

Source: Sigma Capital Group, as at May 2019

Long-leased property

LXI REIT (Tickr: LXI) IPO date: 27 February 2017 Multi-Manager original purchase date: October 2018

LXI REIT is our most recent addition to the portfolios and the most sensitive to the commercial real estate market. The fund differentiates itself by agreeing long-leases inflation-linked agreements with their tenants, reporting a weighted average unexpired lease term over 22 years as at 31 March 2019.

Moreover, the management team, Simon Lee and John White, are forward-funding experts. They finance the construction of

Held in portfolio:

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a development without taking overt development risk, only paying instalments once a certain level of progress has been achieved.

Moreover, they focus on standard-sized buildings, which can be easily replaced by another tenant in a growth industry – think Aldi and Lidl as opposed to large Tesco supermarkets.

2 Institute for Public Policy Research – The Case for Reforming Private Renting

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Holiday parks

Darwin Leisure Property Fund (DLPF) & Darwin Leisure Development Fund (DLDF) IPO date: 31 May 2015 Multi-Manager original purchase date: DLPF – March 2008, DLDF – April 2018

These funds are positioned to benefit from staycation trends in the UK, are countercyclical in nature, and the Darwin Escapes brand has now emerged a holidaymaker’s favourite and one they use repeatedly year after year.

The Property Fund is the more mature portfolio of the two, and akin to traditional property with its income-generating characteristics. The Development Fund, however, contains parks where the management team is executing on transformational projects and offers prospects of larger absolute returns.

Held in portfolio:

LS3 LS4 LS5 LS6 LS7 Distribution Cautious Balanced Growth

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Held in portfolio:

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Darwin Escapes offers holiday home ownership in three different categories. At the higher end of the market are its ‘Boutiques’ parks, which offer quality lodge retreats in beautiful coastal or idyllic rural settings. Its ‘Luxury’ premium resorts offer a full range of leisure facilities and activities alongside luxurious lodge and caravan accommodation.

Meanwhile, its more affordable ‘Traditional’ range offer all the facilities you would expect at a traditional UK holiday park, including leisure facilities, quality lodge and caravan accommodation and entertainment.

Property Fund:

Development Fund:

Source: Darwin Alternatives Investment Management, as at May 2019