The UK property landscape is evolving, driven by mega trends and sustainability challenges. Matthew Norris, Fund Manager of the VT Gravis UK Listed Property (PAIF) Fund, discusses the opportunities and risks for investors today. From the growing demand for healthcare properties to the rise of e-commerce and urbanisation, REITs play a crucial role in addressing these shifts. Below, Matthew offers insights on how next-generation real estate investments are navigating the changing market.
IFA Magazine: Could you explain what the VT Gravis UK Listed Property (PAIF) Fund is?
Matthew Norris: “The VT Gravis UK Listed Property (PAIF) Fund is a fund of REITs. We invest in specialist next-generation real estate investment trusts and real estate operating companies. The outcome that we’re seeking for investors is dividend yield, plus growth, plus upside potential to the values of the underlying assets.”
IFA Magazine: What do you see as the biggest challenges and opportunities for property investors in the UK today?
Matthew Norris: “The biggest opportunities out there are these powerful socioeconomic mega trends that the fund invests in, and really there are four mega trends: ageing population; digitalisation; generation rent and urbanisation. The second bracket of opportunities out there is for real estate investment trusts to develop branded, operational, next-generation real estate, and REITs are the best place to do this.
When you look at the challenges, there’s one overriding issue that impacts all of real estate, and that is climate change. Climate change is the biggest risk facing humankind. Who has the skill set, the money and the knowledge to deal with that? The answer is a professional owner-operator of real estate.
That’s the biggest risk facing real estate, but the second area that is a real challenge is retail. The occupiers of retail real estate still face their own set of challenges. Most recently, we’ve seen Cineworld file for bankruptcy, before that, it was Carpetright, and before that, it was The Body Shop. The next tenant of those retail spaces is going to end up paying less rent to the landlord. There’s clearly a challenge there as the world migrates from an ofÒine world to an online world, from a physical shopping world to an e-commerce shopping world. That is bad news generally for the retail space but good news for the digitalisation mega trend.”
IFA Magazine: Why are the four mega trends so important?
Matthew Norris: “These mega trends are enduring multi-year social and economic trends that are evidence-based. For example, with an ageing population, the over 85s are the fastest growing demographic cohort out there, and that leads to increasing demand for healthcare assets. Who’s going to own and develop those assets? It’s the listed real estate companies.
Looking at the digitalisation mega trend, evidence shows you that more than a quarter of what we buy in the UK, we buy online, which is great news for landlords of e-commerce fulfilment centres.
With generation rent, there’s a growing cohort of renters out there, and they want a good experience and value for money. We see it with the Labour Government promoting renter rights, which is good news for professional landlords.
Finally, urbanisation; green is the new prime and who owns and develops the greenest offices? It’s the listed players.”
IFA Magazine: Could you discuss how special REITs are meeting the growing demand for elderly care and healthcare properties, and are they adapting to this demographic shift?
Matthew Norris: “Within this massive demographic shift, it’s estimated that there will be millions more over 75-year-olds across the coming decades. That puts up demand for two types of assets relating to an ageing population.
Firstly, there’s the healthcare space. If you’re over 80, it’s estimated you go to your GP thirteen times a year, so we have this rapidly growing cohort that uses healthcare services to a higher level. How are we going to, as a society, supply and provide primary health care? REITs like Primary Health Properties (PHP) will play their part in developing the next generation of primary healthcare facilities and diagnostic centres.
Then, when you look at social care and care of the elderly, clearly, to free up space in hospitals, we need to discharge the elderly from hospitals into care homes. Who’s going to provide the next generation with care homes? It’s the likes of Target Health Care and Impact Health Care, who own and develop specialist, purpose-built care homes. They’re definitely responding to this demand for new assets from an ageing population.”
IFA Magazine: Digitalisation has transformed many industries. How is the rise of e-commerce and automation reshaping demand for warehousing, distribution centres and logistics properties?
Matthew Norris: “In the UK, more than one-quarter of what we buy, we buy online, and that percentage is continuing to grow. It’s driven by the three C’s: cost, choice and convenience. The lowest-cost products are found online, the widest choice is available online, and the highest level of convenience is achieved from online shopping. As we migrate to e-commerce, it’s estimated that three times as much warehousing space is required for online sales as it is for offline sales. You need space to store the goods, to pick the goods, pack the goods, to ship them and to accept returns. So, as we are buying more online, more space is required, which is good news for the owners of e-commerce fulfilment centres.
What you’re also seeing happen is consumers are demanding a higher level of convenience. There’s demand for next-day delivery, but what we’re now witnessing is demand for same-day delivery. That requires investment into urban logistics that will satisfy the demand for same-day delivery.
Regarding urban logistics, those warehouses have been generally demolished to make way for higher-value residential property. Thus, supply has shrunk, and demand has increased, which leads to elevated levels of rental growth, and that is great news for investors.
If you look at e-commerce fulfilment centres and the large mega sheds, the good news for investors there is that the value of the robotics in the warehouse and the value of the automation is worth more than the warehouse itself. Again, good news for investors as the tenant will sign a long lease with guaranteed annual rental escalators.”
IFA Magazine: The generation rent mega trend is reshaping the UK residential market. How is this shift towards renting, particularly among younger generations, affecting the demand for build-to-rent and purpose-built student accommodation?
Matthew Norris: “With the new Labour Government, we’ve clearly seen that they are promoting renter rights and terms, as well as a higher quality renting process overall. Who provides the highest quality rental stock out there? It is modern, purpose-built for rent accommodation, owned and developed by the likes of Granger within the build-to-rent market. Then, within purpose-built student accommodation, it’s the likes of Unite. These are modern purpose-built buildings; the owner of the building is also the operator of the building. They value customer service, and they talk in terms of net promoter scores, so it’s really a consumer-driven business as opposed to the old landlord, ‘let and forget’ model. What we see is that renters have a choice: rent from an amateur buy-to-let landlord or rent from a professional residential landlord like Granger, and people are increasingly deciding to rent from a professional.
The government is taking firm action against amateur buy-to-let landlords with low-quality stock. I think you’ll see a continued migration towards professional landlords, which is great news for investors who invest in the REITs within that space.
Concerning student accommodation, the key mega trends are clear from the census data: for the next seven or so years, we’re going to have more 18-year-olds in this country and more university-aged students. We have three of the top ten universities in the world. We have more of the top fifty universities in the UK than the rest of Europe combined. All of which is great news for demand for purpose-built student accommodation.”
IFA Magazine: How do you see the role of environmentally sustainable green buildings evolving in the commercial property sector, particularly in premium office spaces?
Matthew Norris: “Climate change is the biggest risk facing humankind. The build environment is a large contributor to climate change, so green is definitely the new prime. The previous Conservative government set standards for energy efficiency, and we’ve seen the new Labour government adopt similar standards, most recently in the buy-to-let space. We think there’ll be standards for energy efficiency in the UK, and if your building does not meet those ratings and, specifically, the energy performance- the EPC rating of B or better- you won’t be able to lease or re-lease your building. If you can’t lease or release it, then the value of that building is destroyed, and there is a real risk in commercial real estate that substandard assets will become stranded assets. This means the tenant won’t want to occupy them because they’re not a green building. That building likely won’t resonate with the brand values of the tenant, and it will be socially unacceptable to demolish the building because of the embedded carbon in the concrete and the steel. Perhaps the owner doesn’t have the knowledge, experience or money to repurpose it, so there’s a risk that you will have stranded assets. We’d encourage investors to look at the quality of the underlying buildings within their portfolio and pivot their portfolios towards high-quality, modern, purpose-built, environmentally friendly buildings.
Regarding the VT Gravis UK Listed Property (PAIF) Fund, already 55% of our portfolio is future-proofed. The worrying factor is, if you look at England and Wales, only 15% of commercial real estate is futureproofed. To bring it all together, if you invest in the most powerful mega trends, if you invest in the greenest buildings, then the returns that we’re seeking to deliver to investors of yield plus growth plus upside potential are achievable. Right now, that looks like about 4.5-5% yield, inflation-beating dividend growth and double-digit upside to potential value.”
Conclusion
In today’s rapidly changing property market, it’s clear that both challenges and opportunities abound. Investors have much to gain by tapping into powerful mega trends like ageing populations, digitalisation, and urbanisation. At the same time, addressing sustainability and climate change is crucial for futureproofing investments. The VT Gravis UK Listed Property (PAIF) Fund, with its focus on specialist REITs, is well-positioned to meet these demands. By investing in next-generation, environmentally conscious real estate, investors can potentially secure long-term growth while aligning with the evolving needs of society and the environment.
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About Matthew Norris
Matthew is the Director of Real Estate Securities and a Fund Manager at Gravis. He is responsible for the oversight of the VT Gravis UK Listed Property Fund and the VT Gravis Digital Infrastructure Income Fund.
Matthew has more than two decades’ investment management experience and has a specialist focus on real estate securities and digital infrastructure investments. He served as an Executive Director of Grosvenor Europe where he was responsible for global real estate securities strategies. He joined Grosvenor following roles managing equity funds at Fulcrum Asset Management and Buttonwood Capital Partners.
Matthew graduated with a degree in Economics & Politics from the University of York. He is a CFA charterholder and holds the Investment Management Certificate.
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