DTZ Investors manages €10bn ($11bn) of assets globally. In the UK we have an exceptional performance track record having won 15 prestigious IPD/MSCI performance awards since 2000. Our house performance has beaten the IPD/MSCI benchmark by 1.8%pa on average over the past 20 years to December 2018. In Continental Europe, we won the ‘Pierre d’Or’ as Best Asset Manager of the year in 2004 and the European Pensions award for Best Asset Manager in 2009.
Investment principles & strategy
We recognise the importance of income in long-term property investing. Income has generated c.70% of property total returns over the last 20 years. Our philosophy focuses on maximising the long-term income potential from property to deliver superior, risk-adjusted, property returns. We put the occupier at the heart of the investment management process, as the occupier creates the income return. We make allocations to markets where occupiers want to be, choosing buildings that are flexible to their needs and where we believe we can add value through managing the investments in partnership with them. This philosophy is integral to our entire investment process and drives our three-pillar approach:
1. Strategy: Our property market view is rationally based on the relative prospects for tenant demand, driven by business sector growth, location, and building preferences. We aim to capture superior rental growth relative to the wider market by identifying where tenant demand is expected to be strongest.
2. Stock selection: We acquire buildings that suit occupational requirements today, and have the scope to be adapted to suit future occupier needs.
3. Management: Our key purpose is to ensure that the businesses that occupy our buildings are satisfied customers. As a result, we have high tenant retention and low void rates within our managed portfolios. We have a business culture and a remuneration system that incentivises our managers to focus on the occupier.
Our UK track record is benchmarked against the IPD / MSCI Index, which is considered the most reliable benchmark of direct property performance.
INDUSTRIAL: Total returns will moderate this year as affordability pressures, a softer global economic backdrop and a weaker outlook for retailers reduces industrial take up. Short-term performance prospects will be brightest for the standard industrial sector, supply constraints are more pronounced and demand is supported by a more diversified occupier base. Cyclical and structural headwinds in the retail sector together with a rise in speculative big-box development will dampen rental growth prospects for the logistics sector.
OFFICE: Occupier conditions may soften in the second half of 2019 as slower domestic growth and occupier caution returns. Employment growth is likely to slow under these conditions, leading to more subdued levels of take up, but low vacancy rates and a thin development pipeline should support rental values. We expect regional office markets will outperform central London offices and the All Property average in 2019, total returns will be supported by relatively low levels of new grade A stock and above average yields. More affordable rental levels should also ensure that current levels of regional office take up is maintained.
RETAIL:2018 was a tough year for the sector; several retailers ceased trading or took advantage of company voluntary arrangements (CVAs) to restructure their businesses, reduce store portfolios and cut rents. Another difficult 12 months is expected; high occupational costs and modest instore retail spend is expected to suppress operator margins and profitability which could lead to further retail casualties in the short term. The supply-demand imbalance will cause rental values to decline across all retail segments in 2019, with secondary, tertiary locations and non-prime shopping centres at risk of more pronounced rental falls. In the current climate we expect convenience retail (supermarkets), conveniently located retail parks with a supermarket anchor and a low exposure to fashion operators and dominant retail in very prime locations will perform better than other retail segments.
RESIDENTIAL: The PRS sector will remain a popular alternative sector in 2019 rewarding property investors with increased portfolio diversification, lower volatility, stable income streams and better rental growth prospects than for most commercial property segments. The sector’s fundamentals remain sound and supported by a structural mismatch in demand and supply, the high costs of homeownership and the rising trend in the number of young people opting to pursue a more transient lifestyle.
OTHER: Hotels – Performance is likely to be more subdued this year; slower global growth and a lack of major events in 2019 is likely to reduce overseas visitor numbers, while higher labour costs and business rates will make for tough operating conditions. The increased supply of traditional hotels, alternative hotel accommodation (serviced apartments and Airbnb), and a pick up in retail to hotel conversions will keep the supply pipeline full in the short term limiting rental growth prospects.
Student accommodation: Weak student numbers and an increased supply of new stock will result in more modest returns for 2019. According to the ONS, the UK is projected to see a decline in the number of 18-year-olds over the next few years. Other factors such as the increased cost burden of higher education and a fall in the graduate earnings premium will cause domestic students to be very selective in their choice of university, opting for the red brick institutions over lower tariff universities or forgoing a university education for alternative arrangements (apprenticeship schemes). International student numbers could also slow as higher tuition fees, visa restrictions, increased competition from online courses and the improved offering of institutions in developing countries tempts overseas students elsewhere.
Healthcare: Both primary healthcare (doctors’ surgeries) and secondary healthcare (care homes) will contend with existing challenges in 2019 including increased staff costs and greater regulatory requirements from the Care Quality Commission. Of the two core segments, primary healthcare looks best placed to deliver growth against these challenges. The sector is supported by strong fundamentals: virtually no vacancy, low speculative developments, affordable rents (which amount to 5% of overall costs) and funding support through the government’s five-year General Practice Forward View (GPFV). The outlook for care homes is less promising; operator profitability will remain under pressure from higher staff costs due to the National Living Wage and a flatter trajectory for occupancy rates, in part due to the increased choice of specialist housing facilities (care villages and senior living facilities) for elderly patients. The indebtedness of some of the major care home operators is an additional risk to performance prospects.
Occupational prospects will vary across alternative segments. The leisure sector should benefit from resilient consumer spending, given that it provides a service that cannot be replicated online. Rents across most leisure formats (excluding restaurants) look affordable, providing scope for rents to grow from their current levels. Growth in the global economy and the weakness in the pound should benefit the hotel sector by maintaining overseas visitor numbers and incentivising UK consumers to take holidays at home. However, a growing development pipeline and the continued expansion of Airbnb operators could limit the rate of rental growth achieved by the sector. The outlook for the healthcare sector will be strongest for primary healthcare (doctor’s surgeries) compared with secondary healthcare (care homes), assisted by government funding, low void, low speculative development and affordable rents (relative to total business costs).
Strategic corporate development
Over our 50-year history the core of our business has been managing segregated accounts for large institutional clients in the UK. Today, our business is pan-European, but over the next five-year period a key focus for us will be to extend our footprint in continental Europe. We also want to broaden our client base in terms of investor type and location. To this end, we will be adding to our roster of pooled fund products. Specific areas of focus for new product strategies are alternative sectors and continental European markets. We will also develop our asset management service line, working closely with overseas capital trying to help them access and manage European real estate.
DTZ Investors complies with applicable laws and regulations. The firm operates a Global Code of Ethics for its businesses that includes its investment and asset management operations. The Board establishes the compliance framework for its entities and is implemented by Senior Management. In addition, the Group Compliance Manager works to ensure compliance of the firm’s regulated activities and retains third-party auditors to monitor compliance.