Shiraz Jiwa, the founder and CEO of UK and European real estate investment and asset management firm, The Valesco Group, has shared details on a fundraising milestone but also on an exciting 18-month window for office investments.
According to Jiwa, the company sees a window of opportunity of 12-18 months to deploy at least €1 bn of capital into the UK and European office market.
He explains that macroeconomic destabilisers such as inflation, interest rates, and general weakening of GDP in various countries are contributing to the potential for market dislocation.
Jiwa has commented before on the ‘hotelification’ of office assets with everything that implies for landlords and occupiers. But with the new market dynamic of some office assets being overly marked down in value, he sees this as a moment to find jewels.
The strategy remains to invest in very well-located assets, with strong covenants and a clear pathway to ESG enhancement. But he also mentions Grade B or B+ office stock that can be repositioned and upgraded, again with clear ESG enhancement angles.
‘I think a situation has emerged whereby there is an immense pricing dislocation. The reason is that every product is getting treated in the same way irrespective of any differentiation. You are going to see a collection of assets that indiscriminately go down in price. Within those, there will be some jewels. We are in the business of finding these, so it is a very interesting time from that perspective.’
He explains: ‘If anything is just slightly off the beaten track, whether it be asset quality, tenant covenant, location, micro-location, or ESG credentials, assets are getting unnecessarily marked down in some cases. Some assets absolutely deserve that, but it doesn’t mean you have to be in the CBD, it just means that you’ve got to have supporting real estate fundamentals for your downside protection and a pathway to enhanced ESG credentials.’
He adds: ‘We are very much in deployment mode. We are underwriting transactions right now and are undergoing the due diligence process.’
Valesco started deploying capital into the UK and European office market from April 2018 onwards, taking AUM from zero to around €2 bn in 21 months. It made a name for itself particularly for a string of prime trophy assets purchased on behalf of South Korean client investors such as Cannon Bridge House in London for £250 mln (€296 mln), Microsoft’s UK HQ in Reading for £100 mln, Amazon’s CEE HQ in Slovakia for £120 mln, and the Finance Tower in Brussels for a whopping €1.2 bn.
The company managed 100% rent collection across the portfolio during the Covid pandemic. Last year saw a pause in new acquisitions as the firm remained cautious, but now it is ramping up talks with sellers again.
The ESG theme is ever present in the strategy. As an occupier as well as investment firm, Valesco is acutely aware of the scarcity of office assets with top ESG credentials. The company just moved into new premises at 25 Berkeley Square in London’s Mayfair. But Jiwa says 25 Berkeley Square was one of only two options that met its ESG requirements, and the apparent lack of supply in many major locations creates an important dynamic relevant to the investment market.
‘Occupiers are prepared to pay more rent for space that meets ESG requirements. These assets will have a greater degree of liquidity and downside protection,’ he says.
Now in deployment mode, Valesco also reveals progress on the fundraising side for its first discretionary real estate vehicle. It recently held a first close on the new fund cornerstoned by an Asian sovereign wealth fund (not Korean, says Jiwa).
Jiwa explains the investment strategy is not limited to office assets. For example, it can encompass logistics property, but so far the team hasn’t seen anything that fits its strict investment criteria.
‘We have looked at a lot of logistics, but the yields have been eye-wateringly tight, and it is difficult to underwrite the types of prices required – that is what it comes down to,’ he says. ‘I do believe we will be allocating to other asset classes be that healthcare, life sciences, residential development, private debt and so on.’
‘That said, we have tried to avoid herd mentality and we have tried to be contrarian at certain times. It is about positioning for that next part of the cycle. That doesn’t mean there are not some great deals being done or none have been done in those sectors, but as soon as you start seeing swathes of capital and new entrants going into markets, that is when you should start to be concerned because it suggests things are heating up.’