A London council pension fund has received a lukewarm response from the market after attempting to find investment managers for a proposed new property portfolio.
The Royal Borough of Kensington & Chelsea (RBKC) pension fund has been told the main obstacle is a requirement that the council’s investment committee retains the right to agree any property deals before they are signed.
Mercer, advisers to RBKC’s fund, consulted with five property managers, which followed a decision in February to increase the pension fund’s property allocation from 5% to 20% and the resignation of an in-house consultant.
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However, only one of the five managers showed any interest in the council’s specifications.
Mercer’s report said the investment committee’s role was the big issue.
“This is the primary stumbling block, as the managers are reticent to put in place any agreement that might complicate matters from an operational standpoint and potentially impact costs,” said the report.
The document said giving the investment committee an early veto might mean there was not enough information available for a considered decision; a veto late in the process would risk writing off large fees racked up on due diligence.
The investment managers also highlighted conflicts of interest as a problem.
Mercer said that all managers are already operating pooled property funds with “broadly similar” investment characteristics to RBKC’s requirements.
The report said: “Given the investor appetite for properties of this type, the managers would not want to compromise their current offerings, in any way, by encountering conflicts of interest when deciding to allocate to one portfolio over another.”
According to Mercer, the obstacle might be overcome by exploring different sectors or negotiating shorter lease terms.
The one manager that was interested — Aberdeen Standard Investments — proposed a blended fee of 33.75 bps on a commitment of £200m.
The Mercer report suggested the council consider the option of engaging a property manager on a property-by-property basis, with an estate manager then appointed to manage the assets.
However, it pointed out that splitting acquisition from management meant a loss of alignment of interests.
Mercer said in such an arrangement a “transaction manager” could be incentivised to rush through as many deals as possible, regardless of their quality, “as they just walk away once the deal is done”.
The council’s investment committee would therefore need expertise to evaluate the quality of the property proposed for acquisition.
In summing up the response from managers, Mercer said: “Ultimately, although we have made it clear to the managers that there could be some flexibility in what the portfolio might look like, the reality is that these types of property are hugely in demand in the present environment given their attractive yields.
“For that reason, the managers are in a strong negotiating position and have no great need or desire to compromise on their current offerings for high lease to value property.”
