By FERGUS SHAW
Cerno Capital Multi-Asset portfolios, led by TM Cerno Select and Cerno Select (Dublin), allocate around three broad asset types: Long Term Growth, Steady Return and Liquidity assets (which we term Treasury).
The first group comprises a diverse range of equity holdings. Steady Return assets are tangible investments generating attractive cash flows which form the bulk of the return profile with capital values that display less volatility than equities. Treasury assets tend to be defensive stores of value.
The Steady Return component is itself diverse across Infrastructure, Real Estate and Music Royalty assets. We have introduced a new holding to the Steady Return allocation in the form of Life Sciences REIT which listed on the London Stock Exchange on 19th November.
The UK health sector provides several avenues for investment. The linking theme is the need to deliver life enhancing practices and procedures at an ever more economical cost. Health companies are therefore problem solvers and represented in our portfolios through allocation to specialist equity managers and holdings in Global Leader companies.
Companies and other organisations operating in the Life Science sector have very specific requirements in terms of where they locate and the buildings they inhabit. Centre of excellence clusters have emerged where enterprising universities are located near hospitals with strong research and the capability to create spin-out businesses. These businesses prefer to locate close to the clusters that gave rise to them. Furthermore, established life science businesses can be observed moving premises to be close to these clusters. For example, in 2016, AstraZeneca moved its extensive research and development headquarters from Cheshire to Cambridge.
Within the UK, three key clusters have emerged – Oxford, Cambridge and St Pancras. The three are known in the sector as occupying a Golden Triangle. It is important to remember that the UK is a major player in the Life Sciences sector, with some commentators suggesting the UK houses 40% of the worlds Life Science brainpower. Competition for laboratory and associated real estate is fierce and development of new space must compete with the requirement to provide new housing in already congested areas. This presents an attractive backdrop for investment in property that is to be let to businesses operating in the Life Sciences sector.
With tight market dynamics, it is crucial that property investment professionals bring extensive experience as operators in the property market generally and of the peculiarities of the life sciences sector. The opportunity presented is multi-faceted. There is some scope to purchase existing Real Estate, let to life science entities and then to improve the assets. In addition, there is scope to convert existing office buildings to offer a home to life science companies. In this activity, it is crucial that the property managers understand the key requirements to create laboratory settings – in particular, ceiling height, high power connectivity and capacity for a substantial plant room are pre-requisites. The opportunity for substantial income growth from this activity as laboratory rents are well ahead of office.
The lead investor of the Life Sciences REIT, Simon Farnsworth, has substantial relevant experience and his is backed by founder investor Simon Hope whom we know well having worked with him on other Real Estate investments. Our approach to Real Estate investment is to seek out specialists targeting singular markets with attractive demand / supply characteristics. The Life Sciences REIT will sit alongside existing investments in warehouses and long-leased commercial property.
The REIT comes to the market with a target dividend yield of between 4% and 5%, with the prospect of substantial rental growth and value created by the specialist management team that could entail a total return of 10%. This level of return is attractive in the property sector and the security of returns are well anchored in this sector which is a stand out success for the UK.