PropCast: Inside OMERS-backed Oxford Properties

Oxford Properties is the global real estate investment arm of OMERS, one of Canada’s largest defined benefit pension plans, and is one of the largest investors in real estate worldwide across a broad range of sectors.

Lee Coward, the firm’s Head of European Investments, has overseen its expansion across Europe and Australia, where Oxford has acquired specialist expertise and bought operating platforms.

Coward introduces his thoughts on the basis that “being a good investor requires some degree of optimism”. This is a thought process that comes from his belief that having trained as an accountant, “you can talk yourself out of anything”.

Coward joined Oxford Properties in 2013, following earlier roles at Deloitte and PwC.

“I knew I wanted to work in real estate,” he explains. “I just didn’t want to do tax.”

What drew him to Oxford Properties was its structure. “It was a small European team at the time, but with a very large balance sheet behind it,” he adds. Perhaps more importantly, the “combination of fast movement and big deals was quite compelling.”

At Oxford Properties, Coward began in internal corporate finance before moving into European debt strategy.

“That role [debt strategy] really exposed me to how deals actually get done,” he says. “You learn a lot when you’re negotiating with lenders and working through different capital structures.”

By the end of 2017, Coward had moved into equity investing, a role that continues to evolve alongside Oxford’s European expansion.

He recalls an exercise done early in the company’s growth phase to better understand its corporate identity.

“We went out to advisers and partners and asked: if Oxford Properties were a car, what kind of car would it be?” he recalls.

The responses were mixed, but the discussion that followed remains instructive.

“It forced us to think about what sort of business we actually wanted to be,” he says. “Are we a pension fund, a property company or a private equity investor?”

The conclusion, he notes, is deliberately simple.

“We came back to the idea that we want to be good investors first and foremost,” he says. “Everything else comes second to that.”

That philosophy was tested in late 2018 during Oxford’s expansion into Australia, through the take-private of the Investa Office Fund, one of Australia’s premier REITs.

“At the time, we didn’t have a team on the ground,” Coward says.

The approach was simple, if highly ambitious – especially in the context of stiff competition from Blackstone.

“We flew about ten people from the European team out there,” he explains. “We were staying in a hotel for three months and working out of borrowed meeting rooms.”

Within roughly 100 days, Oxford completed the A$4.5 billion take-private, which remains to this date one of Oceania’s biggest real estate deals.

“It was intense,” he says. “But it was a great process and a huge learning experience.”

For Coward, the value lies in exposure, both for the fund, which benefits from a major diversification, and the team, who carried out a career-defining deal in a totally new market.

“You don’t often get that level of involvement in a live public markets deal,” he says. “Particularly under that amount of pressure.”

Asked where the market sits today, Coward consciously chooses to avoid precise labels, instead preferring to look at the exact market conditions present and what they might mean down the line.

“Cycles start and then, a few years later, you look back and realise they started earlier than you thought,” he says.

From Coward’s perspective, the underlying picture is reasonably healthy.

“If you look at occupational markets, things actually look quite good,” he says. “Office leasing in London has been stronger than many expected, and residential undersupply is still very real.”

The challenge remains transactional activity and the broader state of capital markets, specifically the public markets, where despite broad growth real estate as a sector has remained a laggard.

“There’s still a gap between buyers and sellers,” he notes. “That gap has to close before volumes really come back.”

Coward is direct on the question of when core capital will return to the market. “I don’t think core money left,” he says. “I think it’s just got a higher return target than it had.”

In his view, when people ask when core money is coming back, “what they really mean is when’s cheap money coming back. And I’m not sure it is coming back quickly.”

Coward is also cautious about predictions of widespread distress and thinks investors that wait for systemic weakness won’t be rewarded.

“This isn’t post-GFC,” he clarifies. “If you’re waiting for that level of stress, you may be waiting a long time.”

In listed real estate, Coward expects consolidation to continue, with the headwinds that have caused it to do so far not changing.

“A lot of the smaller platforms have already been taken out,” he says. “So naturally attention shifts to larger groups.”

Similarly, he is yet to be convinced about a near-term revival in IPO exits.

“Even when markets were more supportive, many dual-track processes ended up going private,” he says. “That’s been the reality for a while.”

Those experiences inform Oxford’s thinking on liquidity.

“Private markets don’t offer liquidity in the same way as public markets,” he says. “But it’s interesting to think about whether you can incorporate some of the better features of public markets into private structures.”

Coward clarifies that despite Oxford’s long-term capital base, every strategy competes internally for funding, requiring a constant weighing of risk-adjusted returns between different asset classes.

“Within OMERS, capital is allocated across public markets, private equity, infrastructure, real estate and credit,” he says. “Each of those has its own return expectations.”

As an example, Coward points out that Oxford’s US real estate credit platform is currently lending around $1.5bn annually and its attractive return profile affects thinking on decisions in direct investment.

“You can achieve returns of 9 to 10%, largely through cash yield,” he notes. “When that’s the alternative, development has to be very compelling to make sense.”

For stable income-producing assets, Coward sees a levered return of 12 to 13% as a reasonable expectation. For ground-up development, the bar is higher. “You probably want to be levered high teens to take that risk,” he says.

As a result, Oxford has been highly selective.

“Where we do develop, we try to remove as much risk as possible,” he says.

One example is the redevelopment of the London Stock Exchange building.

“We’ve already agreed the lease terms with the LSE,” he clarifies. “That materially changes the risk profile.” In practice, this creates a highly secure and attractive thesis, even in the context of secure private credit returns.

Oxford’s emphasis on control and effective risk management also drives its preference for platform investments – such as the acquisition of M7 Real Estate during the Covid period.

“That deal was executed very quickly and almost entirely remotely,” Coward says. “But it gave us immediate access to a specialist logistics platform.”

Earlier this year, Oxford took that platform strategy a step further by bringing in AustralianSuper as a joint venture partner, selling half of the M7 business and portfolio to create the European Supply Chain Income Partnership. The ambition is to triple the size of the platform over the next few years, targeting up to €4.5bn across six core European markets: the UK, France, Germany, Spain, the Netherlands and Denmark.

For Coward, the rationale is straightforward.

“In a very competitive market, having genuine specialists on the ground really matters,” he says.

Oxford is now expanding that platform across core European markets.

“We’re happy to work with partners,” he adds. “But we want to stay hands-on. We’re not looking for an investment manager or to outsource decision-making.”

Coward also speaks from personal experience on residential investment and the challenges that both tenants and landlords face in the modern market.

“I rented in London until I was about 35,” he says. “Short tenancies, arbitrary fees and a lot of uncertainty” are among the many problems he makes clear he had to deal with.

That experience comes to shape his view of build-to-rent, which he views as providing a more consistent and professional service to renters.

“I think build-to-rent genuinely offers a better experience for tenants,” he says.

Additionally, given that Coward walks the walk as well as talks the talk – by living in a build-to-rent building – he notes that “the tenant WhatsApp groups are probably the best market research you could ask for”.

Looking beyond the Anglosphere, Coward sees material opportunity across continental Europe, with Spain – and Madrid specifically – at the top of his list.

“When we look at the continent, yields are more attractive and borrowing costs are lower,” he says. “I’ve probably talked internally more about Spain than anywhere else.”

Coward’s focus on Madrid mirrors the London-biased approach Oxford took with its UK residential portfolio. He points to strong Spanish GDP growth, Madrid’s role as the engine of that growth, international businesses establishing headquarters in the city, and a quality of life that compares favourably with more expensive Northern European capitals.

In practice this means Oxford is reviewing opportunities ranging from €150m to more than €1bn.

“We work with local operating partners,” he explains. “But we stay very closely involved.”

On governance, Coward is emphatic. No matter how attractive a deal might look, Oxford will not compromise on governance standards or liquidity rights – a lesson reinforced by the past couple of years, where a stagnant market has exposed the risks of inflexible structures.

“There’s no real estate deal that would look so good that we would throw out our governance and liquidity requirements,” he says.

Looking to the future, Coward’s hopes for the market are clear and positive.

“I’d like to see a bit more liquidity return to the market,” he says. “Real estate works better when people can buy, sell and reallocate capital.”

With that said, he remains optimistic – making the compelling argument that across a range of vehicles and asset classes in real estate, “capital has been raised”. “At some point, it will need to be put to work,” he finishes.