Big UK investors poised to buy the dip in US property

By Iain Withers and Sinead Cruise

LONDON (Reuters) – British investment managers Legal & General and Schroders are to invest hundreds of millions of dollars in commercial property in the United States, but are largely steering clear of the hard-hit office sector, the companies told Reuters.

The fund managers, which oversee more than 1.9 trillion pounds ($2.5 trillion) of assets between them, said they had separately been building up their U.S. real estate teams to make the push, anticipating that property prices will recover, aided by falling interest rates.

Legal & General CEO António Simões told Reuters that U.S. real estate was a key expansion market for the company, adding that the market’s fundamentals remained strong.

Higher borrowing costs and widespread adoption of home working post-pandemic have hit property prices globally, with the U.S. office market hit particularly hard and investors still nervous about oversupply.

But expectations of more interest rate cuts after the U.S. Federal Reserve announced a bumper 50 basis points reduction last week have improved the investment outlook.

Property analysts also said the U.S. market tends to reset faster than continental Europe, with lenders and developers quicker to reprice assets.

L&G plans to expand its fledgling U.S. real estate equity portfolio by hundreds of millions of dollars over the next few years, while adding a similar level of exposure in its more established real estate debt business, the company said.

The fund manager has built a team of around 20 people in Chicago to help with the equity investment push, with a focus on rental homes across the country that have fared better than offices.

Schroders said it was aiming to grow its own nascent U.S. real estate equity portfolio from tens of millions of dollars currently, to hundreds of millions over the medium term. The firm this month made an investment in a pan-American data centre portfolio, one of its initial forays.

“We see the beginning of the Fed journey to normal interest rates as a key to unlock some pent-up demand,” said Michelle Russell-Dowe, co-head of private debt and credit alternatives at Schroders Capital, the London-listed manager’s private markets arm.

Schroders has also identified opportunities in real estate debt, as banks retreat due to tougher capital rules.

“The scale of the opportunity is huge,” said Jeffrey Williams, a New York-based investor at Schroders. “There’s a big gap in financing that other lenders are going to have to fill.”

The company said it was not averse to office investments, but they would need to be high quality developments.

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British insurer Phoenix’s fund arm, which manages around 290 billion pounds, told Reuters it also planned to “invest considerably” in U.S. real estate but declined to give details on the scale of potential investment.

($1 = 0.7520 pounds)

(Reporting by Iain Withers and Sinead Cruise; Editing by Tommy Reggiori Wilkes and Jane Merriman)