Investor Bets £400M That Changes In Higher Education And Healthcare Will Reap Outsized Returns

The growth of UK universities has created great returns for the real estate world, in the form of student accommodation. 

But one fund manager is betting that the next profitable opportunities for real estate investors will be schools themselves. 

“There are too many universities, but not enough further education colleges at the moment,” Newcore Capital Management CEO Hugo Llewelyn told Bisnow.

So Newcore is looking to buy surplus buildings from universities in need of a cash influx and lease them back to vocational colleges that are increasingly in demand.

The fund in question is Newcore’s sixth special situations fund, which announced a £100M equity raise earlier this year and is targeting a final close with £300M of equity in the next 12 months. With a maximum of 40% leverage, that will give the fund a bit more than £400M to spend. 

Newcore has grown to £750M of assets under management since it launched in 2011 by focusing on social infrastructure. It has eschewed the standard real estate food groups of office, retail and industrial and instead bought and built in sectors that society will always need but which have suffered from underinvestment, like education, childcare, healthcare and transportation. 

By doing that, Newcore is hitting value-add returns of 12% to 14% and doing something positive for society as well. The company is a registered B Corporation.

“I think investors understand that what we do is linked to what society needs in the long term, and also, that has been underinvested in the last decade,” Llewlyn said. 

The new fund will pursue four main strategies, although its mandate is broad. It focuses on London and major towns in cities in the south like Oxford, Cambridge, Bristol and Bath.  

On the education front, universities that need to shore up their balance sheets are selling buildings, which Newcore can then lease to further education colleges that offer vocational courses in fields as varied as carpentry and language skills, a growing sector. 

It is a reversal of the trend that saw former polytechnic schools become universities in the 1970s and 1980s, and Newcore has a history of underwriting the covenant of providers in the educational sector, Llewelyn said. 

Also on the agenda is the healthcare sector, particularly GP surgeries. It is a fragmented sector, with surgeries often owned by the doctors themselves or individual private investors, and Newcore can buy them, renovate and improve them, and lease them back to the medical professionals. 

The strategy plays into a wider push in the UK to bring primary care back into communities, to avoid patients relying on more expensive hospital care. Newcore owns about 30 such surgeries and has collated them into a private REIT structure, something it frequently does when it has multiple properties in the same asset class. That allows it to either sell the REIT or use the structure to bring in new investors.

The third societal trend it is tapping into is changes in transportation and the electrification of transport infrastructure in the UK. That involves buying roadside assets like petrol stations, motorway service stations or even industrial outdoor storage assets and installing electric vehicle charging stations. 

On a more ad hoc basis, Newcore is looking to take advantage of the dislocation in the housing market to buy land, take it through the planning process and then sell to housebuilders. While house prices in many areas have fallen, the value of land has also fallen in many cases, particularly where a lender is pushing for a sale or a fund is coming to the end of its life. 

That means land can be bought at a level where it is viable to build — and if Labour makes good on its promises to free up the planning system, that helps contribute to the UK’s housing supply, Llewelyn said.  

Newcore favours those strategies because society needs the assets it is buying and building, and that makes the income they provide more resilient. And Llewlyn said they rode out the recent market downturn better than other sectors on a valuation basis, too. 

At the peak of the market in 2021, a building leased to one of the larger childcare providers would have traded at a yield of about 4.75%, he said. That moved out to 6.25% in 2023 and has since come back in to about 5.25%. 

He compared that to prime industrial assets, which were trading for around 2.75% in 2021, moved out to 5% and are still trading at about that level. 

The company had only around £200M of assets before 2022, Llewelyn said, because it felt pricing had risen too high. Now it has hit about £750M, buying at prices that it thinks are defensible in the longer term. 

As well as its value-add fund series, Newcore has a £375M open-ended core-plus fund, which makes returns of about 9% and on which it doesn’t take a performance fee. That return looks attractive compared to government bond yields of about 5%, Llewelyn said. 

As an investor in social infrastructure, Newcore needs to be a good corporate citizen, Llewelyn said — not using too much leverage, paying UK taxes on its investments, things that give the company a license to provide the real estate for essential public services. 

He said there is growing backlash against companies that don’t act responsibly, and real estate risks coming into the crosshairs in a way similar to the owners of water companies or other failing public utilities. That is especially the case in an economic environment where interest rates and inflation remain high and the person on the street feels the effect in their pocket. 

“Populism is bubbling away, and that populism is coming about because of these pressures,” Llewelyn said. 

“People want someone to blame, so that knocks back to the investors. You can foresee the politicisation of anyone in infrastructure in the next decade.”