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Why A Giant Aussie Investor Is Spending £2.4B On A London Mixed-Use Push

Big global investors are increasingly willing to back large, mixed-use property schemes. But AustralianSuper really loves London mixed-use schemes.

The fund, which has total assets of £122B, has committed upward of £2.4B to buy stakes in two of London’s largest mixed-use developments, at King’s Cross and Canada Water, with plans to build them out.

The acquisitions make it the joint owner of 116 acres of the UK’s capital. One scheme has already established itself as an exemplar of regeneration and mixed-use development; the other is set to create a project worth £5B in a previously unloved area.

DAC Beachcroft's Sally Morris-Smith, 10 Design's Chris Jones, AustralianSuper's Paul Clark, Native Land's Jay Squier and M&G's Lynn Smith

“What we're trying to achieve when we invest in mixed-use estates is to create sustainable, diversified income streams from offices, residential, retail, leisure,” AustralianSuper Head of European Property Paul Clark told the audience at Bisnow’s Supercharging Urban Development event, held at the Arbor building, part of Native Land’s Bankside Yards mixed-use scheme on the south bank of the Thames.

“And you hope that you get a premium from that, because of the scale and quality you can achieve.”

Because of the size of the fund, Clark said large mixed-use schemes appealed to AustralianSuper, allowing it to deploy large amounts of capital in individual deals. And it has truly done some large deals in London. 

In 2016, it undertook the first of two transactions to buy a stake in King’s Cross, the 63-acre mixed-use campus in central London that includes offices leased to Google and Facebook, an open-air retail destination, restaurants, bars, cafés, a university and residential apartments. It now owns 70% of the scheme, paying £680M for two stakes, before the cost of developing new buildings. 

Last year it paid £260M for a 50% stake in Canada Water, the 53-acre scheme in south east London that has been pieced together and developed by British Land. The scheme will comprise up to 3,000 new homes and more than 2M SF of commercial space, including offices, life sciences and retail. The whole project will cost in the region of £3.5B to develop, putting AustralianSuper’s outlay at £1.75B.

When the investor bought into King’s Cross, the scheme was already well-established, with Google and Facebook secured and a university and multiple office buildings built. Canada Water, on the other hand, is at the very first stages of the development process. Inevitably, there was a different process for buying into schemes at different stages of their development, Clark said.

The mixed-use scheme at King's Cross

“It sort of depends what risk-adjusted returns you want,” he said. “At Canada Water, British Land has worked very hard on that for 10 years or so before we ever got involved. But as we became partners, the first phase of a 10-12 year project was beginning. And you have to accept that, although it's been master-planned and you can see roughly what the what the future looks like, you're gonna go through at least one cycle over that period, quite possibly two.”

That means speculative development risk and requires a higher return as a consequence, Clark said, with valuation uplifts coming after schemes are completed and income rising once the development is stabilised.

Crucially, part of the appeal of a mixed-use scheme is the ability to control a whole area, curate it, and get better returns than just owning one or two buildings, Clark said. If done right, the whole can be worth more than the sum of the parts. But it's important to buy in at the right point of the cycle and at the right price to avoid chasing your tail, Clark said.

Large mixed-use schemes are often set in areas like Canada Water that are not traditional commercial locations, or in places like King’s Cross, which was associated with crime and prostitution before the current development was up and running.

As a result, such projects offer the chance to buy at scale in areas where rents are likely to grow dramatically, offering high potential returns.

“You would expect that the income streams you can produce from that sort of environment [King’s Cross] would be a lot better than what you might have expected at the beginning,” he said. “So you should should expect to get an acceleration in your rental growth in the last sort of third of the development programme.”

Given the long-term nature of such developments and the speed at which real estate usage is changing, it is important to look for schemes with flexibility to alter the intended use of property, particularly the commercial elements, Clark said.

When Canada Water was conceived in 2015, for instance, life sciences was not part of the plan, British Land Joint Head of Canada Water development Emma Cariaga said. But the growth in demand for life sciences space has been rapid in recent years, and the JV partners felt the scheme’s proximity to research hospitals such as Guys and St Thomas’ in London Bridge and King’s College Hospital in Denmark Hill made the sector a viable option.

CGA Experience's Chris Garthwaite, British Land's Emma Cariaga, Lendlease's Bek Seeley, London South Bank University's George Agyekum-Mensah, Related Argent's Siobhan Jared and LGIM's Denz Ibrahim

A modular life sciences building is being built as part of the first phase of the scheme, to see if occupiers can be drawn to the development.

“We have the opportunity to respond to that in a way which allows us to test that demand, and then respond at scale if it transpires,” Cariaga said of the building, which took nine months to deliver.

“It's not a permanent building, it won't be there for 30 or 100 years, but it's a form of construction that I think the industry could look to for how we respond to changing patterns of demand, with a view to testing and refining product definition and development before building a building that hopefully will last a lifetime,” she said.

Rented residential also forms a much greater part of the plans for mixed-use schemes than when AustralianSuper bought into King’s Cross in 2015, Clark said. 

“I think, over the last five or 10 years, that the big changes in the profile of major mixed-use projects would be that residential looms a lot larger, and particularly BTR,” he said. “Also, if you're in London today, you really do have to have a material affordable social element, and that's really important in terms of creating a sustainable, mixed neighbourhood."

Offices, he added, would still play a large role in such schemes, even as the sector suffers a decline in values and occupancy. There is an oversupply of poor-quality secondary stock but an undersupply of new, good-quality sustainable offices, to which occupiers will increasingly be drawn. 

Mixed-use developments increasingly need to rely on a combination of “data and gut instinct” to create places that people genuinely want to be, according to another speaker at the event.

The Arbor building at Bankside Yards

“I just think the way we used to do it is crazy,” LGIM Real Assets Head of Retail and Futuring Denz Ibrahim said. “You know, you have a box, and we ask how many people might lease it through an agent, and hopefully someone takes it. I just think it was just archaic, and it got a bit lost.

“It can't just be what the data tells us to put in there. It has to be data support, plus gut instincts of how we make a great place, whatever that is.”

Creating a large, mixed-use scheme is an act of faith, given the long time frame over which such projects are conceived and built. 

Bankside Yards is a 5.5-acre mixed-use scheme comprising eight new buildings, with more than 350K SF of offices, 50K SF of amenities, bars, restaurants and cultural space, and a 5-star urban resort hotel. The development will also deliver more than 700 apartments and be fossil fuel-free — all electrical power will come from fully renewable sources, and it will feature a pioneering fifth-generation energy sharing network.

The first building, Arbor, was commenced at the depths of lockdown, said Jay Squier, developer Native Land’s executive director. 

“No one was in the offices or going for a run down the Thames, and the city was empty,” he said. “There wasn't a soul there, and we had to say to our partners, 'This is a great deal, we should build and we should build an office, when no one is in offices any more.'

“The reasons we persuaded them to push on and go on the journey all the way through is we felt this is going to be a building people will have affinity with. It's going to have quality, it's going to have interesting aspects. And we've got to believe in that longer term for London or we won't do anything.”