Buy well, manage well, sell well

I am a passionate advocate of asset-backed investment. I love the fact that the foundations are land and real estate, whose value is tangible and enduring. This is the opposite of the arcane financial engineering, upon which so much false hope can rest and fortunes be lost. I also love the fact that our asset-backed opportunities eliminates inheritance tax liabilities for our clients, while delivering steady returns and full control over their finances. It really is difficult to beat.

The big question is how to make asset-backed investments generate the required return.

Buy low, sell high is the obvious answer; but how to do this without taking excessive risk is far from straightforward. The other key consideration for us here at Stellar Asset Management is how to optimise the value for the investors who trust us with their money and deliver a great product for the people we serve directly and indirectly.

These consumers might be guests enjoying a stay in one of our hotels, the people who buy and live in the homes we build or the people who manage and work in the business premises we develop.

Sadly, I believe that both investors and consumers often get a raw deal from our competitors. For investors, this includes being exposed to needless risk or being denied a fair share of the investment returns. In turn, many fund managers take a backseat approach to managing these kinds of asset. For consumers, the result is often poorly targeted products or sub-standard quality.

Offering a fairer and more rewarding deal for investors and customers was therefore one of the main reasons why I set up Stellar and why I believe that we are so successful. This is clearly the right thing to do. It is also the smart thing to do. By maximising the upsides and sharing the benefits, we can win trust, strengthen our reputation and boost the flow of capital and investment opportunities.

So, how does our approach work in practice?

Think like a consumer

In selecting the investment target and judging how best to develop and uplift the asset, I believe the key is thinking like a consumer. What do customers want? Where is the biggest gap between supply and demand? How can we maximise the interest from potential buyers?

Our strategy for commercial real estate development highlights our distinctive approach. People often ask me why we focus on commercial space for SMEs rather than offices, retail or other high-end development. Our investment team regularly assesses all the various options. Invariably, development for SMEs comes out as the perfect niche. Why? SME units may not attract many architectural awards. But this is a vast, vibrant and largely underserved market. SMEs account for three-fifths of the employment and around half of turnover in the UK private sector. Yet, despite being the lifeblood of the British economy, all too many SMEs struggle to secure enough space to operate effectively and sustain growth. Many find themselves sitting on endless waiting lists for available space or being forced to make do with substandard premises with poor access to key customers and staff.

This shortage of SME units would in itself make this an attractive target for development investment. The diversity within this segment of the economy also creates a huge pool of potential occupiers. Many are likely to be owner-occupiers, which fits our strategy of development and sale. We are happy to offer short-term lets while units are being marketed for sale, but we do not want the cost and risk of being a long-term landlord.

By contrast, the ‘big shed’ warehouse developments we see springing up across the country open up the risk of putting all your eggs in one basket. After all, there are only a finite number of Amazons and their ilk who need that kind of capacity. In turn, the already risky retail and office markets have become even more unstable amid the rise of digital retail and hybrid working. Suitable urban sites are also expensive and come with high fitout, marketing and management costs.

Our approach to residential property development follows the same path as commercial. The UK faces a persistent shortage of housing, especially for people on middle incomes. People in this mid-market segment often find themselves squeezed between social housing that they do not qualify for and high-end developments that are outside their price reach. Our developments therefore target homes for people in this underserved and high demand income range. This is the segment where experience shows that the returns are steadiest and price fluctuations are lowest across the cycle.

Would we consider other segments? Developing luxury properties for Premiership footballers, overseas investors and other ultra-high net worth buyers can have an ‘all that glitters’ allure, but is in fact a highly volatile, highly personalised and often quite saturated market. A sign of this is how often bid prices are dropped or deals fall through altogether at the last minute. In turn, we do not invest in social housing as this would require us to be a full-time landlord with all the inherent risks and costs.

Rigorous due diligence

Following identification of a potential target, we begin our rigorous due diligence process. If we look at commercial or residential development as an example, the assessment starts with evaluation by our development partners and independent surveyors. The sale is then reviewed by our investment committee. Both the selected site and the price need unanimous committee approval before the deal goes through. During development, both our investment team and independent surveyors carry out regular on-site evaluations to check on progress and costs. Third-party valuation may sometimes under-price the asset – the favourable recent sales of our farming assets reflect this. Nonetheless, these valuations offer a useful additional layer of insight and security.

Living our vision

Our estate planning and investment management services help clients enjoy their retirement and make provision for their loved ones. Our clients put their faith in us. In response, we put advisers and their clients first – pure and simple. This intent is central to our investment philosophy. They motivate us as a team, clarify our order of priorities and guide how we treat others.

To know how important this is to me personally and why it guides my decisions, we need to go back to Stellar’s foundation. Before setting up Stellar in 2007, I had been making a comfortable living as a director in a leading merchant bank. I learned a lot there including the value of rigour, original thinking and hard work. But I myself was not comfortable. The market I worked in had become complacent – offering one-size-fits-all solutions that in reality fitted no-one. Companies were also putting their own interests before their investors. Most were reluctant to disclose let alone share the investment upsides, for instance. Few if any were taking proper care over costs, fees and delivering value for money.

I therefore wanted to create a company with a fair deal for investors at its heart. We offer flexible and innovative solutions that reflect the real needs and aspirations of clients and their families. Unlike many other firms, our asset backed investment returns are uncapped, so clients get their rightful share of the benefits when yields exceed target.

We take pride in delivering real value for money. From the outset, we set out a fee structure that is equitable and appropriate rather than copying what everyone else in the market is doing. We carefully control our costs and cut out needless waste through close monitoring and investment in the latest technology.

As part of our commitment to transparency, we disclose all our fees and provide clear and concise performance reporting so investors can see what they are paying for and the value we deliver in return. Following a review, we are now enhancing this by eliminating initial fees. We are also now looking to enhance our investor engagement and disclosure through a new and improved investor portal.

As a company that helps people build a better future for our clients, their children and their grandchildren, we are deeply conscious of what kind of world these future generations will live in. As part of this, we have always preferred to invest in tangible assets that support communities and employment – SME premises and housing development, for example. This is not just altruism. Supporting the real economy makes sound investment sense.

Sustainability is just as important. In March 2021, we signed up to the UN Principles on Responsible Investment (PRI). This is a journey that will take time to embed but we are fully committed. We also recognise that there are some areas of our investment portfolio over which we have no direct control. But we also are committed to continuous improvement.

Pride and passion

So as you can see, I believe that value and values are inexorably linked. I also believe that asset-backed does not mean sitting back – you need a sharp eye and market savvy to succeed. An important part of this is putting ourselves in our investors’ and consumers’ shoes – go the extra mile for them and we will prosper. By being able to provide the outcomes our clients require is hugely satisfying. It’s also a great source of satisfaction that we are giving back to society.