Real Estate: From bricks to bytes

Our webinar 

The current Covid-19 pandemic has transformed the way we live our lives over the past months. And the property market hasn’t been spared the impact. Where are still pockets of value to be found? What are the risks and opportunities of investing in listed and non-listed real estate? How to use data and ESG criteria to your advantage? Find out and click below (to register and) to watch the webinar.

Real estate done differently

Many investors treat listed and non-listed real estate as distinct asset classes, applying two different investment frameworks to what we see as one asset class. This inevitably leads to mispricing. At Kempen, we believe this represents a massive opportunity for investors adopting a holistic approach to the asset class. 

While the short-term investment dynamics between listed and non-listed clearly differ, essentially they both involve investing in physical buildings. Over the long run and correcting for leverage, the returns of both types of real estate investment have been shown to be driven by the same underlying factors: quality of location, quality of buildings and quality of the wrapper (the structure in which the real estate is organised).

We’ve developed a consistent framework that enables us to compare listed and non-listed real estate portfolios in exactly the same way, taking into account factors such as the quality of their management, their ESG credentials and strength of their balance sheet. Our framework enables us to calculate expected risk-adjusted returns for each form of the asset class, so that we – and our clients – can make apples-to-apples comparisons between the two. 
 
Our analysis has resulted in some interesting findings. For example:
  • in contrast to what many investors believe, the physical quality (in terms of their location and building quality) of listed and non-listed real estate funds is on average quite similar 
  • the different average returns of listed and non-listed funds can in large part be explained by the different amounts of leverage they take on
  • if you have a long holding period and corrected for leverage, it doesn’t really matter if you invest in listed or non-listed real estate.

We’ve also made some noteworthy observations at a more granular level, such as:

  • non-listed European residential and UK funds generally apply very low leverage
  • conversely, listed European retail funds apply too much leverage 
  • non-listed UK real estate funds tend to have higher overhead costs than any other listed or non-listed category.

Having this kind of knowledge at hand enables us to invest differently to most other asset managers.

It means our clients can adopt a building-block approach, picking and choosing the best return opportunities from an investment universe of 27 liquid non-listed European real estate funds and 64 listed European funds based on their needs, constraints and the kind of solution that they want to create for themselves. 

From this universe our clients can choose to invest solely in non-listed real estate, solely in listed funds, or capture the best of both worlds by combining both forms in one portfolio. And they can make informed decisions: if they want to optimise returns by using leverage, they might want to avoid non-listed European residential and UK funds. But if they don’t like high leverage, we can suggest they avoid listed European retail funds. 

Our approach also enables our clients to make tactical calls based on what’s happening in the listed and non-listed markets. For example, listed real estate slumped in value in the aftermath of the coronavirus outbreak, which some of our clients are taking advantage of by increasing their allocation to listed relative to non-listed. 

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Disclaimer 

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and is authorised to provide investment services, and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, investment recommendations, research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views only at the date of issue. These may be subject to change at any given time, without prior notice.

Navigating the climate change crisis

Responsibility matters to everyone at Kempen, and that’s reflected in the way we run our portfolios. We believe that incorporating Environmental, Social and Governance (ESG) factors enables us to identify investment opportunities, avoid risks, and encourage positive change at the companies we invest in. All this helps us maximise our clients’ risk-adjusted returns while doing good at the same time.

We incorporate ESG throughout the investment process for our global real estate strategy. The result? A portfolio that has a Febelfin “Towards Sustainability” label1, a CO2 emission intensity 31% lower than that of its benchmark2 , and extremely limited exposure to – and continuous monitoring of – ESG controversies.

One area in which we believe we really excel is identifying the climate-related risk that the properties we invest in are exposed to as a result of where they’re located. Minimising environmental risk isn’t just about looking at a company’s emissions – it’s about minimising physical risk, too.

Climate change is afflicting all parts of the globe and affecting all sections of society. Floods are becoming commonplace, hurricanes more frequent and more severe, wildfires are getting worse.

Such events have clear implications for properties and infrastructure in affected regions. And yet private and institutional investors alike still barely consider the potential effects of adverse climate events in their underwriting process, even though they’re fully aware that climate change is going to impact property and infrastructure valuations over the next 20 years.

Hotels are a particularly good example of what’s at stake. 

Consider a hotel in Florida that’s been hit by a category 3 hurricane once every five years on average over the past 20 years. We might project that it will be hit by a category 4 hurricane once every three years in the next decade due to the impact of climate change. Based on this knowledge, we can use the hotel’s predicted months of hurricane-induced downtime when it will have no income as well as projected refurbishment costs and increased insurance premiums to calculate a fair value for that property. This may be, say, 8% lower than a similarly attractive property in a hurricane-free zone. 

And what happens to the hotel’s valuation if a category 5 hurricane hits once every two years in the future? Would it still be insurable? Would anyone else consider buying it?

We believe that most other investors simply aren’t incorporating this kind of projection in how they value their investments. This might be either because they’re underestimating the future impact of climate change on their investments, or because they don’t have access to the data that they need. 

At Kempen, we see this as a vital part of our investment process that helps us avoid large-scale losses in the future.


  1. Kempen (Lux) Global Property Fund is rewarded with the label as per 7 Nov 2019, https://www.towardssustainability.be/
  2. Kempen Capital Management, as at 30 June 2020, benchmark FTSE EPRA/NAREIT Developed Index
 

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Disclaimer 

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and is authorised to provide investment services, and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, investment recommendations, research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views only at the date of issue. These may be subject to change at any given time, without prior notice. 

An investment opportunity that’s too good to miss?

  

In our last blog, we discussed how there are still pockets of value to be found within the office markets. This time, we look at a company that’s benefitting from the trend towards flexible working and in our view could represent a compelling investment opportunity: Workspace.

Workspace is a listed UK real estate company that provides highly flexible office solutions. The offices in its portfolio are available on quite short leases of a few months up to a few years. It’s almost like a gym membership: you go to an office space and check in or out whenever you need, although you do need to make a reservation. Or you can take out a contract and you’re entitled to the number of desks you need. The key thing is flexibility.

All this is very different to a typical office lease in a place like the City of London, which ties you in for 10–15 years.

Workspace started off appealing to small companies, particularly in the creative industries. But over the past couple of years it’s also been gaining medium- and large-sized clients. Bigger companies realised there was lots of creativity going on in Workspace’s offices and wanted a slice of the action. These spaces can also be an attractive option for large companies who have project teams that need to work separately from the rest of their organisation.

What’s more, Workspace owns small- to medium-sized offices in trendier, up-and-coming locations – rather than huge offices in traditional London office locations like the City, the West End and Canary Wharf. As we discussed last time, we believe traditional flagship headquarters in such locations are going to lose appeal relative to smaller offices in areas that are easier to commute to.

All this may sound great, but when many people hear about this model they’ll probably think about a similar firm that’s famously run into problems recently: WeWork.

But there’s a crucial difference between WeWork and Workspace: Workspace owns the properties in its portfolio, while WeWork rents them. One of the reasons that WeWork got into trouble was that it had a fixed, long-term obligation to pay rents to its landlords while the rents it received from its clients were short-term and flexible. This mismatch caused problems when its income slumped during the coronavirus crisis. Workspace didn’t face this problem because it owns its properties.

Workspace is a great example of a firm that we believe is well positioned for future growth. And the best thing about the firm as a prospective investment? It’s looking undervalued. Its share price got badly hit by coronavirus as people were scared its tenants would leave, but in our view it’s become extremely cheap as a result. It’s trading at a 40% discount to our assessment of fair value (Net Asset Value), resulting in an implied levered internal rate of return (IRR) of 7.2%1   

 1. Based on Kempen Capital Management’s proprietary models, as at 31 August 2020

 

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Disclaimer 

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and is authorised to provide investment services, and as such is subject to supervision by the Netherlands Authority for the Financial Markets.

The Global Listed Real Estate Strategy might currently hold shares in the subject company. The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments.

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. This document is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such.

The views expressed herein are our current views as of the date appearing on this document. This document has been produced independently of the company and the views contained herein are entirely those of KCM.

 

What’s the new normal for offices in a post-coronavirus world? 

 
Everyone knows how Covid-19 has transformed the way we live our lives over the past few months. And the property market hasn’t been spared the impact: with the rise of working from home and the slump in retail, global real estate markets have suffered sharp corrections as investors have attempted to price in rapidly changing fundamentals. 
 
But investors need to be careful: the global property market is highly diverse, and the uses and dynamics of each property type can differ dramatically. While physical retail is clearly in a difficult situation, we believe there are still good pockets of value to be found within offices. 


To find the winners and losers in the property market, we need to think about how life is going to change. Working from home is clearly going to stay with us, but companies will still need offices. We believe the future is going to be all about flexible working, with younger workers in particular demanding exactly this of their employers.

What will this mean in practice? As ever in the property markets, it’s going to be all about location, location, location – but the locations in demand may change. We believe the days of flagship high-rise office headquarters in prime locations that are difficult to commute to, such as the City of London, Mid/Downtown New York, and South of Market, San Francisco, are numbered. This also applies to an extent to cities like Frankfurt, Berlin and Amsterdam, although they have fewer high-rise offices, are more livable and enjoy lower cost-of-living. 
  
Rather, we expect to see firms set up a number of smaller offices in the easily commutable suburbs so that employees can ride their bikes or take an overland train to work. These low- to mid-rise buildings will also mean people don’t need to enter confined spaces such as lifts – an important consideration in the age of coronavirus – and make it easier to track people in the event of an emergency. In our next blog we’ll be looking at the remarkable investment opportunity represented by Workspace, a firm that’s strongly benefiting from this trend.


We also need to think about the changing sources of demand for offices. In recent years demand for office space has undergone a shift from industries that have been downsizing (such as financials, legal and business administration) towards technology, advertising, media and information tenants. Firms in these industries use their office space and working environment as key levers to compete for the young, tech-savvy talent that they’re after, and this has big implications for property investors.   

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Disclaimer 

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and is authorised to provide investment services, and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, investment recommendations, research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views only at the date of issue. These may be subject to change at any given time, without prior notice.