The Fund posted a negative return during September but outperformed the benchmark. Outperformance was largely attributed to the US Healthcare and US Logistics and Storage clusters. In the former, our position in Healthcare Realty Trust outperformed as Medical Office Buildings (MOBs) are seen as a relative safe haven in time of distress. The company upped its acquisition guidance at its Q2 results and is exhibiting strong rental collection rates and above inflation like-for-like net operating income growth rates. Aversely, underperforming clusters included Hong Kong where our overweight in Hang Lung properties weighted down on performance after what we believe to be a healthy reversal from earlier strong performance as Hang Lung benefited from the earlier China reopening (Hang Lung has c.50% exposure to China). As Hong Kong is re-opening form the end of the third wave of Covid the other more Hong Kong centric names have had minor relative claw backs of performance. Additionally the European Offices cluster dragged down performance as our overweight position in Hibernia exhibited temporary weakness in our opinion. The Dublin office market is still exhibiting attractive fundamentals despite worries of slowing foreign direct investments (FDI) from the US and potential trade barriers from the UK (due to Brexit). With a strong management team and a focused strategy, we believe that Hibernia offers attractive value still, despite headline risks (e.g. Google choosing not to go for its expansion for an extra 2000 staff). Ireland has an attractive tax regime, a competitive and skilled English speaking workforce and strong relationships with global tech giants, which continue to be the growth engines of the future.

The month of September was negative for global real estate with performance for the sector coming in at -2% in local currency for the month and essentially erasing its August gains. Once again there was some dispersion between the various clusters as the Nordics cluster was abnormally strong at +20%. There was a rush back into the sector after several months of persistent weakness. Additionally, company specific news such as share buybacks announced at Stockholm office specialist Fabege (up to 10% of its shares) and prime office and retail Stockholm and Gothenborg specialist Hufvudstaden (2% of its share count) caused investors to piggy back on management’s signal to the market of deep value in its shares. Furthermore, Kungsleden reinstated its dividend (a move we fully expected) which aided the stock to a 24% performance over the month. On the other hand, European shopping centres were again particularly weak returning -14% with Unibail-Rodamco-Westfield (URW) returning -20% after announcing a €9b reset plan. The aim is to increase flexibility in executing its long-term strategy and to strengthen the balance sheet. This news did not come as a surprise as we see the balance sheet of URW as over-levered. The plan comprises €4b of disposals by end 2021, a €3.5b capital raise, €1b of savings by lowering the dividend over two years and €0.8b by reducing capital expenditures. UK retail company Hammerson completed its £552m rights issue and now has a bit more financial flexibility. Additionally, the company appointed Rita-Rose Gagné as new CEO (previously at Ivanhoe Cambridge). We still see the company as significantly over levered though and there is much difficult work ahead.

During the month, KKR also disclosed that it bought a c.5% stake in UK office company Great Portland. The private equity firm has signaled that it expects a recovery in the London office sector. Our overweight positions in London offices performed well in relative terms on the back of other informed investors also seeing selectively value in London office players. As a result, office names across the UK and continental Europe performed well on increased expectations of offices valuations being really at the bottom and therefore valued attractive currently.

The UK appears to be battling on several fronts as in addition to Covid, Prime Minister (PM) Boris Johnson threatened to dishonor an earlier agreement with the European Union fearing unnecessary trade restrictions around the British Isles. Whilst this has the potential to make a difficult situation even more volatile, it is highly unlikely that the PM has enough support to cause such a formal block to negotiations as many of his own Members of Parliament (MPs) may not back these actions in a vote. One sub-sector that we have seen value re-emerge in is student housing as higher education has been recognized as a critical sector for the UK economic competitiveness and it is unlikely that any side of the political bench can take actions to hurt the student numbers (which have seen drops due to the logistical issues of many overseas students being able to come in). Furthermore, we have seen supply of purpose built student accommodation (PBSA) drop off as several less institutional developers cannot get the necessary financing to complete their schemes. Established student housing owner such as Unite Group stand to benefit and may surprise to the upside with decent leasing and resilient rental growth even during these challenging times. Furthermore, the current valuation provides an attractive entry point in our view.

Elsewhere, Vonovia, a German residential landlord raised €1b euro to repay upcoming debt maturities and to fund future growth opportunities. It’s striking to see the differences between retail companies that have been raising equity (clearly very defensive) versus for example Vonovia (very offensive). A clear indication of the structural trends that are playing out across the globe. On average we model a difference in Long Term Net Operating Income (NOI) growth of between 1.0-1.5% between these clusters and significant deviation in the shorter term Covid related NOI decline and subsequent recovery.

Over the month we saw what can be interpreted as a second wave of the Covid pandemic as the infection rates once again accelerated for several Western Hemisphere nations (including our home base in the Netherlands). This triggered the tightening of preventative measures once again across various European nations. Whilst this will be once again restrictive to the economy, it does appear like the cluster isolation methodology undertaken by many governments will be significantly less crippling to the economy than the full scale lockdown experience earlier on in the year. With that said, the length of the pandemic is continuing to damage the service sector, entertainment/experiential industries (such as movie theatres) and the travel and hotels sector with the continuation of job losses across those sectors and across temporary/contract employees.

The Kempen real estate investment strategy strikes the balance between qualitative and quantitative analysis. Through application of data-analysis technology our Real Estate Team collects over 20 million relevant data points for 200,000 real estate buildings around the globe, processing this quantitative data in our data infrastructure and turning it into valuable fundamental investment information. The continuous increase in available data helps us make better assessments of the quality, value and risk of each real estate investment. This leads to better investment decisions and results in higher investment returns at lower risk for our clients.

Next to the quantitative approach the investment strategy contains three key qualitative parameters that determine the warranted valuation: management added value, balance sheet strength and ESG. The portfolio managers score each company covered on these three parameters. Companies that excel in ESG for example will be assigned a higher score and hence the warranted valuation for an investment increases.

Portfolio construction of the Strategy is based on cluster neutrality. The European portfolio has 6 clusters defined as homogeneous groups of real estate companies with similar underlying currency exposure. Examples are United Kingdom, European Residential and Switzerland. The portfolio weight of each cluster is approximately equal to the cluster’s benchmark weight. This ensures a diversified portfolio and neutralizes currency and macro-economic exposure versus the benchmark. The Fund assigns its risk budget on the real estate portfolio level only.

ESG is of high importance to our investment process. Over the month of September we progressed with several of our engagements. We had a meeting with Alstria on the re-election of their supervisory board chairman that we argue has become non-independent due to excessive tenure. Alstria is a thought leader in the field of the environmental footprint of Office Real Estate and hence we discussed their Green dividend proposal. Additionally, we continued our engagement with Tritax Big Box REIT in the UK on the benefits of internalizing the management contract of the team.

September was a month with some volatility and we made changes to the portfolio accordingly. In US Offices we have been selling Boston Properties in favor of Hudson Pacific and Corporate Office. In the Nordics, we have been adding to our position in Entra and trimming our position in Fabege keeping balanced exposure between the two names for the moment. We believe that with the recent share price strength seen in Sweden (Hufvudstaden and Fabege buy-backs, Kungsleden dividend reinstatement) Norway had been overlooked and hence we see good value in Entra at the moment. In the European residential cluster we have been trimming Vonovia in favor of Kojamo as we believe that the latter is attractively priced given its recent underperformance. In the retail cluster we have been trimming our position in Klepierre for Deutsche Euroshop. In Canada we have been trimming partly our position in Allied Properties in favor of Killam Properties. We see deep value emerging in Canadian multi-family on the back of some regulatory news coming out of Ontario in the form of a rent freeze in 2021 which we see as a bit overhyped. In the US triple net cluster we participated in the Broadstone Net Lease REIT IPO (selling some of Realty Income to finance the position) as we found the company to have a strong management team and an attractive collection of assets at a good initial price. We continue to focus on refining our models and continuously challenge our assumptions to better fine tune our valuation estimates across our universe.