The Fund posted a positive return during June but underperformed the benchmark. Underperformance stemmed largely from the UK as well as US Healthcare. In the UK our position in Workspace detracted from performance as the company may experience more short term uncertainty with respect to rent collections on its generally smaller tenant base. We do believe that the building types and locations of Workspace are going to be amongst the best long term positioned offices once the pandemic eases off and thus have been adding more to our holding. Once again, as we enter the second quarter earnings season we suspect that stock prices will gradually begin reverting closer to our estimated long term fundamentals. After several months of unprecedented negative economic headlines currently no bad news is seen as good news and herding behavior from investors causes for temporary mis-pricings. We continue to rotate the portfolio as and when volatility uncovers opportunities, but keep the large bulk of our focus to reassess and continuously challenge our estimates of fundamental value across the investment universe.

The month of June exhibited significant intramonth volatility for Global real estate but performance was positive at 2.3% for the month. Once again there was significant dispersion between the various clusters with US Retail and US Triple Net REITs returning 14% and 11% respectively yet US Hotels and Japan REOCs returning 5.2% and 5.6% respectively. The offices underperformance has stabilized over the monthe (US Offices +3%, European Offices +1%) despite headlines of the “death of office” having increased in frequency. For our thoughts on the future of offices please refer to our June Alpha REIT – “How will it work in the future?”

Across the European real estate markets we saw Vonovia continue its pan European residential expansion journey by purchasing a 2.6% stake in Dutch residential platform Vesteda during the month. The company now has interests in Germany, Austria, Sweden, Vonovia, France and the Netherlands. Cross border residential platforms have been very limited in the real estate space with Canada’s CAP REIT being a leading success case (via their IRES platform in Ireland and ERES primarily in the Netherlands). The Multi-Family real estate space is a highly local business with deep knowledge of various regulations and close relationships with municipalities being key for success, and for that a local team is almost always necessary. Vonovia’s winning formula of scale, renovations and good social responsibility leads us to believe that this expansion is another good move as well priced growth opportunities in affordable regulated German residential remain limited.

In the US, many real estate companies experienced a sharp rebound in share prices at the beginning of the month. Several quick thinking management teams were opportunistic to take advantage of the situation by issuing equity, whilst temporarily trading at premiums to NAV, to further strengthen the balance sheet. The management teams generally speak of gaining dry powder with the goal of chasing growth prospects, it is more likely that the companies are reinforcing their balance sheets for a potential strong second wave and further difficulties ahead. For example, US Gaming real estate owner VICI Properties (owner of Caeser’s Palace in Las Vegas amongst others) raised over $600m in equity at a small premium to NAV to help liquidity of its main tenant over generally favorable terms. In the US Triple Net Lease player Spirit Realty raised $298m, WP Carey raised $332m over the month and Lexington Realty also exercised its overallotment option on its May equity raise to bring the funds raised to $164m. In Canada, industrial asset owner Granite REIT raised CAD $290m well above NAV for acquisitions in the US.

As June is a relatively quiet period in terms of company news the markets turned to broader economic news. The debate over the length of the first wave of the Covid-19 pandemic has been reopened with certain nations showing still a high number of deaths and infections (namely clusters in the US and the UK). Furthermore, China and Singapore have shown a second wave of the pandemic with further lockdowns being imposed. In the case of China, early signs show that the country has managed to break a quick second spread but the full results are yet to be seen, especially bearing in mind the transparency from the country. The market’s attention has been set on whether further full lockdown measures will be imposed. Right now it seems unlikely that a full scale lockdown will be re-imposed in Europe or in the US as the economic cost would be disastrous and it is more likely that strict rules will remain in place as businesses remain open in some capacity. Governments did take more measures across borders with the aim to protect their own policies via further travel restrictions (e.g. EU bans travel form the US). Central banks remain committed to providing liquidity such that funds remain available for companies to pay their staff. The ultimate goal is that the millions unemployed on a temporary basis do not end up in that position permanently as this would carry a skyrocketing financial and social cost. In this context of abundant liquidity, real estate as an asset class remains well positioned despite several structural ongoing issues in several sectors (e.g. retail).

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 Global portfolio has 19 clusters defined as homogeneous groups of real estate companies with similar underlying currency exposure. Examples are Australia, US Offices 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. During the month we flagged an issue on cross company ownership with limited transparency in the Nordics cluster. Due to several executives at Nordic real estate companies being investigated for market abuse and inside dealing in quick succession over the last few months, we have begun an independent investigation into these issues and any potential spill over into other vehicles. The Nordics cluster currently ranks below average on our corporate governance proprietary scoring methodology when compared to our global universe.

June was a month full of volatility and we made changes to the portfolio accordingly. In the European offices cluster we further added to Shurgard (self-storage) whilst selling Gecina. In the Nordics, we have sold the rest of our Hufvudstaden position and invested further in Stockholm office focused Fabege and nationwide Swedish office player Kungsleden. We have taken down our long term growth rates in the offices clusters anywhere between 20 basis points (bps) to 50bps after our offices deep dive work. This is primarily due to the challenges faced by the cluster from the Work-From-Home (WFH) phenomenon and corporates’ reorganization of long term office space needs. In the UK we have added to Workspace and Derwent London in place of Segro and Shaftesbury as our l-f-l NOI assumptions in the London low rise/well located office space are relatively resilient in light of the current valuation. In the US Retail space we have sold part of Acadia and invested in Site Centers and in US Healthcare we have continuing moving from Welltower to Healthpeak Properties.