The Fund posted a negative return in September and was roughly in line with the benchmark. Performance was well spread out between the clusters with nine clusters contributing positively and nine detracting from performance. Well performing clusters included the Nordics and US Triple Net Lease. In the Nordics our position in Pandox continued its volatility but benefited by remaining relatively stable at a time when other Nordic commercial real estate companies were rattled from the debt fear fallout from Chinese developer Evergrande. As a reminder, the previous month Pandox had been an underperformer and we do expect the volatility to continue but ultimately see the stock at an attractive valuation although admittedly a bit less so after a strong relative month. In US Triple Net Lease, the cluster performed quite poorly in absolute terms (as it is heavily driven by smooth access to capital and whenever capital markets feel a shock it can translate quickly into share price weakness). However, we outperformed as our overweight position in experiential retail landlord EPR Properties REIT remained largely stable as many movie theatres continued increasing footfall and benefiting from blockbuster movie releases such as the new James Bond film. Underperforming clusters included US Logistics and Storage cluster where our position in Americold continued its weak trend which started in August after the company’s profit warning based on supply chain issues affecting volumes. US Housing also underperformed as our overweight positions in mobile home landlord Sun Communities gave back some of the strong relative August performance.

September was a negative month for Global Real estate markets returning -4% in local currency. The weakness was partly driven by the shock to the capital markets caused by the announcement from Chinese developer Evergrande. We elaborate further below on our thoughts on the debt issues for Chinese developers.

Heaviest hit clusters in September were the ones which have the highest leverage such as the Nordics at -11% and also European Diversified at -9%. However, performance was weak across the board with European Residential falling 8%, Hong Kong and the UK both falling 7% and US Logistics & Storage falling 8%. The clusters which held firm included US Hotels and Singapore at +1% as well as Australia which remained flat over the month.

Over the month, Chinese real estate developer Evergrande announced issues with bond payments which total a staggering $300 billion level. The impact of any collateral damage is difficult to quantify as it is difficult to determine the knock-on effects of a possible Evergrande bankruptcy on for example Chinese real estate or financial markets or steel prices. Therefore, it is hard to quantify possible knock-on effects of a possible Evergrande bankruptcy on our portfolio. We believe the quality and diversification of our holdings to provide solid risk management and do not expect to be effected disproportionally compared to the broader equity market.

During September the German national elections took place. Leading up to the elections the predictions turned more into favor of the SPD which in combination with The Greens and Die Linke could potentially form a very leftist government, which is not supportive for business. The SPD won the elections but a far left government will not happen as they did not win enough votes, which is positive. Over the month we also saw Vonovia waiving most take-over conditions for taking over Deutsche Wohnen showing it was not willing to let this deal slip. Furthermore, ADLER Group SA was the worst performing company (-35%) in the European universe as investors were increasingly worried with the corporate governance and the financials at the company. Outstanding receivables of up to €1 billion euro that take longer and longer to settle and the involvement of influential shareholders with a dubious background caused the stock to slide. During October more information and clarity is expected, to be continued.

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 18 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 and has been so since 2011. During September we held on-site meetings with several Canadian REITs in Toronto. We shared our expectations on how these companies can improve their ESG scores on our framework and all were keen to listen with actionable follow-up points. Additionally, we discussed social issues such as diversity and inclusion, pay gap analysis, talent retention and stakeholder capitalism among others. These are topics that we are increasingly looking forward to integrating deeper into our company scores and continue to draw best practices form a country which generally tends to excel at that.

During September we made several changes to the portfolio as our models were fully updated to reflect the latest results. In the European Diversified cluster we added to our Alstria position and sold part of Warehouses de Pauw and Dutch office landlord NSI to finance it. In US Logistics & Storage, after the labor shortage related profit warning we had been selling part of our position in storage assets landlord Americold and buying urban coastal market logistics specialist Terreno Realty. Additionally we sold part of Extra Space into Cubesmart on the basis of a shorter term valuation gap. In the US Triple Net Cluster we saw value emerging in National Retail Properties as our tenant deep dive work revealed a much better than expected quality of tenants with very few problematic tenants even at the tail end. We therefore adjusted our short term Net-Operating-Income (NOI) growth assumptions upwards for the company. On the back of that work, we rotated part of our position in well performing secondary logistics landlord STAG Industrial into National Properties REIT. Additionally, a deep dive into the property locations of experiential landlord EPR Properties REIT revealed better than average locations. This has been evident as the company has been able to sell off some challenged movie theatre assets at the low end of the quality spectrum with immediate alternative use opportunities (industrial and residential) for the new buyers. We rotated another portion of STAG Industrial into EPR Properties REIT. In US Healthcare we continued selling parts of large cap Ventas and into Omega Healthcare REIT, Healthpeak and Alexandria Real Estate.