The Fund posted a strong positive return in March and outperformed the benchmark. Outperformance stemmed largely from US Healthcare where our large overweight Healthpeak Properties outperformed further attesting the strength of privately paid healthcare solutions in the Medical Offices Buildings “MOB” as well as the very desirable life sciences properties, which are continuing to generate momentum and attract interest through the pandemic. Investors such as ourselves also endorse their strategy of selling senior housing properties, as the market has re-opened since the beginning of the pandemic, in order to focus on MOBs and life sciences. Another outperforming cluster was US Triple Net Lease where our overweight in STAG Industrial was amongst the top performers as the REIT continued to emphasize its increased stabilized like-for-like net operating income “lfl NOI” guidance to 2%-3% per year, up from a usual pace of 1%-2%. This is a direct result of strengthening operating fundamentals in more regional logistics locations, a trend we have forecasted since the beginning of last year. Underperformance came from the European Diversified cluster where strength in Unibail-Rodamco-Westfield, which we do not own, was at the expense of our holdings in Hibernia REIT and Warehouses de Pauw. The latter surely seeing some temporary outflow in favor of the listing of CTP over the month, the central and eastern Europe “CEE” logistics specialist.

March was a very strong month for listed real estate around the globe. It is likely that encouraging vaccine and reopening news from the United States, the largest part of the benchmark representing 55%, has pulled the rest of the globe upwards. Average performance in the US based clusters in local currency was 4% over the month, mirroring the return of the benchmark, in local currency. Strength was broad based with all cluster around the globe being positive barring Hong Kong. In the US, sectors such as Logistics & Storage and Housing returned 6% and 7% respectively. These were sectors which had performed very well during the pandemic yet had underperformed for several months mainly through the initial vaccine news hype. We believe that with the gradual return to normality and societal re-openings, the stock market will return to pricing the fundamentals more accurately and volatility, whilst elevated, should subside a bit.

March also saw the conclusion of the full year earnings season. Surprises were few as management teams guided investors closely on many milestones since a year ago through the pandemic. We did see several companies showing confidence in the stability of their business model and reinstating guidance (e.g. logistics, regulated residential, MOB offices) and others shying away from too much detail as uncertainties still remain ahead (e.g. retail, free-market residential, offices, senior housing). There is a brewing consensus that the second half of the year will see a somewhat sharp acceleration in activity due to broader re-openings. SGlobally, there has been $2.9tn of savings which would have otherwise been spent if it wasn’t for the pandemic (with over half of that in the US alone). With the vaccination progress going admirably in the US, we can see this market power strongly fundamentally and lead the global developed markets recovery. Whilst this may provide much needed lifelines for re-financings for several “at-risk” business models it may only delay the inevitable structural trends at play. These we know all too well: e-commerce has accelerated tremendously, work-from-home (WFH) has and will to continue to impact the broader demand for office and causing for an increase in capital expenditures to re-fit offices of the future, theatres are broadly at threat from streaming platforms and data centers continuing to prosper due to an insatiable demand for data.

On the European Continent, in March CTP raised €948m (with the over-allotment) to help finance its development pipeline which involves strategically located land plots mainly in Czechia and Romania. This was a heavily oversubscribed issue which illustrates the continued interest for logistics properties into less traditional locations. We see the same in the US via STAG Industrial, and we see the same in Europe via the investment shift to the east where yields are higher, land is cheaper, yet demand is growing (but supply too, as it’s inexpensive to build). Part of this may be explained by the creation of the “new-silk-road” via Chinese major strategic investments in ports around Europe (including a large one in Greece). This would provide a less expensive alternative way to move goods to strong consumer markets and potentially one-day challenge some of the established, but also expensive major ports of Rotterdam, Antwerp and Hamburg. Many investors are beginning to accumulate logistics portfolio in traditionally cheaper, but strategically important locations such as Bulgaria, the Western Balkans, Romania and through the Czech Republic and beyond.

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. March was a busy month on this front. We held best practices calls with Canadian REITs Allied Properties on sustainability and with Killam Apartment REIT on governance. Both meetings were very constructive with respect to the willingness of the companies to listen to our ESG policies and potentially implement several changes which would help them both with our valuation premium, but also with the wider investment community. On our side of the pond, we were vocal on rotations at the board of Castellum via sharing our views in a major Swedish financial daily newspaper. We also held awareness conversations with Fabege, the Stockholm real estate specialist, where we urged for the auditor to be rotated earlier than the mandatory required local requirement of twenty years. We also voiced minor concerns on the new appointments at the board of Fabege.

During March we made several changes to the portfolio. In the UK we have trimmed our positions in Grainger and Workspace after good intermediate stock performance and reinvested the proceeds back into a long-time former holding of ours, the self-storage specialist Safestore. In Japan we sold part of Mitsubishi Estate in favor of Mitsui Fudosan and a relative value gap opened up over the period. In Hong Kong we sold part of our Hysan Properties position into Swire Properties. We also sold our position Daiwa House REIT to reinvest into Japan Hotel and Nippon Prologis. In the US we upgraded the management score of Host Hotels due to the company’s ability to weather this pandemic from its superior strategy, the latest proof of which was its acquisition at low prices for an attractive asset in Austin. This upgrade caused us to sell part of our position in Apple Hospitality and reinvest into Host Hotels. In US Industrial & Storage we took advantage of the relative weakness in high-quality high barrier coastal market exposed urban logistics specialist Terreno by selling part of our Eastgroup position.