Kempen Real Estate Update: The easy days in real estate are gone
Back in the eighties/nineties it was easy to make money in real estate. Maybe that is the reason I chose a career in the real estate sector long time ago. However, a property investor today needs to be pretty adaptive to be dealing with an ever-changing environment.
It used to be easy; you research locations and building features, acquire the best building, call a real estate agent to find a tenant and collect the rent for the next 15 years. Nowadays, the real work only starts when you have acquired the building. Tenants are looking for an experience and as a landlord you have to increasingly adapt your buildings to these changing trends to remain competitive.
A sector where this has always been evident is the hotel sector where customers are looking for an experience and convenience. Over the years this has also become the norm in retail and increasingly in the office sector as well. Today’s office tenants want to use their offices as an instrument to attract talent in a tight labour market. Their offices should be “hip and happening” and cultivate creativity and cooperation whilst striking an excellent work/life balance.
But how on earth can you deal with these challenges if you own a small real estate portfolio of a few buildings? This is exactly the point. Real estate companies have invested in building “platforms” to be able to deal with these ever changing tenant requirements. A company like Unibail-Rodamco-Westfield owns a unique platform which should be able to better help their tenants in selecting the right locations for their shops. With this platform we refer to their organisation, expertise, knowledge, systems, network, societal position etc.
“At Kempen, we believe companies that own a platform to better help their tenants will be able to drive superior performance going forward. ”
At Kempen, we believe companies that own a platform to better help their tenants will be able to drive superior performance going forward. We capture this in our company score which determines what premium (or discount) we assign to a company. This assigned premium to NAV can be very substantial as it is the value on top of the real estate we ascribe to the platform - a mispricing that traditional real estate investors often fail to capture.
Extra Space Storage in the United States is a good example. The company invests over US$ 25 million per annum in digital marketing and employs some 25 data scientist who constantly ensure best visibility on online search engines like Google. Extra Space Storage owns a proprietary revenue management system which calibrates between store occupancy and rent level in real time within every neighbourhood. Their proprietary algorithms have shown their effectiveness through superior revenue growth over time outpacing both public and private peers. This platform has substantial value on top of the real estate. But clearly, this also imposes a risk. With ever faster changing market dynamic, companies constantly have to invest to stay ahead of competition. Having access to permanent capital to build such platforms is increasingly a prerequisite. This also explains why many niche sectors like self-storage or student housing, which require operational excellence to drive performance, are easier to gain exposure to through the public markets.
Looking at the composition of the FTSE EPRA/NAREIT Global Developed index over the past years it is evident that alternative sectors are gaining share in the index.
Source: FTSE, Kempen. Data as of 31 December of 2012, 2017 and 2018.
Alternative sectors include data centers, self-storage, student housing, hotels and healthcare. In these sectors you need scale and an operational platform to manage efficiently and consistently. Large companies that already have a platform only get larger and the small companies who don’t only get smaller.
The increasing importance of these platforms also provides a true barrier to entry. Of course new investors can buy all the data to analyse performance of individual assets, however the entry barriers are in the calibrations and algorithms, finetuned over the years, to get the right information out of the data. Once an investor owns this intellectual property they seek out shorter leases as this allows them to mark to market their portfolio every day. With shorter leases you can more effectively reposition your portfolio to meet quickly changing tenant requirements. It will take more time though before other investors and lenders start to realise that long fixed leases are a disadvantage when it comes to cash flow predictability.
Senior Portfolio Manager
As at 31 March 2019, the Kempen Global Property Strategy held no shares in Extra Space Storage. As at 31 March 2019, the Kempen European Property Strategy held no shares in Extra Space Storage.
The views expressed in this document may be subject to change at any given time, without prior notice. Kempen Capital Management N.V. (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.
The information in this document is solely for your information. This article 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.