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Five years of Real Estate: five key success factors

21 October 2019

The Kempen Global Property Strategy* marked its five-year anniversary in October. Since its launch in 2014 its I-share class has returned 12.7% net of fees** in euros on an annualised basis, outperforming its benchmark, the FTSE EPRA NAREIT Developed Global Index, by an average of 190 basis points per year. These results have seen the fund top the Morningstar database of other global property mutual funds available worldwide. To mark this landmark, in this edition of our Alpha REIT we look at five factors that have been instrumental in the strategy’s outperformance over the past five years – and should continue to be in the future. 

 

 1. Capitalising on our unrivalled database of property information
One of the main reasons for our strategy’s outperformance has been the sheer scale of the information that we use to calculate the fair valuations of properties ourselves. This is in stark contrast to many of our competitors and other stakeholders such as banks and insurance companies, who use property valuations provided by external appraisers. These appraisals are often too backward-looking, taking limited account of a property’s future value, which is what is most important to investors. Our assessments are based on each property’s likely returns in the future, resulting in large discrepancies between reported appraisal values and Kempen’s assessment of the value of a property. 

Since 2011 we’ve built up unrivalled access to over 25 million data points on about 200,000 buildings around the world. We have information on every single building that we invest in – and we use it for the benefit of our clients. We have in-depth knowledge of all the properties in each listed real estate company’s portfolio, considering each building according to a pyramid of five layers – the market it’s located in, the sub-markets within each market, the street location, the characteristics of the building itself, and its tenants. For example, for residential properties we have information on how long it takes to walk, cycle or take public transport to the nearest underground station, school, steakhouse and supermarket. For industrial properties, we use software that calculates how far logistics buildings are from the nearest airport, seaport, train node or highway intersection, and analyse data on shipment volumes through these transport hubs. 

Our vast database has also enabled us to close the information gap with the companies we invest in. In the old days, a management team could always outsmart an investor as they knew more about their properties: they would just provide annual and quarterly reports and possibly run a property tour where they would only showcase their best assets. But we now have 10–50 data points per building, enabling us to make fully informed investment decisions about each real estate company. As an example, one Australian property manager told us that they’d sold the worst 25% of their portfolio, but our analysis showed that they’d actually sold a random 25%. 
No other manager can yet emulate our data advantage. While other asset managers are trying to build data centres like ours, they take time to fine-tune. More importantly, how you integrate the data analysis into the investment and decision-making processes is crucial. We started our data-driven investment process back in 2011 and our track record of outperformance is based on this uniqueness.

2. Focusing entirely on real estate risk 
Over the past five years the Kempen Global Property Strategy has achieved an impressive information ratio by outperforming its benchmark with low risk (as reflected by a tracking error below 2%) – the perfect combination for our clients. A vital factor in this success has been the way we allocate our entire risk budget to real estate mispricing.

So, for example, ahead of the Brexit referendum in 2016 we didn’t position the fund to benefit from either a remain or leave outcome as we had no idea which way the vote would go: deliberately moving overweight or underweight the UK based on the Brexit vote would have been gambling, not investing. In short we eliminate all other risks, such as currency risk, political risk, macroeconomic factors and interest rate movements, from our portfolio and focus our risk exposure entirely on real estate, where the biggest mispricings are to be found. In doing so we only invest in companies that represent opportunities to exploit alpha that we can identify.

 3. Exploiting volatility in an inefficient market
Volatility creates mispricing for real estate investors. Some investors seek to shy away from volatility, but we believe volatility is fantastic as it creates opportunities on a daily basis. The underlying value of the real estate the companies hold is very stable, but property company share prices can move quickly. It’s therefore by definition an inefficient market, so we believe it’s a big mistake to invest in a passive strategy. In fact, listed real estate lends itself to active management even better than normal equities. 

Following the Brexit referendum, the share prices of many property companies plunged by 30–35% overnight regardless of the sector they operated in, the quality of their assets or whether they had a loan to value ratio of 10% or 50%. This was a massive inefficiency that could be seized to generate outperformance for our clients, using the right tools. 

4. Considering ESG and climate change
We’ve been considering ESG in all of our investments since 2011, looking at factors such as properties’ CO2 intensity, and each company’s corporate governance procedures and its social impact. But we don’t just invest in firms with the best ESG standards. A company with a poor ESG profile may still be a good investment opportunity if its price is so low it reflects its ESG risks – if we can engage with it to urge it to improve its practices the share price has scope to rise sharply in value. In fact, our data show that most value can be unlocked not by investing in ESG leaders, but in those companies that are below average and then engaging with them. 

Meanwhile, climate change is having a growing impact on real estate valuations. More investors are starting to look at the impact of climate events such as flooding, wildfires and hurricanes on property and infrastructure. But there are still good opportunities to be found in regions that are heating up quickly – it doesn’t mean that no one will ever go to that area again. We believe we excel in underwriting the impact of climate change, taking into account increased levels of capital expenditure or downtime as a result of climate events in our property valuations. What’s more, we assess the financial impact of making properties more sustainable. Ultimately, we identify whether the valuation of the real estate company and its properties is fully reflective of the risks and opportunities linked to climate change. 

For example, we analysed the locations of the hotel properties owned by real estate companies in Key West in Florida, focusing on the sensitivity of those locations to hurricanes that would result in hotel shutdowns. Analysing these data helped us underwrite future capital expenditure (such as insurance premiums, damage not covered and damage to surroundings impacting their relative attractiveness) and downtime of hotels resulting in loss of income. Based on our findings, we are not avoiding hotels in Key West, but only invest when the expected returns are enough to offset the climate risks.

5. Always looking to the future 
Finally, incorporating forward-looking qualitative views in our investment process is very important. Data can tell us a lot about the past and present, but qualitative thematic research performed by our experienced real estate team is just as crucial. 

For example, there is growing unrest across much of the world about the lack of affordable homes: the demonstrations we’ve been seeing in Hong Kong are partly to do with this, as is the yellow jersey movement in France. New regulation has been proposed in Berlin to freeze rents for five years, and there is similar discussion about regulation of residential property rents in London, New York and Amsterdam. Not many property investors are thinking about social inclusion and affordability, but we see it as a vital part of the S in ESG. We incorporate it in our investment process as we believe it could be an increasingly important driver of future returns.

*This strategy is available in the following countries under the name Kempen (Lux) Global Property Fund: Benelux countries, UK, Germany, Italy, France, Sweden, Finland, Switzerland.

**Kempen ranks #1 in the Morningstar database on a five-year track record with the Kempen Global Property Strategy in the Global Real Estate Securities universe – Property - Indirect Global, in EUR, for the NV share category N on 1 October 2019. The value of your investment may fluctuate. Past performance is not a reliable indicator of future results.

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Important Information
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. 

Disclaimer Kempen Global Property Fund N.V.

Kempen Capital Management N.V. (KCM) is the management company of Kempen Global Property Fund N.V. (the “Fund”). KCM is authorised as a management company and regulated by The Netherlands Authority for the Financial Markets. The Fund is registered under the license of KCM at the Netherlands Authority for the Financial Markets.

The information in this document provides insufficient information for an investment decision. Please read the Key Investor Document (available in Dutch and English) and the prospectus (available in English). These documents are available on the website of KCM (www.kempen.com/en/asset-management). The information on the website is (partly) available in Dutch and English. The value of your investment may fluctuate. Past performance provides no guarantee for the future.

Disclaimer Kempen (Lux) Global Property Fund
Kempen (Lux) Global Property Fund (the Sub-Fund) is a sub-fund of Kempen Alternative Markets Fund SICAV-RAIF (the “Fund”), domiciled in Luxembourg. Kempen Capital Management N.V. (KCM) is the management company of the Fund. KCM is authorised as a management company and regulated by The Netherlands Authority for the Financial Markets. The Sub-Fund is registered under the license of the Fund at The Netherlands Authority for the Financial Markets. 

The information in this document provides insufficient information for an investment decision. Please read the prospectus. This document is available on the website of KCM (www.kempen.com/en/asset-management). The Sub-Fund is registered for offering in a limited number of countries. The countries where the Sub-Fund is registered can be found on the website. The value of your investment may fluctuate. Past performance provides no guarantee for the future.