KEPF posted a positive absolute and relative return during March. The Euro Diversified cluster was the strongest performer in terms of absolute performance (+3.7%) as well as relative performance driven by to our large overweight position in Hibernia REIT, which received a takeover bid from Brookfield Properties. Euro Residential was the worst absolute (-8.4%) and relative performer driven by weakness in German residential names.

March saw the first positive month for European real estate with the benchmark returning close to +1.5%. There was a bit of a bounce-back observed from initial panic falling out from the Russian invasion in Ukraine. Whilst the situation is as volatile as ever, real estate is a local business, and barring outright further military expansion, we believe that the worst-case scenario for developed listed real estate is relatively limited in the near future. The risk of continued rising rates in an effort to subdue inflation is very real, and has the potential to challenge several real estate sub-sectors with limited CPI links or subdued pricing power on the ground.

Near the end of the month it was announced that Brookfield had made a cash offer for all outstanding Hibernia shares at a +36% premium over the last unaffected share price. Hibernia owns a prime office portfolio in Dublin and traded at a significant discount to both the KCM NAV and the reported NAV. Brookfield has been consolidating the office space over the past months with the acquisition of German focused Alstria in November last year, Belgium focused Befimmo during February and this month Hibernia in Ireland. All companies traded at sustained and significant discounts to ours and reported NAVs and Brookfield is clearly taking the view that the right office assets, with strong tenants, would provide appealing future returns. The disconnect between private and public market valuations is something that Brookfield is clearly capitalizing on and it is also something that is benefitting KEPF as we held a significant overweight position in Hibernia and also in Alstria previously.

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 European portfolio has 5 clusters defined as homogeneous groups of real estate companies with similar underlying currency exposure. Examples are United Kingdom, European Residential 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. KEPF assigns its risk budget on the real estate portfolio level only.
This month we initiated an engagement with Swedish, Stockholm focused mixed use commercial landlord Atrium Ljungberg regarding its new environmental policy. We saw the new initiatives as a good progress especially with regards to Scope 3 measurements and the 2030 carbon neutrality targets. We provided feedback on next steps including TCFD reporting, verification of targets and potentially ESG targets worked into executive renumeration. We look forward to further engagements with this company.

During March we only made incremental changes to our existing holdings based on relative expected returns. In the Nordics we have been selling Norwegian office specialist Entra and adding Oresund specialist Wihlborgs in its place. We see the yield gap of prime Norwegian office yields to fixed income instruments closed and deem the former less attractive than before, despite the still strong CPI links and strong fundamentals on the ground.