“Crises on financial markets shape you as an investor”

Published on: 14 December 2022

524 Billion Euros. That is APG’s total invested assets worldwide (as of October 2022). The goal: a sound and sustainable return for the funds’ participants. The portfolio is obviously broad. From investments in wind farms in Zeeland to shares in international hotel chains. And from safe bonds to the somewhat more fluctuating trade in gold or soy. Who are the people behind these investments? What drives them? What choices do they make? And why?

In this episode: Vincent Fokke, Head of Listed Real Estate Europe.

There are few sectors that are not being affected by the energy crisis and skyrocketing inflation. The Dutch real estate sector is not escaping these effects either. High interest rates have caused the real estate market to stagnate. The number of transactions is declining because there is a significant gap between requested sales price and offered purchase price and, according to Fokke, this phenomenon is occurring worldwide.   

Can you explain how the current situation in the real estate market came about?

“Until recently, we were in a long-term cycle in which interest rates were mainly declining for the past 20 years and there was practically no inflation - in some parts of the world even deflation. Now inflation has risen sharply and central banks are trying to ensure, through hefty interest rate increases, that that currency devaluation will not continue. When assets become more expensive, it comes at the expense of returns and real estate depreciates. And that is currently occupying a lot of minds.”     

As an investor, how do you deal with the uncertainty of a crisis situation like this?

“I started in the real estate investment sector in 2007, as a junior analyst. That was right before the global credit crisis broke out, so I just barely experienced the peak of the stock market boom. The financial sector really had to struggle through that crisis. I learned a lot from that and since then there has never really been a quiet moment. In late 2009 there was the European sovereign debt crisis, in 2016 Brexit presented itself and recently, capital markets have been shaken up during the Covid pandemic. Looking back, the timing of my entry into the sector has proven valuable. The insights you gain during those earlier peaks and valleys in financial markets help you make sense of the current situation. The dynamics you experience shape you as an investor.”

Can you give an example of what you learned during those crises?

“It is important to ask, especially with intense market developments: have we seen this before? Are there parallels with developments that have troubled capital markets in the past? In the stock market boom just before the credit crisis began, for example, you saw increasingly irrational investment behavior, where you really asked yourself: how is it possible that market participants are still willing to pay sky-high prices for certain assets?”

And that history repeated itself?

“Yes, in the last two years we have seen the same thing, with some companies using more and more leverage - an increasing amount of external financing, to boost returns. That works well as long as interest rates stay low, but now that interest rates are rising fast, debt financing is becoming a lot more expensive. As a result, the profits of these types of companies are under considerable pressure and they are in trouble. As investors, we are therefore concerned that the companies we invest in have a sustainable balance sheet structure. Paying attention to this is an important part of our investment process.

Another example is that almost every crisis has a credit crunch at some point, where liquidity (the extent to which a company can meet its short-term payment obligations, ed.) becomes a major issue - as during the credit crisis. Currently, we are seeing a number of cases where companies no longer have access to the bond market, forcing them to sell real estate properties to meet their payment obligations. When this takes on larger forms, it can lead to quite a significant market correction. That kind of development in the capital market is a signal for us to be cautious - for example, when it comes to new investments, or the amount of leverage we use in an acquisition.”

What are important trends that you and your team are leveraging with real estate investments?

“Megatrends are an important driver in all the investments we make. Take more extensive urbanization, for example. We therefore seek exposure to properties in large cities whose value we believe will increase over time due to increased urbanization, such as residential portfolios or distribution centers for the last mile (the last piece of transport in the process of delivering goods to the customer, ed.). We are also responding to demographic and social trends, such as rising life expectancy, the development of smaller households and an aging population. You can think of real estate that allows the elderly to live independently for longer, thanks to extra service facilities.

Another important megatrend we are responding to is climate change and resource scarcity. We use our influence to develop market-wide sustainability standards for real estate - such as GRESB - and set high sustainability requirements for our own real estate investments. Not only to make a sustainable contribution, but also because we are convinced that sustainable real estate is better able to - continue to - meet the expectations of users.”

How did you get into the world of real estate investing?

“I have always followed my interests, convinced that this way you automatically end up in the right place. During my doctoral studies in economics, I noticed I had an increasing affinity with financing and investments. When I came into contact with the field of real estate investment, it was like a piece of a puzzle that fell into place. I really like the process of arriving at business valuations. The fact that it involves real estate makes it tangible for me. With real estate, you can get a feeling, you can walk around in it. Then I did my master’s in Real Estate Science, which focuses specifically on real estate investment. Because of that, the transition to my first job wasn't very big either. I already had a pretty specific idea of what I wanted.”

You are now Head of Listed Real Estate Europe. What challenges does that bring?

“In my current role, I can combine macroeconomic forecasts, central bank interest rate policy and all sorts of other capital market-driven aspects with my knowledge of specific real estate markets. Quite apart from the current market turbulence, this is an interesting challenge in itself. In this work, the physical markets of real estate come together with capital markets. In that place, I feel like a fish in water.

Over the past 15 years, I have seen APG’s real estate investment process evolve tremendously. The current process is very data-driven and heavily based on fundamental analysis (fundamental analysis is a technique for calculating the true underlying value of a stock based on publicly available numbers, ed.). Moreover, the team responsible for this has continued to distinguish itself.”   

In your view, what is it that sets APG’s real estate team apart?

“We have a global team of 60 professionals with deep-rooted expertise, investing locally in real estate at our offices in Amsterdam, Hong Kong and New York. We believe that real estate markets are very much driven locally. Having the right local contacts and networks is therefore essential. To optimize the global investment portfolio, we combine this local knowledge with top-down insights. 

We invest in both listed and unlisted real estate and both equity and debt. Listed investments require different networks and competencies than private real estate. What particularly distinguishes our team is that we have both types of professionals and they collaborate intensively. This allows us to combine those complementary competencies and networks. This also gives us a wider range of opportunities to put together an investment portfolio and we can arbitrage (respond to valuation differences, ed.) between listed and private real estate markets. For example, if market participants are desperate for liquidity and therefore want to dispose of real estate quickly, this can lead to valuation differences of listed real estate compared to private real estate. We actively take advantage of such moments.

Last but not least: In APG’s investment process, a company's score on sustainability, social aspects and corporate governance, plays a hugely important role. It is important to us to act as an active shareholder and use our influence to create positive impact.”




Facts & Figures

What type of real estate does APG invest in?
APG invests in a highly diversified global portfolio with investments that include: residential, logistics, office, retail, outlets, hotels, healthcare real estate, self-storage and student housing. The investment portfolio is largely invested in equity but also has positions in debt investments.

For how much?
The scope of global real estate portfolio is 53 billion euros (about 9.7% of total invested pension assets).

What does that provide in terms of returns?
2017 +3.4%

2018 +3.3%

2019 +18.4%

2020 -10.2%

2021 +23.0%