APG belongs to the top three biggest investors in real estate and the top six in infrastructure, worldwide. How is APG using their influence during this crisis? “The world has not changed. But I am seeing an acceleration of the megatrends that have been going on for some time.”
This is his second economic crisis at APG already, and just like ten years ago, he wants to make the best use of this crisis. During the first one, Patrick Kanters (51), managing director Global Real Assets at APG Asset Management, was still focused on finding smarter ways of organizing the 49 billion Euros invested in real estate and infrastructure, which he is responsible for. At that time, this was ten percent of the investment portfolio, a portion that continued to rise steadily, at the expense of shares and bonds. During this new crisis, he can look outward more; at the new world that is already emerging.
But, wait a minute. This is not happening that fast. This crisis is very different from the crisis back then. Wasn’t it primarily the banks that were having a problem at that time? And wasn’t “Main Street” affected only years after “Wall Street” was? This time, Main Street got hit right away; this is the street that Patrick and his investments teams travel on. It is a street made of brick and mortar, or rather, asphalt. The visible world, which has been hit hard. There are eighty employees, located in Amsterdam, New York and Hong Kong, who are experiencing the impact every day. Stores that have stopped paying rent, less profit from toll roads, in dozens of countries. The first thing this requires is what Patrick describes as “defensive measures”. Before he can look for opportunities in a world hit by the crisis, the existing investment must be supported where necessary.
Right of veto
Intervention was not easy in that previous crisis. The investments primarily consisted of relatively small interests in real estate funds at that time. And with just a few percent, APG was powerless to take a stand. So, that had to change. “We scaled back the number of funds. Instead, we took bigger interests in fewer projects,” Patrick says. “We also invest more solidly now, i.e. less risky, with less borrowed money. In real estate, the proportion of outside capital was initially over fifty percent, and currently that is less than thirty. A third measure we took was that we started to invest less in the relatively crisis-sensitive office market and more in homes, distribution centers and hotels. Now that the retail and hotel sectors are being hit hard, it is good that we are investing more directly. It makes a difference in fees, which we used to have to pay to fund managers, but in also sometimes laborious negotiations. This time, we have influence.”
About eighty percent of all real estate and infrastructure has been invested directly by APG by now. “As an investor with a minor fund interest, you have to conform to the fund’s policy. The fund determines how the investment is handled. Now we are also involved in that decision-making. Because we don’t only own bricks and mortar (asphalt), but we also make important strategic decisions. When issues come up during this crisis, we can look over the manager’s shoulder. We hear about what is going on first-hand, and then can we shift gears together faster. For example, we are currently having to deal with stores and hotels that are having liquidation problems. Are they justified in exacting discounts or withholding rent? For the hotel chain CitizenM, besides management, we are only dealing with a big co-investor from Singapore. We often figure things out faster together, partially because they are a like-minded partner that we chose ourselves. Our interests often agree. Of course, it does take time to assess the situation. But, because you have the same long-term horizon as the other party, you can take measures to protect your interest more quickly.
Closer to the business
Since the beginning of the Covid-19 crisis, teams have been gaining extra insight into the debt position of the investments, but also into the business strategies, the potential opportunities. Some fifty people are in constant consultation with managers, assisted by a growing army of highly advanced digital researchers and analysts who edit and interpret data. “Do we need to reserve capital? Are there any megatrends we should take advantage of right away? Can we capitalize on price discrepancies?” Of course, we don’t want to throw good money after bad. Besides looking at defensive measures, we are therefore also looking at the opportunities this crisis offers in terms of offensive measures.”
“The teams are much closer to the business now; they have to initiate and negotiate investments, take action and be involved in making decision. This is requiring something different from them than before. For example, they must be able to serve on the company’s board or be part of the investment committee – this may be required for close collaboration with the other parties involved.”
Trends accelerate
What are the forecasts for airports once the pandemic is over? For traveling, for tourism? “The world hasn’t changed. But I see the pre-existing megatrends accelerating. For example, the need for material things had already slowed down before the crisis. Consumers are increasingly focusing on experiences. That will continue. The vigorous growth of the middle class in Asia has not disappeared. But I don’t see the number of intercontinental flights returning to the old level anytime soon. I think further growth in tourism will be mainly regional.”
Online shopping is another unstoppable megatrend. “That has gone way up and I don’t see that ever coming down. Stores that were already struggling will fold sooner. That means that we are investing more in datacenters, distribution centers, homes and highly distinctive outlet centers.”