Robert-Jan Foortse, Head of European real estate at APG, about the post-corona investment strategy
For real estate investors, 2020 is also a very turbulent year. Offices are standing empty because employees are working from home, consumers are increasingly shopping online, store owners are having a hard time paying their rent. How does a big real estate investor like APG deal with this? By becoming much more flexible, says Robert-Jan Foortse, Head of European real estate at APG. “The time when you could buy an office building as an investor, get someone in there on a 10- or even 25-year lease and then sit back and just send an invoice every quarter has definitely passed.”
The real estate market is super-hectic right now. To what extent does that impact your investment strategy?
“Part of our real estate is listed on the stock exchange, we can quickly move that if we want to have other emphases; for example, invest more in data centers and less in stores. But our investment strategy will not change substantially as a result of the corona crisis. We want to build and manage a portfolio of global real estate investments that offers a predictable dividend and grows in value over the long term. That is what our clients want from us. Return on investment is paramount, so that members are assured of an affordable pension. In addition, the sustainability of our real estate is at the top of our agenda; it really is a top priority.”
In what regions do you invest and what do you invest in?
“Worldwide, we invest about 42% in Europe, 30% in North and South America, and 28% in Asia. In Europe it is mostly investments in the Netherlands, England, Germany and France. Out of our total investments, about 535 billion Euros as of mid-November, more than 42 billion Euros is in real estate. We invest not only in houses, stores, outlet centers and offices, but also in logistics, i.e. warehouses, and distribution centers. We invest a smaller portion in hotels, student housing, data centers and other things. In short, we have a very diverse real estate portfolio and our risks are spread out very well.”
Does this diverse approach work during a mega-crisis like the corona pandemic?
“We will probably also have a negative return in 2020. That is certainly something we are not used to. The last fifteen years we have had an average return of 8.7% a year. And please note: that average includes the consequences of the financial crisis in 2008, when things were really bad too. Offices and stores are currently under a lot of pressure, but at the same time, we are seeing that the housing portfolio is stable and that data centers and logistics real estate are doing very well. That also applies to outlet centers like Batavia Stad Fashion Outlet in Lelystad, which are scarcely seeing any decline in the number of visitors. So, yes, this confirms the wisdom of a diversified portfolio all the more.”
The rental incomes will be under pressure for a while yet. How is APG dealing with that? Selling stores probably doesn’t pay much right now...
“The time when you could buy an office building as an investor, get someone in there on a 10- or even 25-year lease and then sit back and just send an invoice every quarter has definitely passed. And the certainty that a tenant will always pay their rent is also wobbly right now. This makes sense during a time when incomes have come to a standstill. But despite the fact that they have a contract, some tenants reasoning is now: if my neighbor stopped paying rent, why should I pay mine? Plus, governments in some countries are more or less advising store owners to postpone paying their rent. This makes it seem like suddenly it is socially acceptable to ignore a rental agreement. We have no control over these kinds of developments, so that means that we have to spend time on complying with contracts, oddly enough. But above all, it means that we have to set ourselves up to be much more flexible.”
“You need to be much closer to your tenant to be able to get the most return out of your building. That is why we are increasingly opting for investments where we have more control and can work more closely with the operational, local partner that really manages the building. No, we don’t do that ourselves; we don’t have the manpower for that. Take, for example, our investment in The Student Hotel, a Dutch provider of student housing in Europe, with branches in Amsterdam, Rotterdam, The Hague, Eindhoven, Maastricht, Groningen and Delft. Students reside in The Student Hotel on the Wibautstraat in Amsterdam, in the former offices of Parool and Trouw, and hotel guests can book a room and flex-workers can have a quiet place to work during the day as well. There is a restaurant and there are all kinds of sports facilities. In the basement, where the printing presses used to be, there is now a swimming pool where you can take swimming lessons from Johan Kenkhuis, a former Olympic swimmer. It is a lively building with all kinds of functions. A great example of how you can be flexible and creative with the spaces in a building.”
What about office buildings?
“I would like to see the same flexibility there too: many tenants really don’t know long they want to be there now and with how many employees. So, it’s better to not pin them down for a long-term lease. For example, you could rent one floor to flex-workers temporarily. As a landlord or owner, you should be close to your tenants, so you know what they want.”
Another example is hotels that are renting out rooms by the day to flex-workers, now that hotel guests are staying away. Does APG see opportunities there too?
“Yes, that is a good example of flexible thinking. We already got into CitizenM, entrepreneur Rattan Chadha’s successful hotel chain, back in 2008. They have now launched two options: in their hotels, you can now buy a subscription for a workspace. And you can buy a ‘global passport’ that you can use to rent a room in any CitizenM-hotel in the world for a month, for the equivalent of about 50 Euros a night. We are certainly looking for new opportunities in that vain.”
Apart from the current corona crisis, what long-term mega-trends are you influenced by in the selection of investments?
“For example, through the demographic and social changes. Every generation, from baby boomers to millennials to generation Z, has its own preferences, wishes and needs. People are getting older and living at home longer. In addition, people will increasingly be moving to cities in the next few decades, even though we are currently in a period where people are fleeing from some cities. Those trends mean that there are opportunities in care real estate, and affordable rental housing in cities. For example, we are investing in Australian senior real estate through an investment in the Australian Lendlease. These are villas for retired people in separate villages that are geared entirely to their needs. In Europe, we are still searching for something similar. And in London, we are currently investing in constructing and renting out affordable housing, which will be very much in demand in the coming years. In addition, the demand for, for example, distribution centers and data centers is also greatly increasing due to technological trends like digitalization and the growth in e-commerce.”
And what about the sustainability trend?
“That trend is our number one priority. In 2008, we were one of the founders of "GRESB", the Global Real Estate Sustainability Benchmark. Almost all parties in the real estate sector now follow this guideline, with which you can measure the sustainability performance of real estate investments very accurately. Over the years, the bar has been raised ever higher. Every year our real estate portfolio scores well above the average; more than 65% of our investments score four or five stars, the highest categories in GRESB. And with every new investment, we obligate the parties involved to not only participate in GRESB, but also to commit themselves to come to a 4-5 star rating in consultation with us.”
In addition, APG announced in May that it is committed to CRREM, de Carbon Risk Real Estate Monitor. Why?
“This Monitor clarifies for various types of real estate how much CO₂ per square meter they are allowed to emit annually until 2050 to stay within the Paris Climate Accord goals. In this way, we can make it measurable to what extent we are providing a contribution with our real estate investments. And we can call real estate managers and listed real estate companies to account if, in our view, they do not sufficiently contribute to the goals of the Climate Accord.”
I don’t suppose they will always be happy about that. Because making things more sustainable means substantial investments...
“Yes, sometimes it requires a discussion. But fortunately, everyone knows about the need of sustainability these days. It gets tricky sometimes when you start to look at the numbers. But don’t forget that sustainability can also result in making money. Think of substantially lower energy costs. Or the higher rent you can ask for as a building owner if you are offering a very sustainable building to potential tenants. In addition, more and more tenants only want to rent responsible buildings, because they want to be more environmentally friendly in their own activities.”
Is sustainability happening fast enough for you in the real estate sector?
“Instinctively I’d say: we are still going too slow. I dare say that APG is in the lead in the real estate world in that aspect. That is why we get together with other big investors whenever possible. Because together you can accomplish more.”
We are having this conversation, each from our own house right now. Will people continue to work from home, entirely or partially after the corona crisis? Or will everybody return to the office?
“The answer depends partially on the culture you work in. Our coworkers in Hong Kong often have smaller homes and really want to get back to the office full-time. I do too, to tell you the truth, because I miss the contact with my team. But other people want to keep working from home, at least partially. It will be interesting to see what kind of permanent impact the corona crisis is going to have on our real estate investments.”