Bouwfonds sharpens focus on real assets

Bouwfonds IM is withdrawing from the US to focus on its traditional mainstays in Europe as well as communication infrastructure, parking and agriculture.

Bouwfonds Investment Management may be planning to wind down its US residential fund activity, but it will continue to seek American equity for its core European business, CEO Jaap Gillis told an EPRA Insight event in Amsterdam in mid-January. ‘We decided in our new strategic plan to stop in the US; not because the market isn’t good enough but because we are too small in the US to become an important player with our residential funds. But we are interested in US investors for Europe.’

In October last year, Bouwfonds Investment Management announced a strategic shift to alternative assets in Europe. ‘We do more than just real estate, we are also active in other real asset categories like infrastructure and natural resources,’ Gillis said. ‘Within the different real asset categories we focus on five sectors: commercial and residential real estate, parking communication infrastructure and agriculture. This differentiates us from other companies and that differentiating factor is exactly what we want to keep and promote.’

At present, commercial and residential real estate account for roughly 80% of the total portfolio, with communication infrastructure, car parks and agriculture accounting for the remainder. ‘We think that in the coming years investments in distinctive real asset categories will continue to grow,’ Gillis said. He added that the fund manager has no plans to launch new US residential fund activities and aims to sell off existing fund assets there in the coming two years.

Pointing to a research paper published in April 2012 by JP Morgan Asset Management, Gillis said the strategy shift reflected a broader trend in the investment environment where recent developments such as low bond yields and equity market volatility are ushering in dramatic changes in asset allocations. Global real assets - real estate, infrastructure, transport and natural resource assets that can provide higher income than bonds and superior risk-adjusted returns to equities - will increase in size and importance in investor portfolios, the asset manager predicts in a paper titled "The Realization: A new world. A new normal. A tectonic shift." ‘In the next decade we believe real assets will move from an alternative to a mainstream asset class. Portfolio allocations could rise from roughly 5%-10% today to as much as 25% in the next decade.’

Expansion
Since inception, Bouwfonds IM has had a strong focus on commercial real estate, mainly in the Netherlands and residential properties in Europe, primarily in the Netherlands, Germany and France, and to a lesser extent the US. In total it operates 26 fund vehicles and had assets under management of €5.7 bn at end-June 2013. But in recent years Bouwfonds IM has also made a name for itself launching new investments funds outside the traditional real estate sectors. In 2005, Bouwfonds IM launched its first pan-European Parking Fund followed by a second fund placed at the beginning of 2013 amongst German institutional investors.

Investments in car parks now total € 450 mln, and the goal is to double that figure, Gillis said. ‘Car parks is a sector that is growing pretty significantly. We’re also seeing a shift among institutional investors. It is now on their wish list and a good spread is also possible across the whole of Europe. We expect to see some of the same investors as in our existing car park and residential funds.’ The fund will only target institutional investors, he added. ‘For German private investors we launched a first separate private fund in late 2012 and we are planning a second fund later this year.’

The sharpened focus on agriculture investment is closely linked to the roots of Bouwfonds IM’s Dutch parent Rabobank, a cooperative bank with a strong base in rural areas in the Netherlands and one of the leading financiers of agricultural businesses and food producers. Under the Rabo Farm label, a farm fund has been launched with €165 mln currently invested in Poland and Romania. The fund is almost fully invested and a second vehicle is already planned, Gillis said. Like its predecessor, the new fund will target investments in farmland, buildings and equipment and will be open to institutional investors. ‘The goal is to improve the quality of farming processes and the yield per hectare. Rabobank has a strong commitment to global food security and vital communities. This is a way of transferring know-how and expertise to less-developed countries. That’s good for us, but it’s also good for the receiving countries. We don’t want to be seen as a party that’s is in for the short term only, ,we want to work together with farmers and grow with them.’

Another area where Gillis sees significant growth potential is communication infrastructure. ‘Mobile communication, digital communication via fixed lines and communication between equipment or machines (such as automated traffic registration for traffic websites) is rapidly increasing. However, to supply the speed and digital storage space needed to answer this raising demand the current communication infrastructure needs to be increased in capacity all over Europe. We’re also seeing an enormous shift in the retail world due to the rise of the internet and ecommerce. Consumers are reacting differently due to forms of technology that are available thanks to advances in communication infrastructure.’

That development has prompted Bouwfonds IM to develop a new communication infrastructure fund in its home market which is targeting €750 mln in assets. The first fund – which invests in data centres, cables (such as fibre optics) and mobile phone masts – is almost full, Gillis said. ‘We’re planning to launch a second fund with a more pan-European focus starting in Germany, but we’re also seeing opportunities to grow our activities in the Netherlands to a minimum size of €1 bn.’ Until now this segment has mainly drawn interest from sophisticated investors like APG, the asset management arm of Dutch civil servants pension fund ABP. Gillis: ‘We’re seeing our strategy endorsed by the larger players and we see significant interest from German institutional investors.’

Traditional mainstays
The focus on emerging segments such as infrastructure, transport and natural resources does not mean that Bouwfonds IM is neglecting its traditional mainstays. The company also has major expansion plans for its residential activities, particularly in its home market in the Netherlands but also Germany where it offers an open-ended pan-European residential fund for German institutional investors. While prices have decreased significantly in the Dutch residential market, Germany and Scandinavia are performing well, Gillis said. ‘There’s more money coming in that we can spend. The challenge is not to make concessions in terms of our investment criteria, but we’re very strict about that. And so far our investors appear to be satisfied. We’re seeing more investors staying in the fund than leaving.’

The fund manager is already active in student housing and car parks in Germany and is eyeing similar investments in France, the UK, Sweden and Denmark, Gillis said. ‘We’re looking very cautiously at countries in southern Europe for residential and retail. The economic problems there have not gone away, but things are getting better.’
Another product that Bouwfonds IM aims to launch shortly is a retail refurbishme√nt fund. The fund will seek to raise €500 mln from German investors and will target retail redevelopment opportunities in inner-city centres in Germany, France and the Netherlands.

As the former chairman of the ICSC Sustainability Committee, Gillis is a staunch proponent of redevelopment and views his own home market in the Netherlands - where vacancy rates in both the retail and office sectors continue to rise - as an example of how things should not be done. ‘We built too many new buildings in the Netherlands without destroying outdated ones at outdated locations. That was foolish. We need to restrain the weight of capital and unbridled desire to build anew. The focus should be on transition and renovation. Everybody loves being in the old city centres… in Amsterdam, Paris, Frankfurt…Buildings on good locations should get a second lease on life and old disused ones must be demolished in a sustainable manner so that we create vital communities. We need to reduce vacancy levels and create a circular economy. Inner cities must be kept vibrant, it’s just common sense.’

The retail refurbishment fund will mark the realisation of an idea that Gillis first initiated in 2005, well before he joined the then Bouwfonds REIM in 2012. The implementation of green labels and certification such as BREEAM will be followed by compulsory recycling of building materials, he predicted. ‘We’ve already seen Brussels regulate the recycling of packaging products. The next step for the property sector is a BREEAM demolition certificate, which is already provided by the Dutch Green Building Council. It will come!’

With a range of new products in the offing, Bouwfonds IM clearly still sees opportunities to expand its traditional business amid a widespread disenchantment with traditional fund vehicles. But the days of setting up new funds, raking in management fees and waiting for asset prices to rise are over, Gillis said. ‘A lot of funds see the value of their assets rise in the beginning and then collapse in the last years of the fund’s life term. I am in favour of greater flexibility in the fund and asset management. You need to make agreements about selling an asset if prices have risen, paying out a dividend or recycling the equity into new growth opportunities. Fund managers need to remain active. In the past some were too optimistic that values would not decline.’

COMPANY PROFILE
Bouwfonds Investment Management is the real asset investment management company of Rabo Real Estate Group, part of co-operative Dutch bank Rabobank. Bouwfonds IM manages a portfolio valued at €5.7 bn focussing on commercial and residential property, communication infrastructure, parking and agriculture. It has offices in Hoevelaken, Amsterdam, Berlin and Paris and a workforce of 150. Bouwfonds IM was the co-initiator of IEF Capital, a joint venture with Inflation Exchange Fund (IEF) in 2001. Since then IEF Capital has grown to become the Dutch market leader in inflation-linked products and has acquired a real estate portfolio worth approximately €3 bn through public tenders, bilateral transactions and a public takeover. This portfolio consists of retail, office and industrial properties and is used as a hedge for inflation products, which are sold to institutional investors.