The fallout of the global pandemic will narrow the investment thesis for equity players, working in favour of funds which are focused on the most resilient asset classes, according to Robert Rackind, partner and head of EQT Real Estate.
‘The investment landscape for potential LPs has definitely narrowed in the wake of the global pandemic,’ Rackind said, reflecting upon sizeable investor interest for EQT Real Estate’s latest fund.
EQT Real Estate II has just closed at a €1 bn hard cap, exceeding its target size of €750 mln, which makes it more than 2.5 times larger than its predecessor fund, EQT Real Estate I.
Seeking investments that are 'decoupled from the financial cycle', Rackind said targets included urban logistics and warehouse assets backed by ecommerce trends, as well as residential investments, including new build for-rent housing, student housing and senior living, in the €40-200 mln range.
According to Rackind, it’s a mix of luck and foresight which has pitched the mandate of EQT’s latest fund entirely in the sweet spot of beds and sheds, with capital already committed into four investment programmes across Sweden, France and the UK.
‘When we launched Fund II, it was late in the cycle and our strategy was about moving to income-producing assets which are less correlated with cycles and more correlated with megatrends,’ he confirmed. ‘We were fortunate that we didn’t invest in hotels, as we were attracted to the fundamentals of the budget hotel space in particular. But Covid has wreaked havoc on the hospitality sector.
‘Where we have invested does look more resilient and we have also increased our pandemic analysis to ensure that our portfolio has the ability to maintain income flows if a lockdown happens again.’
Class complexities
However, even the in-vogue residential and logistics asset classes are not always straightforward in the current climate. Student housing, for example, is back in the headlines as universities activate second-round lockdown procedures. Nevertheless, it remains a target for the fund. ‘We haven’t closed a student accommodation deal as yet. But we remain convinced by the segment. Most of the strategies are about producing future pipeline, delivering in 2-3 years’ time.’
When it comes to logistics, too, the asset class’ popularity – and scarcity – can make life difficult. Eric Lemer, managing director, capital and business development at EQT Real Estate, suggests that is where the firm’s local connections and strategic Nordic base comes into play. EQT has its origins in Stockholm, from an advisory venture between Investor AB, AEA and SEB in the mid-90s and that Nordic private equity base has stood it in good stead.
Today, one of Fund II’s most important commitments in the shape of Stendörren Fastigheter has put it in majority control of a publicly-listed company which owns a portfolio of 733,000 m2 of operational logistics / warehouse real estate across 124 assets in and around Stockholm, plus a further 666,000 m2 of consented land on which it plans to build 800 apartment units and additional logistics / urban warehouse assets.
‘It is harder to compete with the likes of Prologis or Mileway in a market such as the UK,’ Lemer noted, ‘but our deep relationships in the Nordics make a difference.’
Nordic partnerships
Rackind added: ‘Through Stendörren, we have access to buildings and sites which were edge of town, but have been enveloped by the town to become strategic for uses such as last mile. E-commerce has a long way to go, it’s a big area and working out which piece of that sector you can be in is essential. We are also monitoring consumer trends – if e-commerce penetration continues to grow at these rates, retailers and 3PLs will keep driving the search for logistics assets which simply aren’t there at the moment.’
Despite the useful Nordic connection, one of the hallmarks of the new fund is its appeal to an ever-broader international base. ‘If you compare Fund II with Fund I, for our first fund, just 4% of commitments came from the North America. This time, it’s around 26%,’ Lemer noted. ‘Last time 74% was from the Nordics, and although we have retained most of those investors, this time, the Nordic share of the capital represents 18%.’
All this seems to back Rackind’s theory that investors know what they want, and are looking further afield to get it. ‘Our success with the close was surely down to lots of hard work pre-pandemic, but we believe that additional LPs signed up – a few without even meeting us in person – because they agreed with our investment thesis,’ he said.
The latter portion of fundraising for Real Estate II was achieved digitally, in an exciting first for the firm, and the outlook looks promising thanks to its socially impactful mandate which is also resonating with investors. One of the most stand-out commitments to date is in Nest, a residential solutions platform in France with plans to deliver 4,000 purpose-built apartment units to address the housing and services needs of people with physical disabilities.
Rackind concluded: ‘Everything we do in our value-add approach already has green credentials such as Breeam and Leed. But more than that, we are seeking strategies which provide a positive impact on society – without compromising returns.’
