APG is not a typical institutional real estate investor. In fact its strategy could even be called non-conformist, PropertyEU Editor in Chief Judi Seebus discovers in an interview with APG's global real estate head Patrick Kanters.
With some €400 bn assets under management, Dutch civil servants pension fund ABP ranks as one of the largest institutional investors worldwide via its asset management arm APG. No wonder, then, that divisional managers at APG like Patrick Kanters, global head of real estate and infrastructure, are courted like royalty by the investment management community. The good news for fund managers is that roughly 40% of APG’s global real estate allocation is tied up in non-listed investments. The bad news is that only a relatively small portion of the total – or 8% – is now invested in discretionary funds run by general artners
(GPs).
A far bigger share – or 32% – is currently invested via other vehicles such as joint ventures and club deals. Commenting on the variety of ways to invest in real estate, Kanters says there has been a huge development in the past decade. ‘Look at Inrev and how they have broadened their focus to include club deals and joint ventures as well as traditional investment funds. You can’t capture these investments in a single group. Now there are a number of very different ways.’
Partnerships with operators and specialists
APG generally steers away from ‘straightforward’ transactions or auctions of super-prime, super-core assets, he adds. ‘We’re much more cautious about taking part in auctions for super-prime, super-core assets. That’s not for us. The competition keeps us away.’
Instead, APG prefers to develop the product itself in partnership with operators and specialists. ‘We are in the fortunate position that we started building up our exposure to real estate several decades ago. We’re more interested in complex ownership structures and investments where we can restructure and scale up.’
In other words, APG is acting more and more like a principal and has renewed its focus on operators in recent years. ‘The operator is more key than ever. You’re not going to be successful as an investor if all you’re doing is just allocating. You need to be sourcing skill sets. That’s how you can differentiate,’ Kanters explains.
At 10%, APG’s allocation to real estate has remained virtually unchanged since the global financial crisis. What has changed is the number of principal-to-principal deals it has brokered with like-minded investors and specialist players. One deal that stands out is the acquisition in late 2010 together with Canadian Pension Plan Investment Board (CPPIB) of a 50% stake in the Westfield Stratford shopping centre in east London that opened a year later in time for the Olympic Games.
Significant exposure to retail
Retail currently accounts for the bulk – or 55% – of the European portfolio with outlet centres accounting for 20% of that figure. Overall, retail’s share in the global portfolio is somewhat smaller, but still significant at 38%. Kanters: ‘We have always been a big believer in retail, and the emphasis has been on getting the right type of retail property on board. After the outbreak of the global financial crisis, we were one of the first to reinvest again in 2009 and since then we have continued to lift our exposure to retail. The focus is on super-dominant shopping centres, inner-city retail and outlet centres. We will continue to add dominant centres to our portfolio, also through develop-to-own strategies.’
Gaining exposure to outlet centres has been a key priority in Europe, Kanters says. ‘It is difficult to get access to outlet centres, but they have performed very well across the cycles.’
In addition to joint ventures and club deals, APG has significant exposure to retail real estate – and other core and emerging real estate sectors – via the listed route. Parent company ABP’s latest annual report lists large stakes in most of Europe’s leading listed real estate companies with shareholdings in Unibail-Rodamco and Klépierre accounting for just over €3 bn as at 31 March 2016. UK REIT Hammerson accounts for a chunky shareholding of €466 mln, Intu Properties €67 mln while other retail specialists such as Deutsche Euroshop, Eurocommercial, Citycon and Vastned Retail are good for participations of under €50 mln.
Kanters has no clear preference for real estate exposure via the listed or non-listed route. The asset manager pursues an integrated strategy, he explains. ‘We are most interested in obtaining access to the best assets and managers.’
Chinese logistics market is still immature
The same applies to the logistics sector, he adds. ‘In the US, some of our best retail portfolios are held via participations in listed companies. We also have a large stake in Prologis in the US and in Asia we have exposure through our stake in Goodman. If the product is available via the listed route, that suits us very well. In China, however, nothing was available with this dedicated focus which is why we structured something ourselves. If we are able to structure an investment well as a private venture, that suits us equally well. We have no preference for one or the other.’
In May 2014, APG acquired a 20% stake in e-Shang, a leading developer and manager of distribution centres in China, and formed a strategic joint venture to develop prime storage and distribution centres across the country. The deal, which involved a sum of up to $650 mln (€580mln), marked one of the biggest investments of its kind in China. A year later, APG teamed up again with Toronto-based CPPIB to establish a $500 mln logistics development platform in Korea with e-Shang and its Seoul-based subsidiary Kendall Square Logistics Properties.
Develop-to-own strategies through investments in corporate structures and joint ventures are a key theme for APG and the focus has been on scaling up its best existing investments since the crisis, Kanters says. ‘We like to have a minority stake in an operating company as that gives us control over the strategic decisions related to these platforms. Participation in operating companies is crucial to creating value and minimising conflict of interest. We like to take stakes in companies with growth potential so we can reap these benefits. E-Shang is relatively new but already ranks in the top three in China.’
Kanters refutes the idea that non-listed real estate investments are necessarily less transparent than listed real estate investments. A key requirement is that the net asset value (NAV) of an asset or fund is up to date, he says. ‘We know more about our investments on the non-listed side than on the listed side. We have access to detailed information about leasing contracts, how the debt is structured, the address and valuations per asset.’
Concerns about transparency
There are, however, concerns about the transparency of some investment vehicles, Kanters concedes. ‘It’s not always possible to see what’s going on. On the whole though, there is a lot more transparency, thanks to Inrev for example, which has helped with the development of the standard data delivery sheet. Inrev is doing good work and on the whole GPs are providing more information. One area where progress still needs to be made is at the asset level itself. We require more detailed information about the assets themselves. And in that area we’re not unique.’
APG is very active through Inrev, but has also taken other steps to get greater access to asset-level data, for exam-ple by partnering with Dutch tech start-up Geophy. ‘This is a strategic partnership for us to obtain more detailed information at an asset level. This is an important development which we think will help create further transparency and enhance our portfolio management.’
Interest in emerging sectors
In addition to retail and logistics, APG is interested in emerging sectors such as hotels, student housing and the private rental segment of residential. Healthcare is also on Kanters’ wish list and he is open to structuring new ventures. ‘We are seriously looking into this. Healthcare is an important theme going forward. At the moment there are limited opportunities. The properties are simply not available, but we hope to structure deals in this segment in the future. It’s an important theme worldwide.’
The healthcare market is less mature in Europe than in the US, he notes. ‘We need to build developments and back operators in Europe from the ground up. Established healthcare specialists do not yet exist here.’ While the number of sectors in which APG is active is quite diverse, Kanters is keen not to spread investments too thin. ‘The focus is on scalable investments. For us an investment of €100 mln is small. We are interested in scaling up allocations from €200 mln to €1 bn.’
Kanters points to APG’s investment in Dutch hotel chain Citizen M. ‘We started off with a very small operation, just one hotel in Amsterdam. Now the chain has seven hotels in cities around the world with 1,600 rooms. This develop-to-own strategy is really gaining traction. By 2020 more than 7,000 rooms will be operational. A second hotel is due to open in New York next year, as well as two in London this year. The new London hotel is located right opposite the Tower of London and is really a Citizen M 3.0. The hotel is bigger, with more rooms and bigger lounges and the design is even more spectacular.’
A stake in an operator gives APG joint control over the decision-making, for example about exit strategies, and veto rights about new investments, Kanters says. ‘If we have a substantial holding of, let’s say over 25%, we can also determine whether any debt is used and, if so, the amount. All this means that we are now much closer to the assets and the operational management than we used to be through fund investments.’
Limited exposure to offices
Contrary to most other pension funds and institutional investors, APG’s exposure to offices is very limited. ‘We have really moved away from offices,’ Kanters concedes. ‘That’s a global theme. Offices are very cyclical and it continues to be difficult to generate a good return from offices due to the fact that they age so fast. It’s very difficult to increase rents at or above inflation and there are so many developments going on that could make them outdated.’
APG was not a great believer in offices before the GFC, Kanters notes. ‘We sold our Dutch office portfolio KFN before the crisis, in March 2008. Offices may be one of the most liquid asset classes, but that’s not an argument for us as a long-term investor.’
That said, APG is not averse to participations in offices with a value-add component. ‘With office investments you do have to be able to exit at the right time which entails strong control over the exit strategy. We have set up a number of partnerships for a limited time span, for example, we have invested in the renovation and redevelopment of offices in key cities in the US via a structured value-add fund and co-investments with Tishman Speyer. We have done something similar in France via a club deal with Altarea.’
In addition to the non-listed route, APG invests in offices through listed office specialists which, in Europe, includes the likes of UK giants British Land and Land Securities. Listed real estate is ‘definitely’ of interest, Kanters says. ‘We are puzzled that more institutional investors don’t invest in this. Listed real estate is highly correlated to direct properties and it is liquid.’
Investors who think listed real estate is far more volatile than non-listed are fooling themselves, Kanters says. ‘That is one of the pitfalls of a short-term view. Being invested on the non-listed side means we take a long-term view. There is tonnes of evidence available from the most mature real estate markets like the US, the UK and Australia that there are benefits to blending the two.’
