Daniel
Welcome everyone to this Van Lanschot Kempen Podcast. Today we will discuss the intricacies of real estate investing. We will focus on how the real estate market has changed, why the traditional buy and hold strategy is outdated, and how we, at Van Lanschot Kempen, help our clients navigate these markets and their complexities. 

My name is Daniel Whitaker. I'm part of our institutional relations team here at Van Lanschot Kempen, and I have a specific focus on alternatives. Today I'm joined by our Co-head of real assets Jorrit Arissen. Jorrit has over 20 years experience in real estate investing. Alongside his colleagues, he manages mandates across listed and non-listed real estate for our clients, spanning multiple geographies and sectors. 

Good morning, Jorrit.

Jorrit
Hi Daniel. Good to be here.

Daniel
Just before we start, I would like to point out that this podcast is made for professional investors and for information purposes only. It provides insufficient information for an investment decision and does not contain investment advice. The value of investments and the income from investments can fall as well as rise and are not guaranteed. Investors may not receive the amount originally invested.

Jorrit, to kick this off. Are you able to quickly tell the listeners what you define as real estate and what is unique about real estate's risk-return profile?

Jorrit
Of course, real estate are the assets in which we live, we work, we shop, we relax and we have fun. And also where we are recording this podcast, to be honest. It's the buildings that allow us to provide those services.

I think about residential buildings, offices, logistics, retail - those are typically seen as the more traditional sectors. But there are also more niche sectors like schools, student housing, self-storage, cinemas - you can see that real estate plays a vital role in our daily lives. 

Tenants rent these assets for the long term and these rental contracts are following inflation. And what we see is that for good locations, where demand exceeds supply, it will outpace inflation.

The unique feature about real estate is that a large part, typically 75% of the value, is determined by the location, and more specifically, the land at which it is built. And land is not a depreciating asset, therefore, real estate tends to hold its value. 

Daniel
Thank you Jorrit. That’s a holistic traditional definition of real estate. Harvard has been quite clear that there has recently been some upheaval in real estate markets across the globe. Can you please describe what has happened and what this means for investors within the space?

Jorrit
Yes. To fight inflation, central banks globally have been increasing interest rates and this has resulted in a repricing of all asset classes, including real estate. If government bond yields rise, investors will also demand a higher return on other asset classes. The key question is whether the return on assets can be improved through higher rental growth, or whether the initial yields need to rise to offset this. If the initial yield rises, then the value falls to make it sufficiently attractive again. 

Well, on top of this, we see that consumer preferences and consequently tenant requirements are changing at an ever-faster pace. And lastly, we see in almost every market that regulation about ESG, in one way or another, and becoming Paris aligned, is impacting real estate markets. To keep your real estate competitive, you need to be proactive and invest for the future.

Daniel
All clear. A lot of our clients are institutional investors and they've traditionally used a buy and hold strategy for their real estate portfolios, which is very much commonplace within that client segment. I understand you do not believe this to be the best approach. Can you tell our listeners why and what the alternative approach may look like?

Jorrit
Of course, Daniel. Real estate used to be very boring. To be honest, that's also why I choose to enter my career in real estate. But what I've learned over the years is that is that it has become quite dynamic. 

In a traditional buy and hold strategy investors commit to a fund, or an investment based on past positive performance, without taking a few of the expected return to come. And through this short sightedness, investors are more likely to overlook sectors going through a significant change in fundamentals. Like we discussed before, we see this today in offices, for example, and previously in retail, and this means that tactical switches to announce returns becomes unlikely. And due to the dynamics in the market, we see that the dispersion in returns is enormous.

And in our alternative investments solution, we incorporate these future trends and themes into our analysis and consistently compare real estate investment opportunities globally.

By doing so, we try to identify future winners and future losers. If fundamentals change, and like the risk return characteristics change, like what's happening now with rising interest rates or if ESG requirements change, our models will be updated to reflect this and tactical switches can be made quickly and with conviction. 

By identifying future losers at an early stage, we can afford capital cue’s on the way in and on the way out and we can steer away from possible bleeders for our clients. What people often forget are the costs involved with bleeders, and once an investment turns for the worse, it takes a disproportionate amount of time, money and energy, and possibly also reputational risk to get back on track.

A client should try to avoid this at all times. And that's precisely where we can help them.

Daniel
That's a very helpful summary of your sort of forward looking philosophy. And are you able to explain a little bit more detail on how your process works in practice?

Jorrit 
Of course. In real estate, every building is unique and this is great as it helps to diversify. But it also brings a real challenge when investing in real estate. Because how do you consistently compare some 500,000 buildings that are being owned by the frail listed real estate companies have 50 private real estate funds in a universe across 1500 different markets or 31,000 different sub markets. This simply goes beyond the human brain. And that's why we have developed a big data assisted investments approach. We started this 12 years ago and as of today, we process some 25 million data points daily. 

We overlap these more qualitative views and like the future trends, the themes and regulatory requirements. And as such for each single asset we calculate a location score and a building quality score and these determine the expected future rental growth and future capital needed to maintain a cash flow as we calculate expected returns, which are used in our portfolio construction. 

Daniel 
Okay, so just to recap, it is very much a data driven approach which drives the investment thesis, but then it's also overlaid with your own qualitative forward looking views.

Jorrit 
Absolutely. What we also see is that every client is unique. Every client has its own unique portfolio, and they have different objectives when investing in real estate. For example, when it comes to risk tolerance the required liquidity, the target return, etc. And within our alternative investment solution we can help clients make and keep their real estate portfolio fit for future - regardless of what the future brings.

Daniel
Super, thanks Jorrit. Transitioning away from the data, what are your views on appraisal values? Are they a helpful tool within your process?

Jorrit
I don't think so. I do not believe appraisal values are a very useful insight when investing in real estate. Appraisal failures are needed for the bank when you would like to get a mortgage, but appraisal values by rule are not allowed to look forward and incorporate future trends and themes or regulatory changes like climate risk. However, these future changes are essential when underwriting real estate and because you typically invest for the long run. Don't look back - we're not going that way, look forward.

Daniel
On the theme of the long run. What about sustainability? How does this play a role within valuations? 

Jorrit
I want a better future for my daughters, and I want them to grow up on a healthy planet. More and more people are not only thinking like this, but they are also acting accordingly.

It's not only regulation that forces landlords to improve the sustainability of buildings, but it's also the tenants that are really requiring it. We see an increasing bifurcation in the markets between modern, efficient and sustainable offices, which command the highest rents ever, this is quite surprising to many. And on the other hand, the traditional offices which, are really struggling. 

In my view, sustainability in real estate is the biggest mispricing out there. Many people talk about the importance of sustainability, but only very little integrate it in their investment process and can truly assign a price to it. In our alternative investment solution for real estate, we price both transaction risks and physical asset risks. We identify which asset risks become stranded and we calculate what investments are needed to be Paris aligned.

Daniel
Understood, so the sustainability profile of a property is already a hugely important part of the valuation, but this will increasingly become the case. 

Jorrit
Absolutely.

Daniel
I think with that Jorrit we seem to be at time. Thank you very much to our audience for listening to this podcast. We very much appreciate you taking the time. If you have any further questions on the back of what you've heard today. Please do not hesitate. to contact either myself or the team. Thanks also to yourself Jorrit and we wish you all a fantastic rest of your week.