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Professional Investor - Netherlands
23 July 2023

Listed Real Estate: a tactical opportunity hard to ignore

The current economic climate of rising interest rates, largely due to higher inflation, has placed listed real estate in the spotlight. From a tactical point of view, listed real estate could offer a lucrative entry point for strong medium to long-term returns, although the risks remains challenging.

Real Estate in the spotlight
Once upon every investment cycle several attractive opportunities present themselves. These are often very clear in hindsight, but due to many investor biases are overlooked in advance. We believe that carefully selected listed real estate exposure is in that moment right now. The current economic climate of rising interest rates, largely due to higher inflation, has placed real assets in the spotlight. The days of easy broad-based returns due to perpetually falling funding costs are all but over. The asset class’s relative stable and predictable long-term returns, often inflation-linked cash-flows and long-term attractive residual values can be head turning.  

In the current shaken stock market, listed real estate is trading at attractive valuations. In our view, listed real estate price corrections tend to lead the direct markets eighteen to twenty-four months in advance. We believe that listed real estate is well into this correction hence the current discounted valuation opportunity. Therefore, from a tactical point of view, listed real estate could offer a lucrative entry point for strong medium to long-term returns.

Today’s entry point could prove lucrative. We target a 9% annualized net return (after cost) via our listed Kempen (Lux) Global Property Fund over the long-run. This is based on a combination of the listed real estate companies’ initial yield expectation (the rental income that properties generate) of around 6%, an average 2.0% rental growth per annum, moderate 40% leverage (the debt levels of the companies, which adds about 2% to  equity returns), average cost levels (split between capital expendures [capex], overhead [administrative, management and custody] which we estimate at around 2% as well as the 1% alpha net of cost (the excess return above benchmark) that we have aim for. The initial yield of the companies is reasonably high, in part due to the higher base rates globally. However, we argue that the return justifies the current risks of investing in real estate.

Tactically attractive
Listed real estate in our view currently offers a “once-a-cycle” investment opportunity. Simply put, with all the current pressure on real estate asset prices, the stock prices of the listed real estate companies which own these real estate assets are cheaper than the already decreased Net Asset Values (NAV) of the real estate assets that we foresee (the valuation of the assets of listed real estate companies). 

When looking at the global developed listed real estate market, we can see the opportunities being evenly spread across the regions with Europe offering arguably the most attractive valuations. Furthermore, we see the listed real estate sector is in much better shape than it was during the Great Financial Crisis (GFC) of 2008 (with a few isolated exceptions such as in the Nordics). The debt maturities are well staggered, average term to maturity is longer and often fixed, leverage ratios lower and debt service coverage ratios are nearly twice those of the time before the GFC. 

Risks remains challenging
Investing means taking risks, including that a portfolio may decline in value, and, as ever, high yields means high risk, and in the face of an economic slow-down this is indeed the case with respect to real estate occupancies and rental growth. The strong annualized return outlook could quickly be eroded via various individual problematic situations in the space.

These can manifest themselves either in: overvalued buildings or securities of good quality, or optically undervalued buildings or securities of poor quality which tend to be structurally challenged and should thus trade even cheaper. It is safe to assume that a certain amount of either situation are in the general benchmark at any given point in time.

The challenge of our investment team is to separate the truly resilient companies versus those that will continue to suffer, steer clear of these two aforementioned scenarios of rich valuations and find the opposite cheap valuation scenarios as often as possible, which do exist in any investment climate.
Disclaimer

The scenarios presented are an estimate of future performance based on evidence from the past on how the value of this investment varies, and/or current market conditions and are not an exact indicator. What you will get will vary depending on how the market performs and how long you keep the investment/product.

Important Information
This is a marketing message. 

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Kempen (Lux) Global Property Fund (the “Sub-Fund”) is a sub-fund of Kempen International Funds SICAV (the “Fund”), domiciled in Luxembourg. This Fund is authorised in Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier. Van Lanschot Kempen Investment Management NV is the management company of the Fund. Van Lanschot Kempen Investment Management NV is authorised as management company and regulated by the Dutch Authority for the Financial Markets (AFM).

The information in this document provides insufficient information for an investment decision. Please read the Key Investor Document (available in Dutch and English) and the prospectus (available in English). These documents of the Fund are available on the website of VLK (https://www.vanlanschotkempen.com/en-nl/investment-management/fund-library). The information on the website is (partly) available in Dutch and English. The Sub-Fund is registered for offering in a limited number of countries. The countries where the Sub-Fund is registered can be found on the website. The value of your investment may fluctuate. Past performance provides no guarantee for the future.
 

The author

Mihail Tonchev Van Lanschot Kempen

Mihail Tonchev

Portfolio Manager

Van Lanschot Kempen Investment Management (UK) Limited is registered in England & Wales with registration number 02833264. Registered office at 20 Gracechurch Street, London, EC3V 0BG Tel: +44 (0)20 3636 9400. Authorised and regulated by the Financial Conduct Authority (FCA) with reference number 166063.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance provides no guarantee for the future.

There’s a saying in Dutch, Kom verder, it means many things and it’s our business philosophy. It captures the way we work with clients but also the way we steer our investee companies to deliver shareholder value through active engagement.

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