International strategy spearheads niche segments alongside ‘beds and sheds’ in post-Covid era

In mid-November, Bouwinvest Real Estate Investors made its debut in the life science real estate sector with a $60 million investment in life science facilities across the United States on behalf of its North America Mandate. Bouwinvest’s participation in Blackstone’s recapitalisation of BioMed Realty illustrates the type of niche segment Bouwinvest is targeting as part of its goal to add ‘Real value for life’, says Stephen Tross, CIO International Investments.

“Life science is very much top of mind in the Covid-19 era and there’s a huge amount of interest in biomedical research facilities. We expect to focus more on this niche which caters to all those parties dealing with innovative and creative developments such as Covid-19 vaccines and other medical treatments and cures which can really make a difference in our world.”

The life science property market in the US is dominated by some very large, dedicated players like BioMed, which has so far performed very well and has good growth prospects, Tross added: “There is a real need for this type of real estate and we only see it growing. We are not limiting ourselves to the US, we also see opportunities in Europe, but the US is a first mover in this segment. Other niches that we are targeting include affordable housing, student housing and data centres. We have some exposure to data centres in the US via the non-listed route and we want to expand our presence there. We are now also looking outside the US, in particular in Asia-Pacific.”

What are the main goals of the international growth strategy?

“We started our international expansion strategy in 2010 to further diversify the real estate exposure of our anchor client bpfBOUW, the Dutch construction workers pension fund. They were heavily focused at the time on the Netherlands, mainly residential. Since then, we have diversified into other sectors and geographies. Internationally, we now have a presence in Europe, North America and Asia-Pacific and we particularly target Germany, France, the UK, the Nordics, the US, Australia, Japan, Singapore, Hong Kong and China. In the past decade, we have built up a €3.5 billion portfolio that is truly diversified and covers all sectors including residential, retail, office, logistics, healthcare, hotels and niche segments. Furthermore, the portfolio is virtually equally divided across the three regions.”

What are the key criteria for international investments?

“It’s very important to team up with the right partners and we’re constantly looking for high-quality managers and like-minded investors who have robust risk management procedures in place and who make excellent use of data, are well informed about trends and have experienced teams who have navigated different cycles. We also invest in a wide variety of fund vehicles, with listed real estate securities accounting for about 25% of the total. The majority of our international investments are core or core plus and we have a relatively low leverage of around 30%.”

In what other ways is Bouwinvest fulfilling its promise to create ‘Real value for life’ via its international mandates?

“To us, ‘Real value for life’ means the creation of value in both financial and social terms. It includes a number of themes such as sustainability, affordability and a long-term investment horizon. We are, for example, active in healthcare, not on the cure side, but in living and care combinations, both in the Netherlands and globally. In the US, we invest via both the listed and unlisted routes in this segment. The US is well ahead of Europe when it comes to healthcare real estate and other alternatives for that matter: it offers dedicated listed strategies in a wide variety of subsectors which makes it easier to invest in niches there. We expect to see the further development of healthcare and other alternatives in Europe as well. The opportunities for healthcare in Europe are more limited, but there is a lot of interest and we’re seeing more parties enter the fray.”

Bouwinvest recently opened a satellite office in New York following the opening of its first international office in Sydney in February 2019. Why?

“We use our satellite offices mainly for three things: networking, deal sourcing and managing our existing investments. They allow us to be more integrated into the local communities and in more frequent contact with the managers we work with who are often located in the same cities, or in any case the same time zones. Having people on the ground helps us to put more controls in place, to extend our heavy emphasis on sustainability to our international portfolio and to meet the highest standards in terms of risk management and reporting. We have made some very good progress on all these fronts.”

Which mainstream sectors are most attractive globally in the post-Covid era? 

“We invest in all the major sectors worldwide, but logistics and affordable housing are emerging as the winners of the Covid-19 pandemic and we are absolutely interested in increasing our investments in both. There’s a lot of demand and limited supply and despite the growth we’ve already seen, the outlook for both sectors is still very strong. We are investing more in logistics as the pandemic has accelerated trends we had already identified such as the growth of ecommerce, the rise of logistics and the decline of retail. We invest with the big names across the globe who are active in multiple jurisdictions and who are attractive to the ecommerce and logistics services giants like Amazon and UPS. We are now also investing in last-mile logistics as it is becoming a bigger force and an extension of the retail landscape.”

Residential is by far the biggest sector for Bouwinvest in the Netherlands. Is that also true of your global portfolio?

Internationally logistics and residential combined are more than 50% of our portfolio. We had already identified ‘beds and sheds’ as resilient sectors a couple of years ago. More and more countries are moving towards an institutional residential rental market and we are helping create them. In China, we are developing private rental schemes together with Greystar and we’re doing something similar in Japan. In Europe, Germany has a very big residential rental market where we have been investing for some time, and we are now also gaining more exposure to this segment in the UK and France. Our focus on affordable housing in the residential sector is enabling us to generate very stable returns which plays into the needs of institutional investors.”

What impact has the Covid-19 pandemic had on the international strategy? 

“We are now even more cautious about retail, and are also very selective about offices and hotels. We have some exposure to hotels in the Netherlands, but very limited exposure in Asia-Pacific and the US. The hotels that we have in the Netherlands and internationally are located in leading cities and are good assets so we do expect people will go to these hotels first when travel comes back. How quickly the sector recovers depends on when we can travel again and we think it will take quite a few years before we get back to pre-Covid numbers. But the good hotels will be booked first.

The retail sector was already facing headwinds and these have intensified since the pandemic and lockdowns. Retail has been punished on the listed side where we are seeing huge discounts to NAV (Net Asset Value). There’s not much liquidity in the non-listed sector as there have hardly been any transactions, but in terms of pricing I think we’ll see good and bad pockets. Grocery-anchored properties are doing OK, but those with more exposure to fashion are suffering most.

With offices, we are very much focused on what the longer-term implications will be from working from home. There will be an impact, but we believe there will be a place for core offices going forward. We don’t expect the same headwinds as on the retail side. People will continue to want to come together in an office, maybe not five days a week, but certainly for a few. Once again, good-quality assets in well-connected locations will still be in demand. We entered the crisis in good shape with very comfortable leverage levels overall, so distressed assets are not a major theme in our portfolio.”

Has there been a shift in terms of targeted countries or regions since the onset of the Covid-19 pandemic?

“How soon the virus is controlled per region will have an impact. Asia-Pacific has grown the most in our portfolio in the last couple of years and the prospects there are still the best. The region was hit the hardest initially by Covid-19, but it has benefited from the experience of previous pandemics such as SARS and has shown great discipline in controlling the virus combined with rigorous policies to track and trace people. Asia-Pacific is now experiencing what looks like a V-shaped recovery while Europe and the US are taking much longer to recover. But we look at investments from many different angles. For example, on the sustainability side, there are more challenges in parts of Asia than in Europe. China has some challenges on the environmental front as well on the social side and governance. Australia is a very transparent market and compares very favourably with a lot of European markets. We’re looking for the right mix in our portfolio. We won’t put all our eggs in one basket to get the highest returns in the next three years. We have a long-term focus, which means sustainable returns are very important to us and ultimately diversification is the best protection against the known unknows and the unknown unknowns.”