[00:04–00:19] 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 We will focus on how the real estate market has changed, why the traditional buy and hold strategy is outdated, and how we at Van Lanschot Kempen help our

[00:19–00:34] 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.

[00:34–00:48] 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.

[00:49–01:06] 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

[01:06–01:30] rise and are not guaranteed. Investors may not receive the amount originally invested. Jorrit, to kick us 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 go for care, we relax, we have fun.

[01:30–01:46] And also where we record this podcast, to be honest, it's the buildings that allow us to provide those services. Think about residential offices, logistics, retail, and those are typically seen as the more traditional sectors.

[01:54–02:29] But there are also more niche sectors like schools, student housing, self-storage, cinemas. And 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 of typically 75% of the value is determined by the location and more specifically the land at which it is built.

[02:30–02:45] And land is not a depreciating asset. Therefore, real estate tends to hold its value. 

Daniel: Thank you, Jorrit. So that's very much a holistic traditional definition of real estate. However, it's quite clear that there has recently been some upheaval

[02:45–03:05] in real estate markets across the globe. Can you please describe what has happened and what this means for investors within this space? 

Jorrit: Yes. Yeah, to fight inflation, central banks globally have been increasing interest rates. And this has resulted in a repricing of all asset classes,

[03:05–03:26] including real estate. If government bond yields rise, investors will also demand a higher return on other asset classes. And the key question is whether the return on an asset can be improved through higher rental growth or whether the initial yield needs to rise to offset this.

[03:27–03:46] 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.

[03:47–04:00] 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

[04:01–04:17] 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

[04:17–04:35] 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

[04:35–04:49] career in real estate. But what I've learned over the years is that it has become quite dynamic. In the traditional buy and hold strategy, investors commit to a fund or an investment

[04:49–05:01] based on past positive performance, without taking a view of the expected return to come. And through this short-sightedness, investors are more likely to overlook sectors

[05:01–05:15] going through a significant change in fundamentals, like we discussed before. We see that today in offices, for example, previously in retail. And this means that tactical switches to enhance returns become unlikely.

[05:16–05:35] And due to the dynamics in the market, we see that the dispersion in returns is enormous. And in our alternative investment solution, we incorporate these future trends and themes into our analysis and consistently compare real estate investment opportunities globally.

[05:36–05:56] And 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

[05:57–06:09] reflect this and tactical switches can be made quickly and with conviction. And by identifying future losses at an early stage we can avoid capital cues on the way in and on the way out

[06:10–06:28] 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 disproportional amount of time, money, and energy, and possibly also reputation risk to get it back

[06:28–06:47] on track. Clients 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. Are you able to explain a little bit more detail how your process works in practice? 

Jorrit: Of course. In real estate, every building is

[06:49–07:02] 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

[07:02–07:14] owned by the 300 listed real estate companies, have 50 private real estate funds in our universe across 1.500 different markets, have 31.000 different sub-markets.

[07:15–07:29] This simply goes beyond the human brain. And that's why we have developed a big data-assisted investment approach. We started this 12 years ago. And as of today, we process some 25 million data points daily.

[07:30–07:42] 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

[07:42–07:55] location score and a building quality score. And these determine the expected future rental growth and future capital needed to maintain the cash flow as we calculate expected returns,

[07:55–08:08] 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.

[08:09–08:25] Jorrit: Absolutely. And 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, target return, etc.

[08:26–08:39] And within our alternative investment solution, we can help clients make and keep their real estate portfolio fit for future, regardless what that future brings. 

Daniel: Super. Thanks, Jorrit.

[08:40–08:57] Transitioning away from 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 values are needed for the bank

[08:57–09:13] 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 like regulatory changes, like climate risk. However, these future changes are essential 

[09:13–09:28] when underwriting real estate. Because you typically invest for the long run. You don’t look back. We're not going that way. Look forward. 

Daniel: And on the theme of the long run, what about sustainability? How does this play a role

[09:28–09:42] with invaluations?

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

[09:43–09:59] 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

[10:00–10:15] 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

[10:16–10:27] mispricing out there. And 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.

[10:28–10:42] In our alternative investment solution for real estate, we price both transaction risks and physical asset risks. We identify which assets risk becoming stranded and we calculate what investments are needed to

[10:42–10:59] 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: And 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

[10:59–11:12] 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.

Jorrit: Thanks Daniel