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new era is now emerging in real estate investment and changing what this alternative asset class can bring portfolios. To mark 40 years
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Real Estate
A maturing real estate market is gaining new investors
“Net zero commitments are set to revolutionise the world of long-dated real assets”
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Unpicking 40 years of innovation
The changing face of real estate investment
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of innovation, across five insightful articles the Invesco Real Estate team reveal what exciting developments and trends are getting experts in the space talking:
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Case Study – JICA Deep Dive
The importance of going global for real estate
Why investors are turning to real estate debt
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Beth Shard, UK Equities Deputy Fund Manager
Back in vogue: the return of valuation investing
Research, metrics and a human touch: assessing stocks for value
Perseverance, inspiration and progress: valuation investing at Invesco
What opportunities are there across the world’s regions?
An overview of a new era in real estate markets – How real estate is attracting a wider pool of investors with technological innovations in analytical capabilities. Featuring insights from Invesco Real Estate’s European investment strategist Mike Bessell and head of data analytics (Europe) Matthew Hall.
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Real estate debt – With alternative lenders dominating the property finance market, real estate debt is emerging as a source of resilient income, says Invesco Real Estate’s head of Real Estate Debt Andrew Gordon.
Adding real value - Invesco Real Estate’s Higher-returning fund manager Kevin Grundy discusses what is required to make a value-add programme work.
The global solution to real estate - UK real estate investors need to look globally for better returns and greater liquidity, say head of DC and Wealth Simon Redman and client portfolio manager Douglas Rowlands.
Operational real estate - Invesco Real Estate’s head of Alternative Investment (Europe) David Kellett and Higher-returning fund manager Richard Chambers discuss why holding real estate is no longer enough and collaboration is needed.
Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Property and land can be difficult to sell, so investors may not be able to sell such investments when they want to. The value of property is generally a matter of an independent valuer’s opinion and may not be realised. Important information This marketing communication is for Professional Clients only in the UK. It is not intended for and should not be distributed to the public.
Data as at 2nd April 2024, unless otherwise stated. Views and opinions are based on current market conditions and are subject to change. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. This material is issued in the UK by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH, United Kingdom. Authorised and regulated by the Financial Conduct Authority.
Why collaboration is crucial to real estate
The hands-on approach of value-add investing
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Real estate returns have been muted, but there are signs institutional investors are increasingly returning to this asset class
A changing investor base
To make the most of this, technology in isolation isn’t enough and active management still plays a role in researching and finding the best opportunities. Real estate has not been caught up in the indexation trend sweeping equities and bonds, and this still presents an opportunity for active management. At Invesco, the real estate investment team has an average of 28 years of experience and senior director and head of data analytics (Europe) Matthew Hall says more work is having to be done to thoroughly research this market.
The active management opportunity
“[For example] we have a team who invest in the hotel space and they're all hotel professionals who come from a background of working in the hospitality sector,” Hall says.
Mike Bessell, Real Estate’s European investment strategist
£43.8bn
This year, buy-in and buy-out volumes could exceed the record £43.8bn seen in 2019.
Source: LCP
Attitudes among institutional investors have also changed, according to Invesco Real Estate’s European investment strategist Mike Bessell who says there is a greater understanding of real estate among investors now.
This work helps investors, like Invesco, understand what a given real estate asset could bring to a portfolio over the long term. The ‘looking at the dots’ Hall refers to is important given higher transaction costs in real estate when compared with other financial asset classes.
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Real estate is heavily reliant on the lending market, and much has been done in the post Global Financial Crisis years to improve this environment. This has led to a lack of speculative supply, with poor quality projects finding it harder to find funding, and the value of other assets improving as a result.
“What real estate continues to offer is competitive returns against other asset classes but with a differentiated cycle timing and a differentiated risk profile,” says Hall. “In a portfolio, real estate has a well-established accretive role in balancing risk.”
“The willingness of institutional investors to invest in operational assets has been a real change”
here are green shoots in the real estate market as the asset class attracts a wider pool of investors. Institutional investors are at the forefront of this, and according to the 2022 Institutional Real Estate Allocations Monitor, allocations
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n a world marked by increasing economic inequality and environmental challenges, the need for innovative investment solutions that address both financial
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forefront of this, and according to the 2022 Institutional Real Estate Allocations Monitor, allocations increased from 8.9% to 11.1% since 2013. An improvement in the quality of underlying real estate assets has helped stimulate this demand.
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increased from 8.9% to 11.1% since 2013. An improvement in the quality of underlying real estate assets has helped stimulate this demand.
“The willingness of institutional investors to invest in these assets has been a real change,” explains Bessell. “This is one of the things that has driven [real estate] from being a smaller alternative sector to now featuring around 10% of institutional allocations in a typical portfolio.”
In a sense, there are two real estate markets – the occupational market and the capital market. The former is the income stream generated by the occupation of these assets, and the latter is how these income streams are priced relative to other investments.
“We've seen those income streams relatively unaffected but the way they're priced by capital markets has changed,” adds Bessell. “That's the yield change that we've seen. We’re making sure we understand the relative winners from that in terms of those income streams, which in turn should then be better priced by the capital markets.”
Technological innovations have unlocked new analytical capabilities for the asset class. It is now possible to access a wealth of new data about these properties, and process this in a fraction of the time it would have traditionally taken.
New tools for the trade
This is progress given how real estate has lagged other asset classes in terms of digital accessibility. Bessell explains: “Fifteen years ago, real estate data was just a series of rents and yields. While I can find an obscure company, look at its historic financials and trade it, I cannot do the same for an individual building.”
“Two buildings, sitting side-by-side and looking identical, will have completely different rent, risk and yield profiles as well as different valuations. The availability of the kind of data that we need to do the analytics on micro-locations has just taken off,” he says.
Better quality data, and the increased ability to share and use this, are two trends driving the use of tech in real estate investment. The former includes the use of micro-locations data which can arm investors with greater insights.
For instance, retail real estate used to simply be about footfall. Now, with smartphone pings, it is possible to map shoppers’ journeys through retail sites and monitor all elements of this – length of visit, number of shops entered, time spent window shopping and use of amenities and restaurants. These insights can be powerful in sectors as challenged as retail, where owners of bricks and mortar assets are having to think differently.
“In the last 10 years what we've seen is people make fewer shopping trips but when they go they're better informed, they know what they're looking for,” says Bessell. “They will travel further to go to those locations.
“It all just comes to being much more deliberate and proactive in how we approach a lot of that,” he says.
“Then they have people like us, [Mike Bessell] and I sitting in the background, and we’re looking at the dots on a map, processing data and joining them together with modern, machine learning techniques to predict out-performing assets and locations.”
“Two buildings, sitting side-by-side and looking identical, will have completely different rent profiles”
Matthew Hall, senior director and head of data analytics (Europe)
“In a portfolio, real estate has a well-established accretive role in balancing risk”
Charlotte Finch, client portfolio manager
“The most important thing is the impact of the underlying projects”
With only 5% of investable real estate found in the UK, is it time investors looked abroad as they would with equities and bonds?
tendency to focus domestically may be hampering UK real estate investors’ returns, according to the team at Invesco Real Estate who point to a lack of high quality, differentiated opportunities and potentially exacerbating liquidity concerns.
In the UK, debate has raged about how investors should go about real estate investment with open-ended fund structures attracting an increasing amount of scrutiny due to high-profile gating incidents. This has since raised questions about the best way to access real estate for UK investors.
“With 95% of investible real estate lying outside the UK, it makes sense to take advantage of the wider opportunities a global real estate approach offers,” says Redman. His colleague, senior director of client portfolio management Douglas Rowlands, adds that focusing domestically is a natural fault that many real estate investors make.
Broadening horizons
This highlights the importance of looking abroad according to Invesco Real Estate managing director and head of DC and Wealth, Simon Redman who argues that the UK, as a real estate market, is too concentrated to target in isolation.
“You [invest globally] in your equity and your fixed income portfolio, so why wouldn’t you do so for real estate?” asks Rowlands. “We talk to our investors about this a lot and it’s a real ‘penny drops’ moment.”
In terms of underlying assets, global real estate investors are able to capitalise on opportunities not typically found in the UK such as established private healthcare assets. Invesco real estate owns a large number of medical offices in the US, and half of these properties are on or adjacent to a hospital campus, creating strong locational demand among tenants. Demographics, in the form of an aging population requiring increasing care will act as a driver here, says Redman.
International opportunities
Simon Redman, head of DC and Wealth
“With 95% of investible real estate lying outside the UK, it makes sense to take advantage of the wider opportunities a global real estate approach offers”
Investment risks For complete information on risks, refer to the legal documents. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Property and land can be illiquid and difficult to sell, so the fund may not be able to sell such investments when desired and at the intended price. The value of property is generally a matter of an independent valuer’s opinion and may not be realised. Real estate investments are typically not listed on regulated markets and need to be valued via the application of appropriate models (potentially applied by independent experts): this may lead to inaccurate valuations which may not be reflected into transaction prices. Changes in interest rates, rental yields, FX rates, market trends and general economic conditions may result in fluctuations in the value of the assets and of the fund and in the level of cash-flows generated. Real estate investments are exposed to counterparty risk, which is the risk that a counterpart is unable to deal with its obligations. The fund may use derivatives (complex instruments) and borrowings, which may result in the fund being significantly leveraged and may result in large fluctuations in the value of the fund. Real estate investments can be exposed to new sustainability-related regulatory requirements and trends that may negatively affect the value of those assets which are not compliant and can envisage significant costs to be invested to comply or to simply improve their sustainability profile. In addition, real estate investments can be also significantly exposed to negative economic effects stemming from climate change, natural disasters and the general preference of investors for assets with better sustainability features. Real estate investments are labour-intensive and present a significant amount of human/manual inputs and activities, hence potentially exposed to several types of operational risks that may affect areas such as administrations, operations, reporting and others. The underlying funds might make use of debt to finance investments which may result in the fund being more leveraged and may result in greater fluctuations in the value of the fund. Many Real Estate investments are illiquid, meaning that the fund may not be able to sell them quickly at a fair price and/or that the redemptions may be delayed due to illiquidity of the underlying investments. If on any given Redemption Day of the Sub-Fund, the applications for redemption of units of the Sub-Fund represent in aggregate more than: (i) 3% of the Net Asset Value of the Sub-Fund per calendar month, (ii) 5% of the Net Asset Value of the Sub-Fund per any rolling 90 calendar days period, or (ii) 20% of the Net Asset Value of the Sub-Fund per any rolling 365 calendar days
“People look at their portfolio and go yes, why do we have it fully focused in the UK? You get why that happens; there's a bit of home bias but also investors just have not seen many credible options to invest globally in the past,” says Rowlands.
The argument to diversify real estate investment with a global approach is clear in the apparent pitfalls between different countries and real estate performance. From 2012 to 2021, the global unlisted real estate portfolio returned an annualised average of 8.0% with a standard deviation of 2.8. Compared to similar returns from global equities but with four or five times the risk. This highlights the appeal of a diversified global approach, given the difficulty in timing country peaks and troughs.
A broader investment universe, and better access to high quality properties and liquidity, was why Invesco launched the latest in its range of global real estate funds, with the the Invesco Global Direct Property Fund launching at the end of 2023. This global fund blends both public and private market allocations with a skew that is typically split 70% to 30% respectively, predominantly aimed at the DC pension market.
The Invesco Global Direct Property Fund
Previously, unlisted or direct real estate was accessible primarily through closed-end funds or direct ownership which introduces significant specific and/or vintage risk. Investors now benefit from greater opportunities for diversification by adding unlisted open-ended global real estate to their portfolios. Unlisted real estate represents the largest share of the estimated global real estate investable universe, with listed indices representing less than 5% of the universe based on their market capitalisation.
Rowlands explains the firm has been managing DC assets in a co-mingled strategy for several years but wanted to evolve this offering.
“Fundamentally real estate is the biggest asset class outside of equities and fixed income and offers a huge opportunity if you can get it right,” he says. “By bringing it all together - the global reach, high quality investments in developed markets worldwide and a daily priced format which, given that the average size of each of the properties we invest in is over $100m it’s providing for people who wouldn't otherwise have access to a high quality, global real estate portfolio.”
The fund is aiming to deliver long-term returns of between 7% - 10% on an annualised basis. This is similar to the returns forecast for global equities, but 40-50% of the real estate return will come from income and with a lot less risk.
“In the next 20 years, the number of Americans that are aged 75+ will expand by over 20 million, more than doubling in size,” he says. “Accordingly, healthcare spending in the US - which already represents nearly 18% of GDP - will only increase further. This, combined with the country’s private healthcare model, is creating a compelling opportunity for real estate investors.”
A more general theme being targeted in Invesco Global Direct Property Fund is sustainable and carbon-neutral real estate. An example of this is a 30,200 square meter 20 storey office building the fund owns in Melbourne, Australia that is completely carbon neutral .
“Real estate accounts for about 40% of emissions and as an actively managed fund we can have tangible influence on reducing that figure whilst generating attractive returns,” says Rowlands.
“Good quality assets are those that are sustainable. That's definitely a focus for incoming tenants who are prepared to pay above market rents for the best buildings and, as a landlord we want sustainable buildings that are not going to be “stranded” by the capital expenditure required to bring them up to modern standards.”
1
Source.
(1) Whilst the portfolio manager considers ESG+R aspects they are not bound by any specific ESG+R criteria and have the flexibility to invest across the ESG+R spectrum from best to worst in class. There are no guarantees that targets will be achieved.
Douglas Rowlands, Real Estate senior director
“Real estate accounts for about 40% of emissions and as an actively managed asset class we can have tangible influence on reducing that figure whilst generating attractive returns”
period, IMSA may decide to (a) start applying the Monthly Investor Limit (as described hereafter), (b) cancel all requests received on such day, and/or (c) decide that no further applications for redemptions shall be accepted until the first redemption day of the following calendar month or until further notice. Any such decision will be published on the Website of the Sub-Fund (https://invesco.eu/gdpf). IMSA also reserves the right (irrespective of whether any limits have been exceeded) to limit the applications for redemption of units of the Sub-Fund to a percentage between 2% and 5% of each unitholder’s designation account per calendar month (the “Monthly Investor Limit”). Further to this where redemptions have exceeded lower redemption limits (as may be determined by IMSA), IMSA may decide that no further applications for redemptions or conversion shall be accepted until further notice. Important information This marketing communication is for Professional Clients only in the UK. It is not intended for and should not be distributed to the public. Data as at 2nd April 2024, unless otherwise stated. Views and opinions are based on current market conditions and are subject to change. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. This material is issued in the UK by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH, United Kingdom. Authorised and regulated by the Financial Conduct Authority. For more information on our funds and the relevant risks, please refer to the Offering Memorandum, the Annual or Interim Reports, and constituent documents (all available in English). These documents are available from your local Invesco office. A summary of investor rights is available in English from www.invescomanagementcompany.lu. The management company may terminate marketing arrangements. The fund, as a Reserved Alternative Investment Fund domiciled in Luxembourg, is eligible for Well-Informed Investors (as defined in the Luxembourg Law dated 28 July 2023) and marketing in the EEA is permitted to Professional Clients only. The fund is a dedicated Luxembourg open-ended unregulated fund. It qualifies as an alternative investment fund (AIF) managed by Invesco Management S.A. as external alternative investment fund manager (AIFM).
Sources.
(1) Columbia Threadneedle Investments, 30 June 2023 (2) thegiin.org
Investment risks For complete information on risks, refer to the legal documents. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Property and land can be illiquid and difficult to sell, so the fund may not be able to sell such investments when desired and at the intended price. The value of property is generally a matter of an independent valuer’s opinion and may not be realised. Real estate investments are typically not listed on regulated markets and need to be valued via the application of appropriate models (potentially applied by independent experts): this may lead to inaccurate valuations which may not be reflected into transaction prices. Changes in interest rates, rental yields, FX rates, market trends and general economic conditions may result in fluctuations in the value of the assets and of the fund and in the level of cash-flows generated. Real estate investments are exposed to counterparty risk, which is the risk that a counterpart is unable to deal with its obligations. The fund may use derivatives (complex instruments) and borrowings, which may result in the fund being significantly leveraged and may result in large fluctuations in the value of the fund. Real estate investments can be exposed to new sustainability-related regulatory requirements and trends that may negatively affect the value of those assets which are not compliant and can envisage significant costs to be invested to comply or to simply improve their sustainability profile. In addition, real estate investments can be also significantly exposed to negative economic effects stemming from climate change, natural disasters and the general preference of investors for assets with better sustainability features. Real estate investments are labour-intensive and present a significant amount of human/manual inputs and activities, hence potentially exposed to several types of operational risks that may affect areas such as administrations, operations, reporting and others. The underlying funds might make use of debt to finance investments which may result in the fund being more leveraged and may result in greater fluctuations in the value of the fund. Many Real Estate investments are illiquid, meaning that the fund may not be able to sell them quickly at a fair price and/or that the redemptions may be delayed due to illiquidity of the underlying investments. If on any given Redemption Day of the Sub-Fund, the applications for redemption of units of the Sub-Fund represent in aggregate more than: (i) 3% of the Net Asset Value of the Sub-Fund per calendar month, (ii) 5% of the Net Asset Value of the Sub-Fund per any rolling 90 calendar days period, or (ii) 20% of the Net Asset Value of the Sub-Fund per any rolling 365 calendar days period, IMSA may decide to (a) start applying the Monthly Investor Limit (as described hereafter), (b) cancel all requests received on such day, and/or (c) decide that no further applications for redemptions shall be accepted until the first redemption day of the following calendar month or until further notice. Any such decision will be published on the Website of the Sub-Fund (https://invesco.eu/gdpf). IMSA also reserves the right (irrespective of whether any limits have been exceeded) to limit the applications for redemption of units of the Sub-Fund to a percentage between 2% and 5% of each unitholder’s designation account per calendar month (the “Monthly Investor Limit”). Further to this where redemptions have exceeded lower redemption limits (as may be determined by IMSA), IMSA may decide that no further applications for redemptions or conversion shall be accepted until further notice. Important information This marketing communication is for Professional Clients only in the UK. It is not intended for and should not be distributed to the public. Data as at 2nd April 2024, unless otherwise stated. Views and opinions are based on current market conditions and are subject to change. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. This material is issued in the UK by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH, United Kingdom. Authorised and regulated by the Financial Conduct Authority. For more information on our funds and the relevant risks, please refer to the Offering Memorandum, the Annual or Interim Reports, and constituent documents (all available in English). These documents are available from your local Invesco office. A summary of investor rights is available in English from www.invescomanagementcompany.lu. The management company may terminate marketing arrangements. The fund, as a Reserved Alternative Investment Fund domiciled in Luxembourg, is eligible for Well-Informed Investors (as defined in the Luxembourg Law dated 28 July 2023) and marketing in the EEA is permitted to Professional Clients only. The fund is a dedicated Luxembourg open-ended unregulated fund. It qualifies as an alternative investment fund (AIF) managed by Invesco Management S.A. as external alternative investment fund manager (AIFM).
Learn more about the Invesco Global Direct Property Fund
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Impact investing: Where are we now?
Social ratings: Methodology overview
solution and is being recognised for its ability to provide an uncorrelated return in a diversified portfolio.
The level of security afforded by real estate debt can depend on how each loan is structured. Invesco Head of Real Estate Debt Andrew Gordon gives the example of real estate debt with a 65% LTV: “The value of that asset can go down by a third, in theory, and it potentially doesn't affect our returns at all. Whereas if you compare that to equity, obviously if the value drops by a third, your capital drops by a third.”
oday’s challenging macro environment is forcing investors around the world to look for assets that will generate a resilient return while defying both high inflation and interest rates. Real estate debt is increasingly emerging as such a
The nature of real estate debt has largely been shaped by the GFC. In the years following 2008, banks pulled back from real estate lending and this allowed space for alternative lenders to enter the market. These lenders changed the landscape and opened the door for more flexible real estate loans to be written.
Post-GFC opportunities
With high inflation continuing to weigh on global markets, investors are increasingly considering real estate debt as a source of resilient income
The way debt is structured can also provide a hedge against inflation, with the returns on floating rate loans moving in line with underlying reference rates.
“If economic theory works, then that reference rate will reflect inflation at least directionally if not in quantum,” adds Gordon. “So when inflation goes up, the interest rates go up and returns go up.”
Where banks had previously been lending at LTVs above 80%, when they started lending again after the GFC they offered LTVs of closer to 55%. Contrasting this with typical borrower requirements of around 65% LTV presents a clear opportunity for alternative lenders.
As regulation has succeeded in ensuring banks remain at modest LTVs, some alternative lenders have moved towards being flexible in meeting borrower requirements, including provision of whole loans which provide the full debt capital stack in a single tranche.
This is a boost to the real estate market that didn’t exist before the GFC. “From a borrower perspective, that was obviously great because it's painful to try and get the two lenders together to agree terms, the credit interecreditor agreement and close simultaneously," says Gordon.
“The strong advantage of being a whole loan lender is you originate your own loans, you do the due diligence yourself, you negotiate the documents yourself. You are fully in control with the first mortgage and senior security,” he says.
“We might be very happy to lend at mid-60s LTV, it can provide a lot of downside protection,” says Gordon. “If you look historically at the drops in the market, there's been very few times where from a market perspective where you're going to be in trouble at 65% LTV. There is that gap where we want to operate – within a level where we meet borrower’s requirements; above where banks can lend; but at a level which provides sufficient downside protection. That point of dislocation is exactly where we seek to be.”
Real estate lending is no longer about confirming the weighted average lease length is longer than the loan term and then picking an LTV.
No more free lunches
“You've actually got to underwrite the market, the asset and the business plan to make sure that the asset will remain resilient. Broad risk metrics such as LTV are insufficient,” Gordon explains.
The risk characteristics of each loan are always different because each underlying property is different. Without a full understanding of the macro and micro factors affecting the occupational and investment supply-demand dynamics, it is not possible to effectively select or structure loans which meet your investment strategy,
“The way that we're approaching this is through an open-ended fund. This is not a short-term opportunity, this is a core whole loan fund for what we see as a long-term opportunity for investors who want to earn an attractive resilient return,” he says.
Andrew Gordon, head of Real Estate Debt
“Every loan we make is underwritten by someone who works in the local market whose job it is to buy, sell and manage real estate”
“Broad risk metric are insufficient – every loan is different because every property is different”
The Invesco Real Estate Debt Strategy
Managed by Andrew Gordon, this strategy aims to offer a stable, high-yielding income stream with significant asset-backed downside protection. Gordon is supported by a team with an average of over 20 years’ experience, and a track record of originating over €1.5bn of loans across a number of European markets. Loans are focused on high quality assets with strong ESG credentials and our investors benefit from a market-leading combination of fund management and real estate expertise.
Invesco Real Estate who point to a lack of high quality, differentiated opportunities and potentially exacerbating liquidity concerns.
tendency to focus domestically may be hampering UK real estate investors’ returns, according to the team at
Invesco Real Estate’s head of Alternative Investment (Europe) David Kellett and managing director of fund management Richard Chambers recently sat down with Investment Week to discuss the bold new approach required around operational real estate
2
DK: It’s changing all the time. Ultimately you have to apply that business first mindset; you appraise the business first and then the real estate whereas historically we've always started with the real estate. If Invesco is a tenant in your office, you know they're going to pay the rent. But on the operational side it has to be a business that is going to exist and grow because this drives the value of the real estate.
Has the opportunity for operational real estate just expanded?
RC: With operational investment, whether that's exposure to an operational cashflow or investing into businesses, for the value-add strategy we like to see that as upside to a base case return driven by stable real estate income. We can selectively take exposure to the operating cashflow of a business in partnership with the management team. The PropCo generates real estate return, and the OpCo is the icing on top providing both financial and operational advantages.
For an investor who is looking to invest in real estate, what does it offer them when you are managing it operationally?
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“Xxxxxx xxx xxx xx xxxx xxx xxxx xxx xxx xxxxxxx xxxxxx xxxxxxxx xxxxxx x xxxxxxxx xxxxxxx xxxxxxxx xxxxx”
(1) Bloomberg, as at 30 September 2023
RC: Real estate has become more operational generally. There is more interaction between the landlord and the tenant. For example we own a retail park and it is important to understand the performance drivers of the retail businesses that occupy those units, how they're trading out of the unit day to day and what they need in order to improve their performance. And can we, as the real estate owner, help facilitate that? That approach ultimately leads to better performance for all stakeholders, and it transcends all real estate sectors to some degree.
DK: Operational management - the first thing is working with best-in-class operating partners and it's very much a partnership approach. A good example of this is our work in hotels – we target markets with established tourism appeal, supply constraints and a robust capital market size and then we can focus on assets there where we can add value.
What are you typically assessing in some of these areas?
For example, we have a hotel in Lisbon and we're looking at consolidating rooms which involves us working with the tenant in partnership on a capital expenditure (CapEx) plan that we understand. We can't understand that CapEx plan without a hotel business mindset. A huge amount of it starts with the partner you're working with.
In Europe alone we have 28 hotels across seven countries and working with 17 brands. Our assets in this sector are around $1.6bn with exposure to over 5,500 hotel rooms, giving us plenty of opportunity to benefit from the CapEx we have overseen on these properties.
RC: It’s important to understand the asset level levers that drive performance out of real estate. We can reposition and improve the physical asset but it's also about understanding the businesses you want to attract and retain within that property. Look at the evolution of offices post-Covid, for example. The way businesses make decisions about their occupational strategy is continually evolving. The days of long-term inflation linked office leases are largely gone and businesses value flexibility. This has led to some landlords operating and managing spaces they can rent out on an hourly basis as well as fixed rents on core space.
Property owners and occupiers are learning more about each other's businesses and collaborating to find win-win solutions.
With Invesco's experience in this field, where do you see it going?
At Invesco we have always been very strong on partnerships. That’s the way the world is headed. It's no longer a landlord and a tenant relationship controlled by a contractual arrangement; it’s far more collaborative. When looking at investments into and alongside operational businesses this collaborative approach is even more important.
DK: Start with what consumers want at the end of the day. In that regard, the requirement for real estate is changing quite significantly. That's really to me where the operational aspect comes from; these emerging asset classes in real estate are moving away from this is an office, here's the rent, go away, come back in 10 years and we'll renegotiate etc. Those days are gone.
Richard Chambers, managing director of fund management
“It's no longer a landlord and a tenant and a contractual arrangement; it’s far more collaborative”
David Kellett , Real Estate’s head of alternative investment
“You appraise the business first and then the real estate whereas historically we've always started with the real estate”
Performance Delivery
Source: Invesco Real Estate, April 2024
Our hotel investment strategy
Well-located hotels in high barrier to entry markets: Micro location is paramount in all our investment decisions. We look for a balance of business and leisure demand drivers in markets with high overall market occupancy, presence of compression nights (occupancy > 90%), and a favourable supply/demand outlook.
High barrier markets and micro locations
We work closely with operators and brands that have a leading market reputation and strong track record of operational delivery.
Proven operators and brands
We structure deals that suit both the real estate investor and the hotel operator, aligning the interests of both parties usually through a hybrid lease structure.
Aligned deal structures
Sustainability credentials and resilience to Aligned deal structures both climate and ”transition“ risks created by a lower carbon economy, have become central to our asset selection criteria.
ESG+R
Implementation of major capex (refurbishing, repositioning, rebranding) and ESG+R initiatives is key to driving long-term performance.
Active capital investment
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Invesco Real Estate managing director of fund management Kevin Grundy discusses what is required to make a value-add programme work in real estate
What is the European value-add programme and how does the strategy work?
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Kevin Grundy , managing director of fund management
“The logistics sector overall looks the most appealing at the outset, having experienced the largest repricing, while at the same time having positive occupational trends”
Invesco has been active in European value-add investing for 10 years and globally for more than two decades. The leadership team for our European programme come from private equity backgrounds and have been investors for 25 years so there’s a lot of experience through different cycles that we can draw upon.
The best value-add opportunities combine attractive entry pricing with a value-enhancing business plan that ultimately hits the bullseye for core market appetite when completed. The case for value-add strategies in Europe today is that the capital markets have disconnected from real estate performance. Higher interest rates have forced illiquidity and a repricing, but the underlying story in a number of real estate sectors, whether that’s in logistics, residential or sustainable offices, remains positive.
Where are you looking for value opportunities? And how do you find those?
Almost all the best opportunities are sourced off-market, so it's essential to have a deep local presence in the European markets. If you want to find a great deal in Madrid, you can’t do it sitting at a desk in London. Locals deals and the best opportunities usually start with everyone sitting around a table and working out a solution together.
The flexibility that our value-add approach brings to those local discussions is invaluable. We spend as much time working out how we should structure an investment as we do identifying what we're going to invest in. It's not enough to decide to invest in logistics, residential or offices. A lot of a value is created and risk is managed by the work that goes into structuring the investment.
The market is indicating that rates have already peaked and are on their way down. That’s important to support investor confidence. We’re pan-European and invest across sectors. We like a diversified approach to be able to respond to changing market conditions. The logistics sector overall looks the most appealing at the outset, having experienced the largest repricing, while at the same time having positive occupational trends.
Residential rentals and brown-to-green sustainable offices also look appealing, in both cases showing undersupply in primary markets. But it’s not universal – the quality of the location and the asset are differentiators and superior ESG credentials are essential regardless of sector. To date, our European value-add programme has made 39 investments across six sectors in 10 countries and over 80% of the capital we’ve invested since 2016 has had a high ESG certification. We see the advantages of ESG-forward investing in both the occupational markets and the investment markets.
Where do you see the opportunities coming up in 2024, given where we are with rates?
Our investor base is global and it’s a mix of specialists in the value-add space and investors with diversified portfolios who want to have a portion of their exposure in a higher-returning category with a manager who they're comfortable will manage risk appropriately. Historically the investor base was institutional, but increasingly we're seeing interest from private wealth channels.
Finally, what type of investors does this appeal to?
Invesco Real Estate value-add Strategies
Following all-weather investment principles designed to perform in unsettled markets, the value-add strategies merge the sourcing and execution advantages of locally based teams with proprietary access to best-in-class partners. A Pan-European, multi-sector approach positions the strategies to take advantage of market disruption with speed and conviction.
The strategies are flexible, investing across the capital stack. Traditional equity investments, structured equity with preferred returns, and mezzanine debt are considered with a 15-20% IRR objective. The strategies also offer investors the opportunity to participate in platform investments with operating partners.
Kevin Grundy, managing director of fund management
“We spend as much time working out how we should structure an investment as we do identifying what we're going to invest in”
Fundamentally, the strategy seeks to create stabilised assets for sale into the core market. It's very hands-on investment management, involving everything from improving income to managing refurbishments and development. Within the programme, we have the flexibility to structure investments as traditional equity, structured equity or mezzanine financing, as well as making investments in real estate platform companies. We’re looking to achieve returns in the range of 15% to 20% IRRs.
