Dutch pension services provider APG, one of the largest investors in real estate world wide, says the pandemic has not caused it to alter its strategy of focusing on investments that reflect technological change, demographic change, and sustainability.
APG uses a fully integrated strategy combining REITs and non-listed real estate to build and manage a portfolio of global real estate investments that offer a predictable dividend and grow in value over the long term. Return on investment is paramount for APG so that its pension fund clients and their members are assured an affordable pension, while also contributing to a more livable and sustainable world going forward.
Patrick Kanters, managing director of global private investments at APG Asset Management, spoke with REIT magazine on topics including APG's investment thesis, how it balances its portfolio, and the advantages of investing in REITs.
How does APG make allocation decisions regarding REITs versus private real estate?
For more than a decade, we have run a fully integrated strategy. That means that we don't really differentiate between listed and private assets in real estate. I would say 60% of our portfolio is in private real estate and the remaining 40% is listed real estate. Each time we select investments to build that portfolio's diversification with regard to regions, sectors, and risk styles, we always try to select the very best company or funds available.
For example, in Europe, there's very little available in the more alternative real estate assets, so that actually requires us to be more active in setting up these platforms ourselves, to work closely with the strong operators in that field.
In the U.S. however, there's a very wide variety of alternative listed asset classes to invest in such as senior housing, health care, life sciences and lab space, and others. In that case we might be more inclined to invest our money in REITs and complement these with private investments. It really depends on the markets, but having that integrated strategy allows us to think and choose from the full universe that is available to us.
What are some of the advantages of investing in REITs?
The simple answer is liquidity. REITs are more liquid so we can move in and out of them or give them a long-term focus over extended periods of time. And then of course there is the tremendous breadth of REITs available, although that depends on the market too.
The U.S REIT market has a very broad offering in all different sectors. The European REIT market is still going through a development phase where hopefully more alternative real estate sectors will be added to the investible universe.
We are long-term investors, so the true benefit of the liquidity isn't overly important to us, but it's an investment structure that we utilize. There are numerous great companies out there that provide us a focused exposure to varied sectors and other regions as well.
Are there ways you see the REIT industry needing to evolve?
I certainly think broadening REIT offerings to include alternative real estate sectors, a true integrated focus on newer sectors like technology solutions, would benefit their cause greatly.
For example, there are new technology solutions that will help in decarbonizing REIT portfolios, technology that will in turn help to run REIT portfolios more efficiently. I think many REITs will also need to have more people on board that aren't just knowledgeable about bricks and mortar but also knowledgeable about technological solutions and how to operate as best-in-class REITs.
Has the pandemic changed APG's investment thesis?
Interestingly enough, it hasn't really changed. I mean, a lot has happened with the pandemic but simply put, the key mega trends that we try to implement in our investments, that we try to capitalize on, have remained in place.
The pandemic has catapulted us five, six, seven years ahead of where we would have been. So, investing in the mega trends like technological change, demographic change, and sustainability have all remained by and large unchanged for us. We are going to keep investing according to these trends.
When we look at the market, we can see a clear polarization of returns from the investments that have been able to capitalize on these fast-moving trends. In short, those returns have been stellar. For the more traditional asset classes, it's not been as easy to capitalize on those mega trends.
Much of APG's investment thesis is based on sustainability. What is an example of a recent responsible investment in real estate APG has made that will produce solid returns for investors and also contribute to a more livable and sustainable world?
For every investment that we execute on, we always look first into the physical climate risk and also the transition climate risk. A very simple example is our timberland investments that we executed on this year in New Zealand and Chile. We bought numerous acres of timberland assets that meet the Forest Stewardship Council (FSC) certification. Adhering to the FSC's criteria means that these assets are managed to preserve biological diversity and benefit the lives of local people and workers.
These investments also qualify to meet the United Nation's Sustainable Development Goals (UN SDG). We've made numerous other investments that comply with FSC and UN SDG as well. We are taking long strides in sustainability, like setting up networks to recover waste heat from data centers for housing and offices, for example.
On some of our existing larger platforms we have been very active in engaging with the companies we invest in to make sure they improve their scoring on the GRESB real estate assessment. For every investment that we make, we actually require that the company fills in the GRESB survey that provides protocols that allow us a means to engage, to see where they can improve because ultimately, we want every real estate investment to be labeled as four- or five-star performers. In order to do that, those investments need to perform in the highest quintiles compared to the GRESB benchmark.
How has APG distributed its real estate investment allocations globally?
APG's real estate investment portfolio is composed of an approximately 40% exposure to Europe, 33% to the Americas, and 27% to Asia Pacific. We don't expect meaningful changes to the regional allocations as the current allocations fall well within the targeted bandwidth exposures set.
How have European REITs and real estate fared during the pandemic and what does the future hold with regard to REIT investments in Europe?
We've seen a kind of polarization of REIT investing in Europe. On the one hand, traditional asset classes such as hotels, traditional style retail, and office have stagnated, but we've seen mass inflows of investments into mega trend sectors like logistics and data centers. Residential rental property returns have also been exceptionally good.
Returns, by and large, are back or even above pre-COVID levels. As far as what the future holds, we think it will be very strong for those REIT investments that are able to capitalize on these mega trends. We continue to be big believers in logistics, in further expanding our exposure to affordable rental housing, but also to the many new sub-sectors.
We feel the trend will continue to move away from the more traditional sectors and more towards student housing, senior living, health care, and labs and life sciences buildings. There are other sub-sectors that are also being defined as alternatives that we think will be the core of REIT investing going forward in Europe.
With new trends surfacing post-pandemic, what sectors do you favor with regards to investment in European real estate?
Over the last six or seven years we have worked hard to establish ourselves in these newer alternative real estate sectors. At the same time, we also continue to build more exposure towards the affordable housing sector as there seems to be near-infinite rental housing demand. So, that's definitely an area we are heavily concentrating on for the future in Europe.
Outside of Europe and the U.S., what real estate markets and sectors are particularly attractive to APG?
Within Asia Pacific, key investment areas are Australia, mainland China, Hong Kong, India, Japan, Korea, and Singapore. We very much favor the same sectors in Asia Pacific as we do in Europe and the U.S., as these markets are expected to capitalize on the same mega trends. Also for Asia Pacific, we run a fully integrated investments strategy across listed and private investments.
Can you talk more about APG's natural resources real estate portfolio?
For APG and our clients, it's being treated as a separate asset class. In other words, it's not an integrated portfolio between natural resources and real estate. The natural resources asset class strategy is fully targeted towards forestry and agricultural land. As of today, we have around a billion plus Euros exposed to forestry and also a billion plus Euros exposed to agricultural lands in North and South America, Australia, New Zealand, and a minority invested in Eastern European lands.
Why are these types of direct investments so attractive to APG?
We have moved towards more direct investing because we're able to lower the total investment costs to our clients. We also have more influence and control in direct investing than we typically have in our private fund investments. We have ownership stakes of 10% on up to 40% and 50%, and that way we can be more influential in the course of the business and in controlling our own destiny. It also provides more control over managing our sustainability policies and ESG factors.