This would drive initial yields down, because investor demand will shift from traditional fixed income instruments to real assets that provide a stable income stream. During the last few years, infrastructure and real estate investments enjoyed a growing interest and have been considered as a substitute for bonds. As a consequence, real estate prices would stick to their current high levels whenever a Grexit would result in a continuing low interest rate environment.
The impact of a Grexit on the occupational market is more difficult to predict. The impact will be delayed and the negative effects will be visible after at least one or two years. If one assumes that a Grexit will result in a continuous low growth environment in Europe, further job cuts and a decrease in retail demand should be expected. This would hurt rents and income streams going forward.
There is also the end of the lose money looming. How does that eventuality impact your investment strategy?
No clear view on this unfortunately. Hopefully, a clear solution for Greece is concluded shortly. Because of QE, a lot of money flows into financial markets which drives security prices up. On the other hand, signs of substantial economic growth are hard to be seen. That is at least a confusing situation.
Only a few see a property bubble in Europe? Where do you stand?
Indeed, we don’t see a bubble on the occupational market. On the other hand, in many core real estate markets entry yields went down quite significantly anticipating economic and rental growth going forward. Only the US can be seen as a market where yield compression could be justified by strong occupational demand. In many markets and sectors anticipated rental growth has been priced into current transaction prices. This observation is, however, not only applicable to real estate markets. Most financial markets seem to be expensive nowadays which proves the added value of diversification over multiple asset categories.
UK and Germany are investment magnets. Which other markets hold the best opportunities at the moment in your view?
Yes indeed, a lot of attention is devoted to Germany and the UK. TKP Investments (TKPI) concludes that other real estate markets and sectors are attractive as well. A sounding example is the Dutch residential market that suffered from political uncertainty about anticipated changes in the leasing regulation during last few years. This topic has been solved. Furthermore, residential yields went up after the Global Financial Crisis. Nowadays, there is room for yield compression during the next few years. Furthermore, if you take into account that residential investments offer a stable dividend stream, it’s fair to conclude that residential investments are quite popular amongst Dutch pension schemes.
Another positive example is the European logistic market. As soon as European economic growth really takes off, the demand for modern logistic buildings will increase. A further boost of logistic demand will be provided by the increase of online sales.
Although the Nordic real estate market may be priced quite aggressively, TKPI still considers active managed Nordic investments as attractive. Especially when investments are being done alongside well-informed local partners.
Exit Strategies, Raising funds, identifying product, finding the right partners – What is your biggest challenge?
It’s a challenge to find real estate fund managers that stick to their believes and don’t show signs of style drift. This is especially applicable to value add and opportunistic fund managers. For that reason, TKPI has decided to team-up with a limited amount of value add and opportunistic managers going forward. Only the ones that showed ongoing skill are part of the TKPI investment universe for value add and opportunistic categories.
Another challenge is to diversify in terms of vintage years. During periods of uncertainty, like today, it’s important to spread your investments over time and to diversify in terms of vintage years. You shouldn’t put your money at work during a short time period. The cliche of not putting all eggs in the same basket proved it’s truth again. History has shown that a good mix of vintage years pays off.