October 14, 2014
Interviewed by: Privcap
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Inside APG’s Global Real Estate Portfolio

After spending the past 10 years diversifying its global real estate portfolio, APG Asset Management is happy with its asset allocation mix and is eyeing specific sectors, geographies and strategies for investment.

After spending the past 10 years diversifying its global real estate portfolio, APG Asset Management is happy with its asset allocation mix and is eyeing specific sectors, geographies and strategies for investment.

Inside APG’s Global Real Estate Portfolio
With Patrick Kanters of APG Asset Management

Zoe Hughes, PrivcapRE: I’m joined here by Patrick Kanters, Managing Director of Real Estate and Infrastructure at APG Asset Management. Patrick, thank you so much for joining me today.

Patrick Kanters, APG Asset Management: Thank you.

Hughes: There’s no doubt that real estate is a truly global affair today, and capital flows have certainly proved exceptionally nimble when it comes to international investing. It’s great to have you here with us to get some insight into an institutional investor’s view of international investing and international allocations. How much international exposure does APG have in terms of real estate?

Kanters: We have a truly global portfolio. Over the last 10 years, we started to really globally diversify our portfolio of being a Netherlands-dominated portfolio. To give you an example, in 1995, 95% was exposed to the Netherlands. Today, it’s only 8%. It’s only 8%, but in absolute amounts, it’s still substantial and the monies are diversified over Europe, Northern America and small allocations to Brazil. Also, the Asia-Pacific region is a truly important region now in our global diversification.

Hughes: That’s been a huge change for APG.

Kanters: Yes.

Hughes: When you’re looking at the international allocation, what’s your expectation for growth as you look at the next five or 10 years?

Kanters: Actually, we are quite comfortable with how we have globally diversified our portfolio. About 40% is exposed to Europe, around 35% to North America and the remainder in Asia-Pacific. We are quite comfortable with that. We’re truly looking at what niches, sectors, countries or regions can be added to create further value. It’s not so much about whether we should expose billions more to the U.S.—we’re looking at opportunities truly globally.

Hughes: Are you surprised at how global capital flows have actually become, particularly in the wake of the crisis?

Kanters: It’s amazing how many new names you’ve seen this year, and not just new names, but they’re actually executing deals. Real estate I seen more and more as a mature asset class that should form part of the overall investment portfolio along equities, fixed income and the more plain-vanilla, liquid categories. To that extent, we are definitely not surprised. We are surprised at the speed that people are now executing deals, and also the variety in how they execute deals. It’s not just funds. It’s JVs, it’s co-investments, it’s direct exposure, also listed real estate. Securities are seen more and more as a full proxy for real estate. So, you see a larger variety and an enormous amount of activity.

Hughes: Is that variety of more structures something that APG is also embracing? Do you have a preference for the more direct, more JVs, more co-investments?

Kanters: First, what differentiates us vis a vis most other parties is that we fully integrate listed real estate securities and non-listed real estate. Within non-listed real estate, we continue to focus ourselves on the broadly marketed funds. But more and more of the last five, six or seven years have exposed money to JVs, club ventures and co-investments, where there is increased control and where we truly align ourselves with like-minded investors that have similar investment horizons and ideas. But, we do not rule out non-listed funds because certain strategies can also be perfectly suitable for that.

Hughes: When we have conversations about global allocations, risk is obviously at the forefront of investors’ minds. I’d love to get some insight from you as to how you assess risk when considering a global allocation, particularly when you look at net fees and global allocations. How does risk come into that equation?

Kanters: Yes. First, where approaches might differ is that we invest globally to provide for diversification and we’re not just going outside Europe or the Netherlands to get a higher return. Certainly, we need to be compensated for certain higher-risk in particular, of course, in emerging markets or sometimes for certain currency risk, but the true basis behind it is to provide for diversification.

Hughes: It’s an interesting perspective, because obviously when you look at a lot of the U.S. institutional investors, when they go overseas, it’s much more for higher returns.

Kanters: Exactly.

Hughes: They need the higher return to justify, but obviously APG is very happy to do overseas core, core-plus.

Kanters: Yes, we do. We do a lot of core investments in the U.S. We do core investments in developed markets in the Asia-Pacific region, but it’s not always just to get this extra return. You might even argue that certain areas in Europe are lower risk than areas in the U.S., where there are fewer constraints to adding more supply.

Hughes: As you look globally, where do you see the greatest relative value for APG today? What excites you the most?

Kanters: It is very difficult nowadays, cause if you look at the core assets, the true prime assets, pricing is getting very steep. The markets are very hot. Where we do see more value, for example, is in the rental housing market. The rental housing market in the U.S. is highly established, dominated by the listed players, but also a few very good players on the non-listed side. Whereas in Europe or Australia or other developed Asia-Pacific markets, it’s still not an institutional asset class and rental housing is something that we have committed more monies, in the London market, for example. We’ve also looked at countries like Finland and continue to look into Australia to see how we can add more exposure on the residential side. We saw relative value in emerging markets like India and certain niche categories in China. Value because enough parties actually left it that we thought, “Let’s re-enter” and we were able to team up with the few parties that had a good track record that are true operators. There, we saw good opportunities. Also, in Australia we saw good opportunities with a healthy underlying market. In the U.S., we also remain positive on the future.

Hughes: What are your growth expectations for Asia, as APG has done quite a few investments there over the last 18 months? What are your growth expectations as you look out over the next three to five years?

Kanters: It remains a very good region from a demographic perspective, of course. It also will continue to be highly volatile and you have to be very selective in the types of niches you select. Looking at developing markets, yes, we have been very keen on adding more logistics development and logistic ownership assets to our portfolio. We have looked into hotels. In China, we are still eager to also somehow create a shopping center/retail development platform there. But, it’s not easy.

Hughes: What’s been the biggest challenge for APG?

Kanters: It’s really finding the right true operating partners and being able to align yourselves with those parties. Developed markets have few available and some are also not accessible. It’s not always the case that they need our money—they can also be funded differently, especially in the Chinese market. It’s not always overly important that there is international money.

Hughes: You’re Chairman of INREV, which has done a huge amount of work over the past 10 years in promoting standards across Europe for the non-listed real estate community.

Kanters: Right now, we’re putting a lot of energy into further globalizing the products and tools that INREV successfully has made. Of course, we have the strong relationship with our sister organization in Asia (ANREV) and we are further capitalizing on our increasingly strong relationships with PREA and NCREIF.

Hughes: Is one of the ambitions also to be able to do a real apples-to-apples comparison between your value-add, your opportunistic—those managers within those sectors? Do you really want to get that apples-to-apples comparison between managers and strategies?

Kanters: That full apples-to-apples will never be achievable, at least that, if we talk about a certain NAV, we are all talking about the same kind of NAV. What’s included there? If we talk about a certain sector where we know exactly what falls into that sector and what does not, that will help and further mature real estate as an asset class. Because we should not forget that real estate as an asset class has matured immensely over the last 10 years. But we are not there, where the liquid asset classes are. It’s still sometimes very difficult to explain the risk return and correct characteristics over a 10 to 50-year timeframe.

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