Departing Belgian REIT Doyen Carbonnelle reflects on the path that led Cofinimmo to diversification from ‘pure play’

Jean-Edouard Carbonnelle spent his final working day before retirement at the end of May much as he had for his 20 years at Belgium’s largest REIT Cofinimmo: reflecting on the shift of the company’s strategy to healthcare assets from a ‘pure play’ on the Belgian office sector.

Jean-Edouard Carbonnelle

Jean-Edouard Carbonnelle joined Cofinimmo as CFO in 1998 and worked for two decades at Belgium’s largest REIT, the last six years as CEO before retiring at the end of May this year. Latterly, he also headed EPRA’s Tax and Regulatory Committee.

Jean-Edouard Carbonnelle spent his final working day before retirement at the end of May much as he had for his 20 years at Belgium’s largest REIT Cofinimmo: reflecting on the shift of the company’s strategy to healthcare assets from a ‘pure play’ on the Belgian office sector.
When he joined the company as Finance Director in 1998, Cofinimmo was the largest REIT operating in the Brussels office market with a heavy reliance on rental income from the Belgian government and the European Union’s administration and associated service companies. By 2005, rents in Brussels were under pressure as new flexible ways of working amplified the structural oversupply of office space caused by each of the three regional administrations in the relatively small Belgian capital having their own planning powers.
“Back in 2000, we started to think we should be doing something else, although we had a very strong ‘pure play’ office portfolio. A switch in strategy would be contrary to most institutional investors’ demands for sector focus,” recalls Carbonnelle, who became the company’s CEO six years ago. “Then I met an investor who first flattered and then flattened me by saying Cofinimmo had the best house … but on a bad street, and that was the tipping point,” he said. “What else could we do but make the move?”
As the Belgian REITs’ senior executives explored other sectors, such as retail, logistics and residential, they found these markets were already dominated by other real estate players. However, fortuitously, they came across an individual investor who had acquired a portfolio of serviced care apartments and just one nursing home, Carbonnelle said.
“After discussions with him, we quickly concluded that there was a big opportunity in nursing homes because the sector was crying out for consolidation. Operators providing care and accommodation for elderly people were seeking real estate partners, and it was a wide-open field for Cofinimmo in a market that could only grow with the ageing population,” Carbonnelle added.
Cofinimmo bought its first healthcare asset in Belgium in 2005 and three years later buildings in France, the Netherlands (in 2012) and Germany (in 2014). It has diversified its healthcare portfolio into specialist sub-sectors such as rehabilitation, long-term psychiatric care and medical consultation services. Offices have declined from nearly 100% of its holdings to slightly over a third today through selective disposals of the riskiest assets, while healthcare now represents 50% of the total portfolio and is to remain the new focus.
“Back then, there was no European listed real estate healthcare specialist, but in the US it is much more developed with three of the top 10 REITs being in healthcare. Cofinimmo has subsequently become quite a different company over the years,” he said.
Jean-Edouard Carbonelle
Carbonnelle added that the company’s diversification strategy has made its portfolio more stable, with fewer larger riskier offices on relatively shorter leases being replaced by the long-term cash flow typically associated with the healthcare sector. That has allowed Cofinimmo to protect its dividend payments, net asset value (NAV) and share price, with the total investment return of stock averaging 6.4% over 20 years, including the two market crashes of 2000 and 2007-2009.
The former Cofinimmo CEO developed a sharp focus on what generates value within the moving parts of a company after obtaining an MBA at the Wharton School in Philadelphia and spending his early career as a financial analyst at the World Bank working on mining and industrial projects in Tunisia, Thailand and Brazil. He then joined Belgium’s previously largest holding company, Société Générale de Belgique, in 1980 to develop business strategies for the underlying subsidiaries before moving to one of them, a manufacturer of diamond tools, to develop his managerial skills as Finance Director prior to joining Cofinimmo in the same position in 1998.
So, it is unsurprising that on the last day as a member of Cofinimmo’s management team, 65-year-old Carbonnelle was in typical form, presenting a carefully articulated argument on why the European listed real estate sector should adopt internal rates of return (IRRs) as a financial reporting standard, as other investment sectors do.
“IRRs are the standard method to assess the quality of an investment, notably in private equity, because they are well suited to long-term investments like real estate. You measure where you started and then update the picture as you go along until the exit. So, it always surprised me that in the property sector people talk about yields all the time, which are just a spot measure of profitability – whatever you get over a year on a net basis or value growth basis,” Carbonnelle said.
“It is relatively simple to build IRRs, with the purchase price or development costs as your base, followed by the direct costs, such as maintenance and taxes, and indirect cost, like staff, set against your rental income. Through this process, Cofinimmo has built and updated annually a very accurate and granular picture of how its entire portfolio has performed by individual assets, geographies and property sectors over the last two decades,” he said.
The positive evolution of the REIT regime in Belgium, which is tailored to the needs and protection of the country’s relatively large retail investor community, has also played a role in Cofinimmo’s strong performance, he observed.
Belgium introduced REITs in 1995. The flexibility and tax efficiency of the regime meant it quickly attracted the conversion of several existing real estate companies, and some non-listed property portfolios also came to the market. Domestic retail investors voted in favour with their capital and, to this day, usually comprise the largest single investor group in most of Belgium’s 17 REITs. The government also saw its regular tax-take from the listed sector soar, facilitating legislators’ favourable disposition towards the industry’s requests for future tweaks to the efficiency of the regime.
Until his recent retirement, Carbonnelle headed EPRA’s Tax and Regulatory Committee where he was intimately involved in discussions over the relative merits of European REIT regimes and complex taxation issues, amongst other industry topics.
“Being part of EPRA was extremely useful for meeting other CEOs and CFOs and the fruitful exchange of views with specialists in areas such as taxation and best practices,” he said. “I will miss the very friendly and professional atmosphere that has been created within the Association. For Cofinimmo, as a mid-sized European REIT, EPRA membership is also particularly helpful for the access it provides through the Investor Outreach programme to certain categories of investors who would otherwise not be easily reachable through the usual market channels.”
Carbonnelle is moving onto new challenges and has been appointed Non-Executive Chairman of the management company for a new infrastructure fund targeting mainly the energy and telecom sectors in Belgium, which is backed by large public and private domestic institutional investors.
But as he prepared to head out of the door of Cofinimmo’s Brussels headquarters for the last time as an employee of the firm, the former CEO couldn’t resist lobbing a final suggestion in EPRA’s direction.
“I believe EPRA should establish a common reporting standard for IRRs as we did for yields. It would make the comparisons between various categories of investments far more evident for investors over the long term. So, why does not listed real estate companies report on these criteria? That is a question mark I leave with the Association.”