For all the noise surrounding the downturn in real estate equities in Europe as a result of the coronavirus crisis, the scent of opportunity is in the air for at least one real estate investor.
“Listed shares mean only short-term volatility in this climate, but volatility equals arbitrage, and this is good for long-term investors,” says Rogier Quirijns, the London-based portfolio manager responsible for the sector leading performance of the Cohen & Steers SICAV European Real Estate Securities Fund, emphatically.
Embracing volatility is not unusual for active managers like Quirijns, yet volatility often drives fear into the heart of institutional investors across Europe. But, Quirijns explains, an investor’s aim should be to generate the best long-term returns for shareholders and investors, not to avoid risk in search of smooth returns or low fees.
“This leads to too many passive strategies and, incredibly, too much focus on open-ended property funds because the returns perceived to be smoother,” Quirijns says. “We are long-term investors, and as active managers in this market, we expect to ride out this volatility and use it to our advantage to generate outperformance.”
Quirijns is among a host of managers that have proven this to be true. As of September 30, his fund has achieved an annualised return greater than 10.5% over ten years. Yet, he says, despite this track record, they have not seen the inflows they expect from institutional investors and wealth managers, whose goal should be to create positive long-term outcomes for their clients.
A key problem, Quirijns suggests, is a lack of understanding of what listed real estate offers. The institutional investors see valuation volatility but ignore the income profiles that are ideal for pensioners and long-term savers.
“The institutional and wealth industries often mistake our sector with equities,” explains Quirijns. “And this is a costly mistake for their clients, who are missing out on attractive long-term, income-driven real estate returns,” Quirijns asserts.
But incomes are not the only attractive aspect of listed real estate. “Being listed is great from a returns perspective,” he insists. “When a company is listed, there is always a premium or discount to NAV. Where there are premiums and discounts, there is an opportunity for arbitrage.”
And this opportunity is two-fold. Quirijns is able to arbitrage based on his perception of the share price of a company versus its underlying asset value. At the same time, the listed business itself can arbitrage its own assets. The total process allows for what amounts to a double discount that cannot be replicated in private or direct real estate investing.
Essentially, where Quirijns extols the virtue of actively managing his own portfolio, he also believes that corporates and management teams worth their salt should be actively managing theirs. Understanding whether their active management is done well or not is the difficult part. How is it that Quirijns sets his team and himself apart from the industry?
For a start, the Dutch fund manager has a long history in real estate that gives him an edge. “I grew up with real estate,” he says, reflecting from his home in Putney, one of the leafier London suburbs. “My father was in real estate. I studied real estate economics under Piet Eichholtz, who was a pioneer in bringing listed real estate knowledge from the more advanced US to Europe. So, I was among the first financially educated real estate students in Europe.”
Where Quirijns describes his father’s real estate career as “less professional, preferring to make a quick quid rather than a slow million”, the fund manager’s own path after leaving university has been quite the opposite and investing for the slow million has very much become his ethos.
His career began in real estate corporate finance at Arthur Anderson before moving into real estate asset management with Equity Estate, then spending time as a real estate sell-side analyst at ABN AMRO before settling at Cohen & Steers in 2008.
Working across many pockets of the industry has given Quirijns what the Germans would call fingerspitzengefühl, meaning ‘fingertip feeling’ or intuition, instinct and flair. All of that is to say that the team at Cohen & Steers have a real feel for the quality of a property, and the search for arbitrage is not simply a case of chasing balance sheet bargains but a real understanding of what constitutes ‘good’ in real estate, and what does not.
But the European real estate team at Cohen & Steers does not rely on fingerspitzengefühl alone. The asset manager has its own proprietary modelling systems: a net asset value (NAV) model with an internal rate of returns (IRR) and a dividend discount model. The models are based on a combination of quantitative analysis supplemented by qualitative data that the team collect from their research and face-to-face visits with property companies and players across Europe.
And the qualitative data is an extremely important part of the mix, according to Quirijns. “We want to try and know our companies better than our competitors,” he explains. “We do property tours, talk to brokers and use a lot of other data. We make sure we have done all the work on the ground to understand the situation properly. Property is a very local business, so you want to be as local to your investments or potential investments as possible.”
Pay attention to indicators of good and bad company management
There are key indicators for good and bad management, which, says Quirijns, are underpinned by a willingness to change or be active with assets. “The best management teams continuously look at assets and the total return of each asset within a portfolio in comparison to their share price and adjust, much like we do with our portfolio.”
“Adjustment, to me, means a willingness to shrink as well as grow, and to refocus where needed,” he elaborates. “Big is not always beautiful; failure to accept this is a warning sign of poor management.”
What Quirijns points to is a willingness to offload assets that have reached maturity, making the assessment that an asset that was once good value for shareholders now no longer is. At this point, Quirijns looks for management to sell and readjust.
“One must always be open to change,” he says. This has been at the heart of his own continued success and appears to be the message he bestows on listed property companies hoping to succeed everywhere across Europe. Growth at all costs can be a dangerous game to play in fluctuating markets. There are not always enough good assets to go around; this is the danger of always accruing more of the same – it can lead to disaster.
