A bright future for listed

An interview with Morten Schou, Co-founder, REIT Adviser

Morten Schou

REIT Adviser isn’t your typical investment firm, and Morten Schou isn’t your typical co-founder. Together with Søren Gjelstrup, Schou created REIT Adviser in Copenhagen four years ago. The firm manages EUR 500 million worth of funds across Europe’s real estate sector and is performing 12% above the industry benchmark.
Schou and Gjelstrup work in central Copenhagen with just one other employee – a senior advisor who provides operational and marketing support. But what REIT Adviser lacks in size, it makes up for in the focus its small footprint allows: “When we go into the office, the first thing we do is to look at our portfolio. We update our model, check in on the companies we’ve invested in and speak to them to get any updates directly,” Schou says. This allows the co-founders to concentrate on what really drives the business – their deep knowledge and judgement of opportunities.
One thing that has remained constant is their love for Copenhagen, which has an institutional investment sector that punches above its weight. Pension funds – where the Dane spent many years – are thriving, and interest in the real estate market from the institutional sector is growing.
There is a challenge to overcome, however: “There’s still no consensus here on how listed real estate is viewed and what it is. Some see it as stock, others real estate, meaning there’s a real lack of clarity around the asset class.” While this debate rumbles on, investors’ motivation remains focused on finding the best value for money. This is where listed real estate comes into its own in Denmark and across Europe.
The cream of the crop
REIT Adviser’s strategy is centred on finding the very best companies and opportunities in the sector. Put simply, Schou and Gjelstrup have faith in their views of value, have good knowledge of the sector across Europe, and are driven by finding the best discounts on offer thanks to the listed market’s current position as a cheap option to invest in.
At its core, the firm’s approach is based on deep knowledge: “You have to know your stuff – that’s as much about knowing what you shouldn’t go for as much as what you should. It’s because we know what we’re not invested in that we can perform well, and it’s something which sets us apart from the wider investment world.”
It’s not just about the numbers for REIT Adviser, though; putting money in the right places, as well as the profitable places, is very important for Schou. He explains that “we’ve always had ESG in our minds when deciding where to invest, and in the last few years, it’s become one of the first criteria we assess when modelling and thinking about our direction”.
He believes that housing markets across Europe aren’t working for everyone and that there aren’t enough homes to meet demand in nearly every country in the region. This is increasing demands on the private rented sector and providing an opportunity not just for returns but also for projects to make a real difference to people.
Schou says that “this is an area where we don’t just look at the numbers. The intangibles are really important for investing in residential projects. For us, it’s things like how landlords treat their tenants”. He continues that ”the German market is a great example. It used to be all about the returns, but now there’s a lot more attention paid to the quality of the housing and building communities in which people can feel at home”.
REIT Adviser’s sense of responsibility extends to how businesses are being run, and they won’t invest in a company that doesn’t have good enough governance. EPRA’s rating is a key benchmark for judging this, as it’s not always easy to see behind the scenes and past annual reports that aren’t always a true representation of the inner workings of a business. In particular, the Dane says that sensible gearing is a crucial measure for both the management of a firm and its prospects for future success.
Navigating choppy waters
Schou doesn’t see rising inflation as the nadir many others do: “To properly understand how inflation is impacting the listed market, you need to look backwards. The financial crisis of 2008 meant that gearing is far lower in many businesses, and debt levels tend to be below 40%. This means that interest rates are having a much smaller effect than they would have done 15 years ago, and even the rapid rises we’ve seen this year aren’t enormous when considered against recent history.”
This means that listed is an attractive and investible asset, and inflation could deliver greater returns as rents increase over H2 and into 2023. Any further rises from central banks are also unlikely to be felt too hard, as rate increases have, to some extent, already been priced in.
According to Schou, the most unpredictable variable continues to be Ukraine and the impact the conflict has on commodity price inflation. This is already having a big impact on homeowners and tenants alike, but it may also be a negative for asset owners. He says that “there’ll be a lag between commodity price rises and rent increases due to contract terms, and also many landlords and developers are rightly reluctant to pass on higher costs at a time when personal finances are under immense pressure”. Coupled with the demand for more housing in eastern Europe to accommodate those who have fled the war, it’s possible to see a crunch point for demand not far over the horizon.
The way ahead
Schou and REIT Adviser believe that listed real estate can play a big role not only in the economic development of Europe but also in doing good and solving the challenges its societies are facing. Immediately, the demand for housing caused by limited stock and the war in Ukraine is something REITs can address; but in the longer term, working on backing the best companies and developments will have a big impact. As far as REIT Adviser is concerned, it plans to continue to make a difference while also delivering for its investors.