While APG Asset Management’s real assets boss Patrick Kanters does not discriminate against one sector over others, he considers office to be the most challenging right now. Currently, office represents only 8 percent of the investor’s portfolio.
One main challenge with office is the hybrid working experiment. “We’ll have to see how that will affect and influence, of course, the overall demand for offices,” Kanters said in a PERE Global Passport interview.
“Then the other main challenge, I think, is offices are aging very fast,” as the sector is in the midst of greening assets to meet net zero targets.
“If you’re not early enough in greening your assets, you will be hit by regulation that actually will require you to do so,” Kanters said, noting such regulations are already in effect in countries like the Netherlands, the UK and the US.
“If you cannot provide for A, B or C energy certificates, you will not be able to lease out your building, so you will have to green your assets simply to lease them out. I think we should be very much forward leaning and anticipate that.”
He believed more and more office users would be willing to pay for more sustainable buildings and those higher prices would eventually be reflected in valuations. A failure to make office buildings more sustainable, however, “will eventually hit valuations, if you are not taking care of it properly,” Kanters asserted.
Despite these two main challenges facing the sector, APG is still looking to expand its exposure in offices. Kanters still sees good opportunities in Asia markets where the working from home phenomenon has had less of an impact on metropolitan areas like Hong Kong, Singapore or Tokyo.
He also thought grade A, sustainable and quality offices will continue to be attractive to tenants due to the lack of supply in some locations. In many cases, however, real estate investors will have to develop these assets, he added.
Meanwhile, Kanters said the Dutch pension fund manager is actively looking at niche opportunities in retail. He explained that there are different subsectors within retail and some still provide interesting opportunities for real estate investors.
For example, APG has increased its exposure in retail outlet centers in Europe. Last year, the Dutch investor paid €301 million to UK real estate firm Hammerson to acquire full ownership of shopping outlet operator VIA Outlets despite the disruption caused by the pandemic. VIA Outlets owns 11 retail outlet centers in Europe. Before the transaction, APG had already held a 50 percent stake in the firm and it is understood that the transaction was taken at a price “below market value.”
“[Retail outlets] provides really something extra for the consumers and also for the retailers wanting to sell off their excess branded goods in a protected environment that would really support the rent value,” Kanters explained. But he also thought this is a rather “niche” strategy within the retail sector that is “very much being dominated by a few players in the European market.”
Apart from shopping outlets, the investor has focused on selling down its retail properties in recent years. Kanters believed that retail pricing is still “elevated” and the investor is taking a wait-and-see attitude until there is more clarity on the future role of physical retail.
“The market is getting nearer to what might be some sort of ceiling towards e-commerce expenditure,” said Kanters. Such a threshold could lead some investors to begin investing in retail again.