Blueprint: APG’s early movement in AI, ADIA takes advantage of current China opportunity, PERE’s Expo Real takeaways

PERE meets Samuel, APG's digital colleague, and hears about the investor's early moves in artificial intelligence; the Abu Dhabi Investment Authority reveals its opportunistic activity in its annual report; Expo Real conference delegates hear a notable shift in emphasis in regard to sustainability; and more in today's briefing, exclusively for our valued subscribers.

They said it

“We sold 27 out of about 30 office buildings over the last few years, but we still got stuck with three, and just those three can keep you busy.”

Joe Sitt of Thor Equities Group, discussing how his own firm has been affected by the sector’s challenges on Fox Business’s Varney & Co last week.

What’s new

Robot holding city under construction

Human versus machine

Dutch pension investor APG Asset Management is one of the world’s largest private real estate investors, placing 16th on this year’s PERE Global Investor 100 ranking, with nearly $32 billion allocated to the asset class. It has also distinguished itself as an early mover in the adoption of artificial intelligence in real estate, having developed a digital portfolio manager named Samuel to work alongside its 55-strong global team of human portfolio managers, as we highlight in our October cover story. “To me, investment decision-making will always be a function of man and machine,” Rutger van der Lubbe, APG’s head of global real estate investment strategy, says in his interview with PERE. Although one of the biggest fears around the adoption of AI in real estate is the eventual displacement of human investment professionals, van der Lubbe and others make various arguments as to why they do not foresee that happening. For more on APG’s journey in AI and the future of AI in real estate, read the full story here. Also be sure to check out our web-only companion piece on the data-related risks associated with AI here.

ADIA shops in China

Last year was all about exploiting dislocations and accessing high risk-adjusted return opportunities, says the Abu Dhabi Investment Authority. While sticking with its long-standing allocation range of between 5 percent and 10 percent, the United Arab Emirates’ predominant sovereign wealth fund notably said in its annual report released today that China was among countries where its real estate department was able to be more competitive – with a particular focus on growing exposure to data centers. ADIA’s activity in the country comes as western institutional investment appetite there has waned – as PERE examined in our March cover story. The investor also said it capitalized on mispricing in listed real estate around the world “where long-term operational fundamentals and secular trends remain intact.” ADIA added it has continued to deploy capital in the residential space “where rent growth remained strong despite higher funding and development costs.” ADIA ranked fourth in PERE’s latest iteration of the Global Investor 100, out last week, with equity invested in private real estate of $59.25 billion.

Trending topics

Expo Real Oct 23

Expo Real 2023: Three things we learned:

1. Carbon is clashing with returns
Sustainability was touted as a key theme at this year’s conference in Munich, but in the opening panel, moderated by PERE, real estate managers’ role in decarbonizing the built environment was thrown into question. “The business case doesn’t work yet for sustainability,” said Julie Townsend, ESG lead for Europe & Asia-Pacific at manager PGIM Real Estate. The panel agreed that more needs to be done around embodied carbon – unregulated and difficult to understand – because as long as the most valuable building in any city is the newly built, sustainable one, the industry has a problem. Managers with a core responsibility to protect value for their fiduciaries question whether it is theirs to solve. Read more in our analysis.

2. Markets will bounce back
The macroeconomic conditions of the past two years have created huge uncertainty in real estate markets, but the speed and succession of the interest rate rises are the cause of the pain. The occupier market is still strong, meaning it has never been further apart from the investment market. Many attendees PERE spoke with were confident rates may have just peaked, or are about to, meaning that when capital markets catch back up to the positive path of demand and rental growth that most sectors were enjoying prior to the rate hikes, managers will be back in business. Investing in a higher-for-longer environment will look quite different, of course, but as one executive pointed out, “where we are now is a known territory, whereas no one knew how to do business in a 0 percent environment.”

3. Value-add and debt are flavors of the month
“The rationale for why you should invest in real estate has been challenged,” said one chief executive. The past year of value corrections has changed the math behind the asset class and its role in institutional portfolios, diminishing investor appetite for fresh commitments and raising the bar for returns. Managers are responding to this by focusing on strategies higher up the risk curve. PERE met with multiple core or core-plus managers that are currently implementing or have recently implemented a new value-add or debt strategy. “Value-add firms will be the buyers of core real estate for the next 18 months,” said a broker. Managers at Expo Real were adamant that vintages 2024 and 2025 will be the best of the new cycle.

Insurance stability

The ratings of US life insurance companies are not expected to see an impact from their exposure to commercial real estate mortgages, even with the potential for a mild recession in the second half of 2024, according to a report this week from Fitch Ratings. The New York-based rating agency cited diversified, high-quality portfolios, conservative underwriting and the effective management of assets and liabilities. Life insurers’ exposure to the sector is mainly through commercial mortgages, which comprise about 13 percent of portfolios. The average LTV at the end of 2022 was 54 percent. Because of this, insurance company lenders are better braced than other lending institutions, including national and regional banks, which maintain larger exposures. This insulation provides more room to be opportunistic lenders on their own terms relative to other private credit managers.

Data snapshot

Capital costs expected to rise

Commercial real estate market participants are expecting the cost of capital to rise next year and its availability to drop, according to Deloitte’s 2024 Commercial Real Estate Outlook. The firm, which surveyed 750 commercial real estate chief financial officers globally, also found that economic concerns will drive decision-making through the next 12-18 months.


Tapping into the Middle East

US multifamily specialist TruAmerica Multifamily has hired Abu Dhabi Investment Authority’s former global head of capital markets and deputy chief operating officer for the real estate and infrastructure division to grow its relationship in the Middle East. Rob Kukulka has been named the firm’s capital adviser and will be based in Chicago, according to a release. In his new role, he will focus on expanding the firm’s capital markets and investor relations across the Middle East. Prior to joining the US firm, Kukulka spent a decade at ADIA, where he was responsible for $20 billion in capital markets activity and oversaw relationships with fund managers and separate accounts. He also ran some of the investor’s financings and established risk management protocols for debt positions. Stella Pappas, TruAmerica’s senior managing director and head of investor relations, said Kukulka will bring “distinct insights and experiences that span across the Middle East investment landscape.”

Investor watch

The $1bn change of hand

Canada’s QuadReal Property Group has extended its relationship with Australian real estate group GPT from logistics to student accommodation. QuadReal has bought out the remaining 10 percent share in a A$1 billion ($636 million; €604 million) student accommodation portfolio in Australia and New Zealand from its existing manager Cedar Pacific, according to a release. Currently owning 100 percent of the portfolio, the Canadian investor has passed the management of the portfolio to GPT. While GPT has traditionally focused on office, retail and logistics, the pair have built up a relationship from the A$2 billion logistics joint venture established two years ago. Despite this being GPT’s first time venturing into the student accommodation sector, the firm has “had a long history of leveraging our expertise and experience to add value for our investment partners,” according to a statement made by GPT’s chief executive Bob Johnston.

This week’s investor meetings

Tuesday 10th October

Wednesday 11th October

Thursday 12th October

Friday 13th October

Today’s letter was prepared by Jonathan Brasse, with Evelyn Lee, Charlotte D’Souza and Christie Ou contributing