As chief investment officer of international investments at Bouwinvest Real Estate Investors, Stephen Tross has been on the road a lot this year. In addition to visiting existing managers and investments, as well as scoping out potential new investments, he has also been traveling to manage dispositions of some of the Dutch pension investor’s property holdings.
Bouwinvest’s dispositions have continued this year after divestments reached a five-year high of €540 million in 2022, of which €286 million were in international real estate, according to the investor’s 2022 annual report. The investor has not yet published its total sales transactions data for H1 2023.
“Sometimes a good divestment opportunity is as important for the performance of your portfolio as finding the right investment opportunities,” he said, when interviewed by PERE at Bouwinvest’s offices in Amsterdam earlier this month. “Finding the right timing for the divestments goes hand in hand with investments, of course.”
One reason for making divestments is the denominator effect, when public market volatility last year left the investor close to exceeding its real estate allocation target. “We still wanted to be able to capture market opportunities, and in order to be able to do so, we did need to sell some investments as well,” he explained.
As part of this rebalancing, Bouwinvest has sold some of its general residential and logistics assets in order to make new investments in the niche strategies within those sectors. The investor also has been reducing its office exposure, while making more investments in life sciences, which is a better-performing subcategory within the sector.
Sustainability regulations have been another driver of divestments. “Our desire to be a really sustainable investor has made us divest assets which we feel do not fit with our portfolio and where we want it to be,” Tross said. “And part of that analysis is also the changing climate risks, with the disasters going on in various places around the world. So we have made some very sophisticated tools to assess those climate risks on an asset-level basis. And we include that data also in our divestment strategies.”
For example, Bouwinvest divested some of its office assets in New York’s midtown Manhattan last year and redeployed the capital into a property located in the city’s Hudson Yards neighborhood, partly because of changing ESG standards. “That’s on an asset level where you want to position yourself,” said Tross, whose organization previously invested $100 million in The Spiral, Tishman Speyer’s $3.7 billion Hudson Yards office development, in 2018. “[You want] to invest more in the best assets in an area like Hudson Yards, with the most up-to-date floor plates, specs and ESG criteria.”
The global decarbonization pathways under the Carbon Risk Real Estate Monitor project provide more insights on which assets are sustainable and which will become obsolete or require a lot of capex in the future, Tross noted: “So if you can sell those before others start to realize that, then that’s of course the route to go.”
An additional factor in divestments has been performance. “The investments which aren’t contributing enough from a performance perspective, you want to change to investments which are outperforming our benchmarks,” he said. The benchmarks are also changing because of shifting allocations and valuation changes in various sectors, Tross added.
Performance is driven more by sector allocation than asset specifics, Tross observed, noting for example that property owners generally have not been able to perform well in US office for the past two years and in retail for the past seven. “So allocation is a very important factor,” he said. “We focus a lot on how we want to be positioned and within that positioning, of course, we are focused on the best assets. But that comes second.”
Residential and logistics together make up about 60 percent of Bouwinvest’s international portfolio of €5.1 billion in assets under management at the end of 2022, while office accounts for approximately 16 percent and retail for 10 percent. More niche strategies including data centers, student housing and care facilities make up the remainder. The investor had total AUM of €15.9 billion as of year-end 2022.
Among its international mandates, Bouwinvest reported returns of -8.8 percent in Europe, 0.5 percent in North America and 1.5 percent in Asia-Pacific in 2022. However, the investor beat its benchmarks in all three regions over the five-year period of Q4 2017 to Q3 2022, delivering outperformance of 2.1 percent against the INREV/GPR index in Europe; 1.1 percent against the NCREIF/GPR index in North America; and 1.1 percent against the ANREV/GPR index in Asia-Pacific.
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