Hello. I’m Dirk Holz, Director of Product Management, Head of Private Capital Services at RBC Investor & Treasury Services.
Thank you, everyone, for joining. On behalf of RBC Investor & Treasury Services, I’m pleased to welcome Justin Brown from BlackRock today for a discussion around the real estate investment market.
Justin leads the European real estate equity business and is responsible for all European-based funds within BlackRock. BlackRock managed more than US$10 billion assets under management within the European fund range. Three out of the five European funds have a core investment strategy, whereby two follow our value-add strategy.
Before we start, I would like to thank you, Justin, for taking the time to participate in this virtual discussion considering the current COVID-19 situation. Welcome, Justin.
2020 was a very challenging year for all of us. I would like to ask you to share with us your views on the current situation and your expectation of the real estate investment market going forward.
Well you’re certainly right, 2020 has been a year that was not anticipated by anybody. In the immediate aftermath of COVID and the spread of the virus, our main emphasis and focus was on making sure that all our assets were meeting the local and national legislation, which was moving very rapidly.
We then changed to focus really on the businesses which were inhabiting our assets, so the tenants and a lot of tenant engagement happened around rent collection, viability of the businesses going forward, and what we could do as landlords to support those tenants through these very difficult times.
But what we were also seeing was a huge effort from both governments and central banks to support the economy, both fiscally and monetarily. We very quickly became aware that there was a lot of money flowing out of those institutions into the general economy and supporting asset prices. And what that’s meant is that we’ve become more confident around certain elements of the market, particularly those assets with very strong tenant credit on very long leases, and we feel there’s a lot of support for those assets.
So what we eventually saw was almost a trifurcation of the market where long let to strong covenantal tenant assets were going to be very well supported where there was possibly a bid-ask spread between buyers and sellers on assets with more problems. And there was quite a large bit in the middle, which we’re still trying to put our arms around.
So we feel the market has moved quite a long way and will keep on moving as we get more and more comfortable about coming out of all the various lockdowns that we’re in with the arrival of vaccine, which looks incredibly promising for both global health, but also for markets as we progress through this.
As BlackRock has been very successful over the past few years with their real estate investment strategies, can you tell us which real estate types are in the centre of the BlackRock strategy?
Yes, thank you. Well thank you for that compliment, and it has been an amazing few years for our organization having a lot of success in most investment classes.
I guess over quite a long period of time, we’ve been very aware of the change in dynamic, the structural change from in-store retail to online retail. And we’ve seen different penetration rates for the internet shopping with really being led out of the US where the penetration rates are somewhere between 20% and 30%, so 20% and 30% of goods bought are bought online. That’s true in the UK, and it’s gradually becoming more and more true across continental Europe, that structural shift.
I think what COVID has done is really accelerated an already existing trend. So if you think about places like Italy and Spain, where internet penetration was much lower at 5% to 10% of all goods bought were bought online, COVID has really accelerated that trend and people who had never bought assets online are now very comfortable with doing so. They feel secure in doing so, they know they’re not going to lose their money, and they’re getting obviously very comfortable with having their goods bought and delivered to them in their houses, which is reducing their risk of exposure to the virus.
We think that trend is just going to continue and continue, and we’ve almost crossed the Rubicon now where people who didn’t think they were ever going to buy online now are very comfortable with that process.
From a real estate perspective of course, what that means is that the focus is moved very firmly into distribution units. So these are large industrial units let to the likes of Amazon or other retailers looking for their e-fulfillment centres. And there’s been an explosion of tenant demand in those sectors, and that’s why we’re positioning a lot of our strategies to meet that demand.
The other area that I think is really interesting and has been for a while but is probably again the impact of the virus has made us more certain about this, is residential. And a quip I often use is, you can’t outsource where you sleep. So we feel there’s always going to be this demand for residential. And what COVID has done is probably just slightly changed that demand. Maybe the demand has moved more from city central or town centre locations to more suburban locations. Maybe it’s moved from being very small, centralized locations to larger suburban locations with outdoor space, but we think the demand picture is very strong in that.
So two strategies which we’re deploying money into side by side is industrial, and logistics, and residential.
BlackRock has been focused on raising capital from institutional investors. How do you see the private and retail market as a potential new chain for capital raising?
Yeah, it’s a good question and it’s very true. BlackRock has built a lot of its success on the institutional markets. Defined benefit schemes have been the bedrock of BlackRock I suppose and indeed in real estate within BlackRock.
That is certainly changing now and it’s changing for a number of reasons, one of which is simply a lot of those defined benefit schemes are reaching full funding status, and the emphasis is therefore shifting to find contribution and there’s more capital likely to come from that avenue than there is from the defined benefit schemes.
And retail generally is a really important focal point for BlackRock. I think we’ve already been very successful in more liquid strategies in attracting retail capital into the funds, and I think we’re getting there on illiquid strategies. And part of that has been a bit of an education process both of BlackRock ourselves, but also the retail investor market where we’ve been slow, I think, but it’s being sped up how we’re communicating about the underlying asset class.
And I think we’re reaching a point where retail investors do understand that they’re investing in one of these illiquid strategies, real estates, or some other strategies. They’re investing in what is underlying that, an asset class which isn’t going to allow them to take their money out as quickly as they can put their money in, necessarily, unless market conditions support that.
Now we need to be very clear in our messaging around that, and retail investors need to be clear in their understanding of that message, but I think we’re reaching that point now.
I think we’ve also benefitted from the fact that, if you look at the investment landscape and the various options available to any investor seeking a decent income return, those options are becoming more and more limited in a rates environment, which is going to stay lower for a very, very long time. Not even longer, just an incredibly long period of time. And real estate within that context sits very nicely from its income perspective.
The income return from real estate over a long period of time in most developed markets is something like 70% to 80% of total return. So income is really at the heart of real estate return, and retail investors really do understand that and they’re willing now to trade off that liquidity, or lack of liquidity, for the premium that they can earn from an income perspective in real estate.
And I think again we’ve bridged that gap and BlackRock of course needs to be at the forefront of approaching retail investors to support our capital base in our funds.
BlackRock is known for successfully launching mega funds. How do you see the competition changing between specialized boutique funds and the market leading mega funds?
Yeah, I’d answer that in a slightly different way if I could. Let me just start by saying I think there is a place in the market for both mega funds, which are kind of diverse geographically and sectorally, so invested in all the main real estate sectors of office, retail, industrial, residential, as well as some of the more alternative sectors, including maybe care homes and hotels and other areas that you can invest in the real estate market.
I think there’s definitely a place for those funds, and we do try and build our business around some of those funds. But I don’t think that’s at the exclusion of boutique or specialized funds. I think what the real important thing is from an investor’s perspective looking at where they are in their own evolution of their investment timeline, thinking about what their exposures look like.
And you may take a slightly different course depending on where you are in that investment timeline. If you’re beginning your journey and you don’t have an exposure at all to real estate, then having that diversified exposure through one of the larger funds with all the additional liquidity that that might provide, as well as an existing portfolio of assets which you can understand, underwrite, and get comfortable with, you might put more of your capital to work in that sort of style if you’re at the beginning of your journey.
But if you’ve gone through that journey and you’ve built up your exposures, then having exposures to some of the specialized funds may allow you to tilt your portfolio to directions that you think make sense for you and for your outlook on the investment horizon.
So, for example, what I was speaking about earlier around industrial assets and the distribution units, and the tenant demand around that, having an exposure to some of those specialized industrial funds may allow you to increase your weighting to that particular sector, while still maintaining your diversified investment elsewhere. So I think there’s a place for both.
From a BlackRock perspective, I think the benefit to investing with BlackRock is to get your investing alongside an enormous number of other investors, which both creates liquidity, if you’re looking to come out of your investments, but also creates an environment where you can be talking and engaging with other investors, understanding their viewpoints, and sort of positioning yourself with respect to what other people are doing as well.
So I think in short answer, there is a very good place for both strategies in the market.
ESG is a hot topic for the investment industry, and even more important for real estate investments. How does BlackRock cover ESG?
I think it’s possibly a good thing to have somebody from BlackRock talk on the topic of ESG. Every year our CEO, Larry Fink, writes a letter to the various companies that we invest in, and the topic of that letter becomes a focal point for those companies that he writes to.
This year, his letter really concentrated wholly on ESG and really put some challenges out there to companies around what they were doing to position their companies in light of the climate crisis that we’re in.
So BlackRock has a real focus on this, and you can feel that on a daily basis in the work we do and the emphasis being placed on ESG. From a real estate perspective, I think ESG has switched from how much is it going to cost me to incorporate ESG into my portfolio to how much is it going to cost me not to incorporate ESG considerations into my portfolio? And that’s a really interesting point to reach with ESG.
It’s one which maybe five years ago we weren’t at, but today we’re seeing that from a number of different sides. So we’re seeing it from clients, who when they’re investing capital they want to be investing into something which they can feel good about, that the right strategy’s in place around ESG.
We’re also seeing it from tenants who have their own stakeholders that they need to consider and their employees who they need to consider who also want to be working for a company who puts ESG at the heart of everything they’re doing.
So what I think that actually means from a real estate perspective is if you don’t have a good ESG strategy, if you’re not thinking about the environmental performance of your assets, actually you’re in danger of losing value in those assets. So that’s the flip that has happened in the last few years.
From our point of view, what we’re talking about now is less about data collection, how are our assets performing from a waste disposal perspective? And we’re actually now talking much, much more about what can we do to those assets to reduce our impact on the environment? What can you do to those assets to incorporate and involve the community in those assets? Because that’s how to build a successful business. And what are we doing from a governance perspective? Sitting over the top of that to monitor our asset managers and their engagement on this topic.
So every time we go and buy an asset, we’re scoring that asset from an ESG perspective and putting into the business plan—really at the heart of our business plan—the things we’re going to do to that asset to improve its ESG performance.
And that’s all benchmarked because today there’s a benchmark which has really emerged over the last few years, which is the GRESB benchmark, which really looks at all the various real estate funds, looks at what they’re doing from an ESG perspective, and scores them against one another. And we’re really striving to be at the top of the GRESB surveys. And actually at the moment we’re managing to achieve that, so I feel very proud of what we’re achieving from an ESG perspective.
Many thanks, Justin, for your open and insightful views. I really enjoyed our discussion, and I’m looking forward to reconnecting and continuing our discussion in the post-COVID-19 era.