Finding investment opportunities in global real estate

Please Note: Below is a transcript of the video, modified for your reading pleasure. Please check the corresponding video before quoting in print, as it may contain small errors.

I’m Sam Slator from FundCalibre, and today I’ve been joined by Ji Zhang, portfolio manager of the Cohen & Steers Global Real Estate Securities fund. Thank you for joining us today. 

Thank you so much for having me.

So, maybe we could start with your investment universe. If you could perhaps tell viewers what type of companies and real estate investment trusts you can invest in?

[00:23] Sure. Maybe it will be helpful to just kind of tell you a little bit about Cohen & Steers, and then we can kind of talk a little bit about what we invest in? So, our company was founded in 1986 by Marty Cohen, who is our chairman now, and Bob Steers, who is our executive chairman. We were the first investment manager dedicated to real estate securities and have one of the largest dedicated
investment teams specialising in REITs [Real Estate Investment Trusts] globally. And we have about 80 billion dollars of AUM [Assets Under Management] as of the end of October.

So, what does it mean, real estate securities? So, these are listed real estate companies’ securities; these are publicly listed owners and operators of real estate in North America, Europe, and Asia. So, it’s a broad spectrum of companies that we can invest in, across different markets and across different real estate sectors.

And part of that universe has been expanded recently to include things like data centres and towers. Can you tell us why this is and whether there’s any other new areas that you’re looking at?

[01:29] Yeah, so I guess, you know, if you and I were talking 20 years ago, real estate would’ve been mostly shopping centres and offices. So, that’s reflective of the old economy and how people worked and lived then. And we can all recognise that a lot has changed, right? So, with e-commerce, digitisation, so as a result, real estate has also had to evolve and reflect the needs of how we live today. So, because of that, we’ve seen this emergence and kind of growth of new sectors like logistics, data centres, tower self-storage, single family rental, because people are shopping online, they’re interacting through their mobile devices. Not to say, you know, they’re not only doing stuff online, but relative to 20 years ago, they’e doing more. So, there are more of these newer sectors because, real estate, just like everything else, has kind of evolved with the changes in how we live and work and play and interact with each other.

And when it comes to researching these companies, the team looks at each company from both an equity point of view and a property point of view. Could you perhaps explain what that means to our audience please?

[02:44] Yeah. So, when you look at listed real estate, it has the characteristics of equities and real estate. And I think over time, it kind of acts like private real estate, meaning the underlying fundamentals of the actual asset is what matters. But over shorter periods of time, it can also be influenced by the capital markets.

So, when we value listed real estate, we look at it in two ways. We come up with a view on what the individual assets in the portfolios will be worth in the private market. So, and then we aggregate them to a view of net asset value. So, that’s more of a kind of private asset/private real estate kind of point of view.

At the same time, we also come up with a view of the recurring cash flows that are generated by the assets, in aggregate. And that is using kind of a dividend discount model, which is more of a traditional equity valuation method. And then we kind of combine the two to come up with our view of value for the companies.

And am I right in thinking that when you’re looking at these companies, you’re also looking at competitors or supply chains to give you a better picture of demand and supply, that type of thing?

[04:02] Yeah, yeah, that’s right. Because look, people like owning real estate because it’s tangible, it’s part of our everyday lives. So, it’s no different with listed real estate. So, for example, when we think about the demand for or value for retail real estate, we want to know who are the retailers that are in that shopping centre? Do shoppers like them? how are their sales and profitability? Because that has implications for how that shopping centre is doing.

So, in similar parts of real estate, when we look at data centres, who are the tenants? Historically it’s been the enterprises that move their data centres out of their server closets in their office to third party data centre facilities that the listed players own. In recent years, it’s the large tech companies that have really kind of shown strong growth in their cloud businesses and are leasing data centres to put in that,
you know, data centre stuff.

So, for us, when we understand when we’re trying to underwrite the real estate and understanding the companies, it’s also really important to understand the competition: what are private developers doing? How are they influencing the competitive dynamic? What is the supply and demand in the market? And you know, we talked about the supply chain – Data centres, just sticking with the data centre
example, we will look at semiconductor companies: what are they saying about data centre demand? We will look at upstream and downstream to really kind of understand what’s happening holistically for the industry.

Similarly, when we look at self-storage, the listed players entered into a fragmented market and started to consolidate share over time and gain share because they have more scale, they have better systems. So, in that case, we really kind of look to, you know, what are the mom and pops doing? How are they doing? And how can the list of players continue to benefit? So, really understanding the full ecosystem for each of our sectors is critical to having a really strong fundamental understanding of the companies and how they are positioned within that sector.

And 2022 was really a difficult year for pretty much every asset class. How did real estate securities perform and what are your thoughts on the outlook for next year? I’m not sure how a global recession might impact this particular asset class?

[06:32] Yeah, I mean 2022 was certainly a tough year for REITs, as you mentioned has been for most asset classes. And it really was a confluence of, you know, concerns about high inflation, higher rates and recessionary concerns. And generally, that’s not good for asset values and it certainly was not good for real estate values. But the reality is, the impact on our estimates of cash flows has not been nearly as significant as impact on values. Now, asset values, and this isn’t just real estate, but you see in all of equities, cap rates got too low over the last decade and multiples got too high fueled by a decade of quantitative easing and cheap money for a long time. And the listed market corrected very swiftly. And the private market, I would say generally lags, but we’re starting to see markdowns on the private side
as well.

So, when I look out to 2023, I do think that a lot of the headwinds in 2022 will ease as we go into 2023, and inflation and rates probably peak as growth slows.

Now I do think the economic outlook for Europe, maybe in the UK in particular, remains a little bit more challenging, but I do think the benefit of looking at a diversified global portfolio is that you can access different parts of the world that are in different parts of the economic cycle.

So, Asia, for example, generally held up a little better in 2022 as markets like Australia, Singapore, Japan reopened, and I think China reopening, even though I think the exact pace is unpredictable, the signposts are pointing to the fact that China is finally ready to gradually reopen. And that could continue to be a tailwind, not only for China, but also for all of the countries where China tourism could be a meaningful driver of demand, continuing into 2023.

The US I would say is growing in terms of the growth indicators, but when you look at the fundamentals, demand is still holding up relatively well, especially for real estate. And even in the case of Europe, look, I do think it’s going to be more challenged, but the reality is it was down over 40% year to date in 2022.

So, I do think a lot of fear, a lot of concern, a lot of negativity, is priced in. So, I don’t think it would take a lot to see some rebound in the listed market for Europe in 2023.

And perhaps you could just wrap up with telling us about one or two opportunities that you’ve made the most of recently?

[09:18] Sure. So, as I mentioned, you know, we’ve been more positive on Asia. Earlier in the year we liked Singapore office and retail, and as Singapore started to reopen earlier this year, but also because we think long-term it does continue to benefit from some of the political challenges in Hong Kong and China.

Japan, I think as a market has also been more insulated from a lot of the issues everywhere else globally.

We haven’t seen as much of the same inflationary pressures we saw in the US and Europe. And because of that there’s been less upward pressure from rates.

So, our positions in Japanese developers have also done well, but recently it’s, as I mentioned, we’ve turned more positive on China reopening. So, even though we’re a little bit more cautious on China itself – I think there’s still a lot of uncertainty with the regulatory and political framework – we do like regions that we think will benefit from the reopening, whether it’s Hong Kong, whether it’s Macau gaming, benefiting from that Chinese tourism or other Asian countries that can really kind of benefit from that inbound traffic.

In the US, we favour sectors with pricing power, so it’s self-storage, single family homes for rent, where rent growth has significantly outpaced inflation this year. Europe, I would say has been more challenged as the region, but within Europe we generally prefer more defensive sectors with pricing power. And again, that’s storage.

We like logistics in Europe. And we have also kind of gravitated a little bit more towards France and Spain, where we think the impact of the energy prices could be a little bit less than other parts of Europe, and there’s a little bit more labour availability that we think will help keep wage inflation under control.

Thank you very much. It’s not an asset class we talk about a lot, so that was really interesting. Thank you very much.

Great. Thank you so much for taking the time.

And if you’d like to find out more about the Cohen & Steers Global Real Estate Securities fund, please go to FundCalibre.com