Property Site Visits
Our primary research methodology is bottom-up fundamentals driven. Our dedicated in-house research team tracks trends which drive the real estate sector, property portfolios and specific assets. In-depth company research and analysis is performed on each stock within our universe. We have in the past supplemented our research by attending real estate conferences and property site visits throughout the year.
With most Covid-19 restrictions being relaxed across most markets, we took the opportunity to attend physical site visits in the 1st half of the year. In the beginning of May 2022, we attended the MAS Real Estate (MSP) site visit which included asset tours of their recently developed retail centres and under construction residential schemes. Overall, the site visit was positive as the new retail centres are high quality with a sizeable grocery offering. Many of the centres have further extension opportunities and capture a broad catchment area with limited modern competition. We spent time at the centres mid-week, and it was pleasing to see the level of foot traffic in the centres. The tenant mix were similar across the centres, but reflective of consumer demands in those areas. Romania has a demand/supply imbalance with regards to quality modern residential accommodation. MSP through the DJV is capturing this opportunity through significant residential schemes which are in various phases of development. Each scheme is unique and tailored to the mid-market segment in their respective locations.
NEPI Rockcastle (NRP) hosted a property tour of eight of their assets located in Romania, Poland and Lithuania in June 2022. Notwithstanding the recent changes to their CEO and CFO, the tour cemented our views that the management team have excellent property skills with good depth down to asset level. Assessing the new management team’s capital allocation skills is key. They appear to be knowledgeable; however, they lack experience, and this can only be evaluated with hindsight. Some assets have vacancies as a result of Covid-19, but letting strategies are in place and demand for space is increasing with vacancies expected to decrease over the short term. All Covid-19 restrictions have been lifted and the last few months trading densities are in excess of 2019 levels. Though footfall is still approximately 10% down, basket sizes are up 27% compared to 2019 levels. The company is currently undertaking their first residential development earmarked for sale and using their own balance sheet to finance. The 252 units are currently pre-sold in seven months, but management suggest that progress made is reasonably good in that market. NRP is a relatively large company, and it will not be easy to move the needle organically. We still view the company as a defensive play with strong fundamentals in the regions they operate.
Instinctif Partners further organised a UK and European property tour visit for investors and analysts from 20 – 30 June 2022 on behalf of Capco, Equites, Hammerson, Industrial REIT and Capreg. The tour included retail centres across the quality spectrum owned by Vukile, Capreg, Hammerson and Capco, providing insight into the health of shopping centre operating fundamentals across the UK and Spain. Very few effects of the pandemic still linger and, on the face of it, retail occupational market appears to be back to pre-pandemic levels. Sales densities are nearing pre-pandemic levels and physical vacancy across the quality spectrum was limited.
The tour further provided a platform to spend time with the Capco and Shaftesbury management teams, helping us better understand the merits and opportunities of an enlarged entity given the proposed all-share merger between the two companies. From a Capco investor’s perspective, the transaction screens as attractive. Credit must be given to the management team for engineering this deal from their initial 25% stake in Shaftesbury through to the merger, in such a way that allows shareholders to benefit disproportionately from the deal economics. A combination of the two portfolios makes strategic sense and is likely to create a dominant central London REIT focused on key, irreplaceable mixed-use assets. Given the significant overlap across the portfolios, the locations of assets seem highly complementary, which will further allow the company to amass scale and better control their nodes of operation in the West End of London. We expect operating efficiencies, driving both cost and revenue synergies, while the increased company size should allow for a larger investor base and improved liquidity.
The Equites and Industrial REIT site visits provided an opportunity to get an in-depth understanding of key fundamental drivers of big box and multi-let industrial sectors in the UK. We were impressed by the Newlands development teams’ knowledge and expertise across the entire value-chain, with the management team providing investors with detailed information regarding barriers to entry, planning application risks and delays, competing schemes and opportunities for value unlock with current options on land bulk. The UK industrial sector will be faced with headwinds, including increases in business rates in the short term and will not be immune to the current macro challenges; however, we expect the sector to continue to benefit from structural changes and ecommerce penetration, low vacancies and strong rent growth evidenced recently, albeit at a slower pace.
Our team was also hosted by the Lighthouse management team to view the French portfolio recently acquired in H2 2021 from Wereldhave. The French portfolio, with a gross lettable area (GLA) of circa 147k m2, makes up about 38% of Lighthouse’s physical property portfolio. The management team provided detail into asset management initiatives and extension projects planned over the next 18-24 months that they see creating additional net operating income and revaluation uplifts. Lighthouse is currently finalising the acquisition of land in the city of Strasbourg that could add circa 1,136 m2 of additional retail to the current scheme. Saint Sever, a 34k m2 retail asset located in Rouen currently has vacancy of 20% and presents potential value unlock in the short to medium term given current asset management initiatives planned for the centre. Management is currently undergoing a Primark extension with an expected GLA of 6,709 m2, with opening anticipated for Q3 2023. We expect vacancies to reduce over time given the current heads of terms agreements and the addition of the above-mentioned key anchor to the center.
Lighthouse also owns circa 22.3% of Hammerson. We walked the Birmingham estate with the Hammerson management team and got insights into the future development plans to merge the three Birmingham assets which include Grand Central and Martineau Galleries, into a prime urban mixed-use estate. The Bullring shopping center remains a key flagship center, well located close to transportation hubs and is currently undergoing transformation of its repositioning given recent departures by Debenhams. Expectations is that a combination of customers’ return to pre-Covid-19 behaviour, further reductions in the centre’s estimated >10% vacancy rate, and Birmingham’s hosting of the Commonwealth Games should contribute to stabilisation in net rental income in the next 12-18 months. Hammerson’s balance sheet remains a concern and, given the size of the redevelopment plans, it is hard to see how the plans get financed given a constrained balance sheet, current de-leveraging strategy, and rising funding costs.
Property site visits are fundamental to our process as these events create an opportunity for us to get to know the look and feel of an asset, understand the tenant mix within retail schemes, assess the asset management opportunities and provide some sense of barriers of entry and competing schemes located within close proximity. These events further provide invaluable access to real estate management teams. With Covid-19 in the picture, physical site visits were hampered over the past two years and led us to supplement our research with technological artificial intelligence research such as Google maps for location of assets and competing schemes in the node, data analytics tracking vehicle, and customer visits and dwell times at malls. We thank the management teams involved for planning these physical visits and dedicating time and resources to allow stakeholders an opportunity to tour some of the assets owned.
