Reflections from Invesco Real Estate’s Value-Add Team

Reflections from Invesco Real Estate’s Value Add Team

Kevin Grundy

Let let's talk about what we've experienced the last 12 months. And let's start with our vantage point, because we had a little bit of an unusual position when the market was generally retreating and transaction volume was down considerably across Europe. We were out there playing offense while a lot of people were playing defense. And you know, Richard, you and I have been doing this for about 25 years or so in value add opportunistic investing. It feels to me like the environment that we're in right now is more career defining than any other time during that period. And I wonder if you feel the same about that.

Richard Chambers

I absolutely do. I think, as you say, time flies in 25 years. If you go back to the pre-GFC years when we were starting out, the value add discipline, I think was a bit different. It was very much bottom up, very granular sourcing, and it was all about how you drove returns out of your activity within that piece of real estate. I think what we've seen in recent years has been a slightly different shift, with momentum and market movement playing a part in that. And back then, it was all about underwriting at the asset level. If the market came into the equation, it was really how do I protect in a downside situation, what levers do I have? How can I mitigate those impacts? And I think, to execute like that, you need local teams. You need boots on the ground. It is very granular and I think we're back to that kind of discipline again. So for people like you and I who've been doing this for a long time and grew up back in that environment, and actually for many of our colleagues who did the same, this is a market that that really plays back to those strengths.

Kevin Grundy

It's the skill set that that you can apply right now. So one of the things that that we haven't really seen in the market is full on distress. I think some people, outside observers have been expecting that, but I wouldn't describe what we're experiencing as full distress. But there's been enough stress in the market to push forward some opportunities that we felt are pretty interesting for our value add program. What you might call deep value. And really, the characteristics that these deals share are they're repriced assets. The structuring is much more sensible, I think, than it has been in more recent years when the markets were rising. And one thing that I want to come back to in our discussion here toward the end, which is to me, the most exciting part, is the way that the interaction with best in class partners is going very different than it has been. And I think a very exciting, exciting space.

Jonathan Feldman

Definitely. I think the important point is we didn't rush to invest last year. We saw a lot of opportunities. We were extremely patient. We said no to a lot of things, but when we saw something we liked, we acted with conviction. And I think that has made for a really exciting execution for us.

Kevin Grundy

And it took time. Didn't it?

Jonathan Feldman

Absolutely. I'm not surprised that we've actually allocated all of our dry powder through 2024. But I think one of the lessons is that it was a difficult market to transact in.

Kevin Grundy

We started a lot of these conversations at the end of 2023 and into the first half of 2024, and it takes 6 to 9 months to bring these things to a conclusion. One of the things that was important about the discipline here is that we stuck to our conviction themes. If you look across what Invesco Real Estate's high conviction areas are for Europe, and you compare that to where we were executing and the value add program, it's right on top of each other, a perfect match.

Richard Chambers

If you go back to our playbook in 2023 and what we were really looking for, we were certainly focused on logistics and particular subsets of logistics. We liked living and particularly student housing, and we were interested in ESG brown to green momentum. And the real target for us, I think, was London and central London because of regulation and momentum in that space. And if you look back now and what we've actually done, we've been active in all of those spaces, and particularly within logistics, if you think about the way we've accessed that, I think that's been interesting. We've got different themes in different markets. In Germany, we're doing urban logistics development in great locations. In the UK, we've moved to multi-let industrial. So more income focused. We've got a really interesting idea that we're executing on, which is around sustainable logistics sites that might come forward for powered land initiatives, which then moves towards the data centre space. And so I think, within that whole logistics bracket, we've been really granular and interested in different subsets, in different markets, and we've been able to execute on all of those things.

Kevin Grundy

And if we if we focus on logistics just for a moment, if you look at all of the activity that we've had, about 60% of it was in the logistics space, which makes sense because, you know, in our view, the fundamentals there are still very strong. And yet we've had a repricing. And what I really like about it, I like the fact that we've we're accessing different kinds of subsectors within logistics. But I also like the fact that we're thinking about it creatively, creatively in terms of structure. So one of our investments is mezzanine. One of them is a well thought out joint venture structure in the traditional sense. And then two of them are actually platform investments. So we're approaching these things from every different angle. And I think what it really shows is the power of flexibility and structuring in this kind of market. I mean, the way things that were coming in the door over the last period of time has been very different than the way that they left the door when we've structured them and completed the deals. And it's not just logistics, it's we've been very active in purpose built student housing as well.

Jonathan Feldman

We really like student housing. I think each market is a little bit different and has a different story, but fundamentally all the markets we're looking at are very much undersupplied, and we are disciplined about how we execute. We've already acquired in the UK, France and Spain, and the focus has been strong university markets, broad demand and providing quality space rather than luxury space to really hit that largest part of the demand curve. That's been our focus and what's been really exciting is the structures we're going into. They've traditionally been kind of forward funding structures that core capital have been in, but with core capital out of the market, we've been able to enter in those defensive sectors, but just repriced for value add returns.

Kevin Grundy

And you mentioned some of the countries that we’re active in, I think the way the countries are playing out in the early days for us here in the value add program is quite interesting and it's different than it has been in the past, isn't it?

Jonathan Feldman

I think it's fair to say that the UK and Germany have always been difficult for us to access just because of the amount of capital chasing opportunities there, and that that has changed this time. We're very much active in both countries.

Kevin Grundy

I did say in the beginning that I wanted to return to this exciting point about the way we interact with partners and how much that has changed and my perception on that. And Richard, you can help with this as well, is that we're moving from an environment where partner relationships were more transactional, the one off deal where we are the right people to be working together to, to a real business building relationship, which has which has benefits for both sides. And we're seeing a lot more of that, aren't we?

Richard Chambers

And I think, we've had the benefit of building up relationships with a whole range of partners over Europe for many, many years now. And a lot of those partners have struggled in the last two years because the capital partners they traditionally had have all dried up, and they've got great teams ready to execute there. There are great opportunities in their markets, but they just haven't been able to access them. So we've approached that very much with the mindset of, let's think about our key themes that we want to execute on, and then let's go to the people we know best and that we really believe in those management teams and partner up in a really holistic way, like, let's build a business together.  I think it's a much more equitable relationship. And we are getting the benefit of vertically integrated teams within the themes that we like on a repeat basis in terms of executing on real estate that we like, but also with the benefit for our investors having participation in those businesses as they grow and succeed for no cost. It’s a different dynamic. And I think it's a really healthy dynamic. So it's been really exciting to see that evolve over the last 12 months.

Kevin Grundy

These positions with these partners are owned within the program. It gives you the benefit of exclusivity on pipeline, exclusivity on that talent, and also better economics and potential upside as well. Now, the one thing that we haven't mentioned yet in that regard is that it also opens up the door to a lot of co-invest opportunities. And if you know, we've talked about this in the past, that investors who are particularly keen on a certain sub-theme that we like can dial up exposure to that theme within the program by participating in co-invest. And if you look across the co-invest opportunities that we are working on at the moment, it's in all of those high conviction areas. It's in the logistics space, multi-let industrial, student housing, and in brown-to-green office in London.

Kevin Grundy

Every single one of those through one of these partner relationships has a co-investment opportunity linked to it. I think that's a powerful thing.

Richard Chambers

Absolutely.

Kevin Grundy

It's been a very busy end of the year and really throughout 2024. For us, it's looking like it's going to be the same in 2025. Really exciting time to be active and to draw upon all of our experience. I think really what we should do is probably get back to work.