MAGAZINE: Structural trends yield opportunity

While Karim Habra, head of Europe and co-head of Asia Pacific at Ivanhoé Cambridge is well aware of the opportunities that lie in crisis, he is quick to underline that his firm’s current approach – as always – exists outside of financial movements.

‘We haven’t changed our views based on the latest economic cycle. We have strong convictions on markets supported by structural trends,’ Habra says.

Those strategies include an eclectic mix of big box and last-mile logistics, co-living, residential, cinema studios, life sciences and new generation offices. Habra underlines that the firm has a ‘very hybrid’ way of investing. ‘We can buy properties directly, we can create JVs with operating partners, we can buy companies or we can fund platforms. At the moment, we are ensuring that all the assets in all the partnerships are managed appropriately, so that we can obtain the maximum performance from them.

For direct assets, including our construction projects, we ensure that they are on time and on budget. It is more necessary than ever to have a very dynamic asset management of our existing portfolio and our development projects to create value by obtaining development permits, converting assets and leasing up vacant space. Our direct assets represent a significant portion of our European portfolio, particularly in France, Germany and the UK – our most important markets and the ones where we have deployed our talents.’

One of the newer asset focuses is last-mile, a segment which has finally ‘clicked’ for a firm that has long focused on logistics. ‘Due to the granularity of the assets, last-mile logistics is quite challenging for a large investor like us. We deemed it necessary to have a specialised partner to deploy our capital. Deals are often in the €10 to €50 mln range, which is why we invested into Mileway.

'More recently, we also announced a partnership with URBZ Capital to develop a large portfolio of last-mile assets in continental Europe. We have already committed €400 mln in equity and we have identified targets at speed. URBZ is helping us access deals that are often under the radar for an investor of our size.’

Since its inception at the end of 2021, this partnership has acquired 21 properties in the Netherlands, Sweden and Germany. ‘At the same time, we are still looking at big boxes, such as the ones we are developing with PLP in the UK or our Hub & Flow portfolio in continental Europe,’ Habra adds.

Future of the office
Despite all the talk around the difficulties the office market is facing, this remains a sector of interest to the firm. ‘We believe there is a new way to invest in the office market, such as technology-oriented workplaces, new generation offices, co-working, offices within mixed-use projects and life sciences,’ he says.

‘However, obsolescence in older offices is the challenge, and even newer buildings can become obsolescent quite quickly, given all the technological progress and the evolution of users' expectations and needs,’ he adds. ‘Moreover, working from home has affected the sentiment of this asset class, although the impact is more important in North America than in Europe.

‘Generally, we see a disconnect between the operational performance of assets, which is generally strong, and the liquidity of these assets as the market anticipates an acceleration in the obsolescence of these buildings. As operator and investor, our duty and mission is to take all the necessary measures to reposition and retrofit or renovate the stock of existing properties. Yet, the best buildings are leasing well and seeing strong rental growth.

We are still confident that if you own the best product, you will continue to see demand from users to occupy that space. Requirements have also changed – there’s a need for more collaborative space and a greater than ever focus on ESG. We take all these elements into account, and we believe Europe is the world’s most advanced office market from this perspective.’

Habra says that while ‘in the past, offices were driven by cash flow’, today the environmental and social requirements are much stronger and confirms Ivanhoé Cambridge’s belief that financial performance and ESG commitments are very closely linked.

‘When we invested in Icawood in 2019 and started to look into building cross-laminated timber offices, people said we were too early in the market. The last couple of years have changed people’s minds and there is now a lot of interest in this type of office construction.’

Icawood, a low-carbon office development fund for the Grand Paris area, was launched in collaboration with Guillaume Poitrinal’s Icamap, and currently has seven offices in the pipeline. The first, Arboretum, is expected to complete at the beginning of next year and is being tipped as the world’s biggest wooden office construction. ‘We have a really strong conviction that the leasing will simply follow.’

Residential opportunities
Residential is another area where the firm is pushing the envelope on ESG. Last September, Ivanhoé Cambridge signed a partnership with French housing player CDC Habitat to develop a portfolio of new residential housing in France, in high-density urban areas featuring opportunities for site re-use.

The partnership has an investment capacity of €500 mln and is part of a four-year plan to significantly increase the firm’s sustainable residential holdings in a variety of ways.

‘This asset class is attractive because of its resilience and our development in this sector aims to meet the challenge of affordability in a context of housing deficit in France and Europe,’ Habra says.

The partnership seeks to achieve the best ESG performance in terms of environmental quality —green certifications, limiting urban sprawl, combatting land artificialisation, reducing carbon intensity — and social impact, through the provision of affordable housing and mixed-use schemes in turn adding to social and functional cohesion.

The investment strategy includes both traditional development projects and projects to convert built or unbuilt assets and land into housing (including office, hotel and warehouse conversions). The portfolio will also be built up through forward deals for affordable family housing and managed residential housing (co-living, student residences and senior residences) from national or regional developers.

Habra makes it clear that where there is demand, there are opportunities, and that means recognising that former niches such as co-living are now compelling trends. ‘Co-living is an extension of residential, albeit also part hospitality, part student housing, and part affordable housing.

We would not contemplate an asset class unless the demand dynamics were compelling. And the demand is 10 to 50 times higher than current supply, depending on the market,’ he says.

In December, Ivanhoé Cambridge became the largest institutional investor in Brussels-based Cohabs, a co-living specialist managing around 1,500 rooms across the cities of Brussels, Paris, New York, Madrid, and Luxembourg. Two other institutions — Belfius Insurance, and the property arm of the Belgian sovereign wealth fund SFPIM — also joined the €110 mln funding round, while AG Real Estate and Alphastone reduced their participation.

‘Cohabs identifies the right buildings, it converts them into a really great product, and then manages the rooms. There are significant common areas and amenities, which we know are essential to the users,’ Habra notes.

He adds: ‘What we also appreciated about the Cohabs deal was investing into a successful operating company, which allows you to induce performance not only from the assets, but also from the operations. Having the right team on the ground means we can create value and pursue granular deals, something that could be difficult for a large investor. We see clear opportunities for value creation and outperforming the market.’

Cohabs is currently targeting 5,000 beds in the medium term which Habra says will still exceed demand. ‘Last year alone, Cohabs had over 10,000 applications, despite doing relatively little marketing,’ he notes. ‘Furthermore, we were impressed with the business resilience during the pandemic, when they maintained a 90% occupancy rate. Occupancy today is around 99.5% which says everything about the need for further supply.’


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