Please give us an overview of the SafeGuard Group?
The group consists to of two main businesses, SafeGuard Real Estate Management, our asset management firm and SafeRE, our digital real estate platform. They pursue closely coordinated strategies.
SafeGuard Real Estate Management, with its headquarter in Singapore and on-the-ground teams in the markets where we invest, is a classical real estate manager customizing client-specific investments. It was formed in 2013 with a team that has decades of experience in real estate and finance, comprising experts for cross-country, tax-efficient, international investments. What distinguishes us is our approach to tailor the investment strategy and structures for each client. Our deep local relationships and partnerships in Asia and Europe give us access to off-market transactions not available to other managers. Our investors include high net worth individuals, family offices and institutions.
SafeRE, which is based in the European Union, is our contribution to the increasing digitalization of real estate. It is a market place that uses asset tokenization to make real estate investment more accessible, transparent, selective and liquid for investors globally. SafeRE will officially launch in the second half of this year and will feature properties from our own stable as well as from other asset managers and owners. We are convinced that the impact of Covid-19 on real estate transactions and the macro-economic consequences of the crisis really pushed asset managers to become more innovative. Real estate transactions have not seen the radical progress seen in other asset classes with the advent of the likes of Charles Schwab, Alibaba, Amazon, etc. These firms have created speed, transparency and they have taken out unnecessary process tiers and cost. There are too many layers of involvement in real estate from parties that hamper efficiency and drive up cost. We want to deliver higher quality products to investors and do that more efficiently.
What are your core investment strategies?
SafeGuard Real Estate Management invests across the capital stack in (accommodation-related properties like) hospitality, student accommodation, residential assets, mixed-use developments and logistics. We cover the whole management value chain including green-field developments, building conversions and refurbishments as well as yield -focused investments. Geographically we prefer South-East Asia and Central & Northern Europe. After tax returns can range from 8% p.a. for lower-risk core strategies to above 30% p.a. for more aspirational opportunistic strategies. Thematically, we favour investment themes that benefit from the fast growing global middle-class and associated trends including travel and education sectors. We also like logistics but stay away from office and retail properties. We are presently working on transactions in the €30 to €150 million range and can accommodate investor tickets starting from €5 million.
What is the impact of Covid-19 on real estate markets?
The effects on real estate will vary by sector and market, and the extent of the effects will depend upon the duration of the economic shutdown in each geography and the behavioural changes of consumers, workers and firms caused by the crisis. Our views should not be clouded by short-term effects, but rather by what will impact markets in the longer-term.
Office and retail properties for instance are exposed to permanent, tech-driven behaviour changes enabled by the digitalization of the world. 5G and better digital infrastructure enable remote working and shopping. While these sectors have not suffered too much in the short-term because tenants keep paying their rents, it is clearly not a positive development for the office and retail sectors in the medium- and long-term.
It is very positive though for logistics and manufacturing real estate that help deliver products efficiently to consumers, and consequently these sectors have done well even during the crisis.
Hospitality and PBSA on the other hand were hit hard in the last few months but remain excellent investment sectors for the future. The desire and need of people to travel and to educate themselves has not gone away.
Why is hospitality specifically a good invest during the Covid-19 crisis?
Hotel assets with long-term leases are an opportunity that will continue to provide safe and growing income streams for investors going forward. The hospitality real estate market is expected to recover strongly. Leisure travellers can’t wait to get out again. Business and event travel might even be more sought after than before the crisis as a result of the down-sizing in offices and increased working from home. After all, people still want and need to meet.
One has to be selective though, and be careful where to invest. With our risk averse strategy we prefer hotels in countries like Germany, Austria, the Netherlands, the Baltics and the Nordics, because these countries have managed the Covid-19 period confidently, suffer from less psychological and economic damage, are recovering faster, and can rely on strong domestic travel demand during the remainder of 2020. In these markets, hotels can even benefit because travellers want to travel but will prefer to do it within their own country. The Dutch, Germans and Scandinavians who used to crowd the Mediterranean beaches prefer now the North and Baltic Sea beaches, going for a hike in the Alps or visiting museums in Berlin and Amsterdam.
In addition, we like leased assets in Europe more than managed assets in the current scenario. Typically, we would acquire freehold asset which are then leased to a hotel operator on a long-dated lease, for twenty or twenty-five years for instance. We usually also require rolling bank guarantees that protect us from operators’ failure to pay the rent. The lease agreement includes an inflation-linked adjustment of the rent. What we call positive jaws, meaning the revenue of the assets is larger than the cost related to it, leads under inflation to a steadily increasing return. This results in long-term rising income streams and returns that are less volatile through a market cycle than traditional real estate and less volatile than government bonds.
And where do you see good investment opportunities in Asia at the moment?
As a region, Asia will recover faster from the Covid-19 crisis. We expect to see more capital allocated to the region for all asset classes including real estate. For investors who are a bit more risk tolerating, we believe that select service hotels in some South-East Asian markets will do exceptionally well after this crisis. You have to look at where demand clearly outstrips supply, and that hasn’t changed during the last few months. Our favourite market in South-East Asia remains the Philippines – young demographics, an ambitious, growing middle-class and pro-business policies continue to generate high demand growth rates for travel. Our hotel properties in Manila for instance have been resilient, despite an extensive lock-down, and have seen occupancy rates of around 50% throughout the crisis. This class of hotels is, unlike the five- or four-star hotels, very flexible and our operator has been brilliant in responding to changing needs over the last few months by focusing on corporate business for firms in need of quarantine space for employees. It makes sense to invest now because supply is even more constraint as capital dried up during the crisis and construction activity halted.
And why do you like PBSA?
We like PBSA pretty much for the same reasons as hospitality. The demand from middle-class families for college and university education, and therefore for student accommodation, is expected to grow at much faster rates than the demand in other real estate sectors. Globally, tertiary education demand is expected to triple over the next twenty years, and there are just many cities in Europe and Asia that suffer from a short supply of purpose-built student accommodation properties. Student accommodation has shown that it performs very well and anticyclical during recession periods too, because school graduates prefer to study rather than go into a stressed job market. We have used a data-based approach to identify locations for investment in the United Kingdom and we do the same across Europe and, in our preferred Asian market, the Philippines. There are good opportunities now to invest in yielding, completed student housing and more so in development opportunities in Asia and Europe.
Which other sectors do you consider for investment?
One sector we have been putting some focus on recently is the logistics and manufacturing market serving those companies that benefit from serving the fast growing home shopping market. This sector offers decent yields with long-term leases by quality tenants.
Other than that, some of our investors have asked for distressed opportunities. In the markets that we cover, we see those, however, only coming up in Southern Europe. We have lots of experience in Spain for instance and the hospitality market there has been suffering tremendously creating some distressed opportunities.
How should investors be playing the market?
This depends of course on each investors own view of the markets. Generally we recommend a mix of secure, yielding investments and some opportunistic exposure selectively to those sectors that are expected to perform in the long-term and which I have mentioned earlier. If investors expect, like us, that interest rates will stay low for an extended period, it makes absolute sense to invest now. It is an investors’ market and a window of opportunity which will be gone as soon as economies recover from the Covid-19 crisis. The current debt financing environment allows us to lock in interest rates for long periods, thereby protecting investors against potential pressure from rising long-term interest rates. Long lease terms with built-in inflation adjustments provide investors looking for wealth preservation and capital gains with good returns.
For investors with a little more risk appetite, we recommend the same sectors, but invest at an earlier stage, into development projects, and exit upon completion or holding on.
Geographically, we recommend to focus on countries that have managed better through the past few months than others and countries that are less exposed to the all too common political turmoil of recent times, i.e. we recommend Asia and Central & Northern Europe.