Real estate, USA, internationalization, and the importance of professional due diligence of target investments are currently increasingly discussed among institutional investors. Markus Hill spoke for FONDSBOUTIQUEN.DE to Martin Stoss, BVT Holding” about his passion for the US real estate segment, due diligence factors in the selection of properties, the specifics of the US market, and the importance of the different market segments locally. These remarks were also underlined during the panel discussion held in May this year as part of the “Real Estate, Alternative Investments & ESG” study.
Hill: What area do you oversee in your company?
Stoss: I have been with BVT for about two and a half years as Managing Director for the US division. Before that, I worked for a subsidiary of Deutsche Bank as well as PGIM, one of the global top ten managers, with assets under management of around USD 1.5 trillion, as Executive Director (Portfolio Management) for the regions Asia, Australia, and the USA. At BVT, my activities include the fund conception of closed-end real estate funds under German law as well as for institutional investors under Luxembourg law. In addition, I am responsible for portfolio management, acquisitions, and sales as well as investor reporting. As a civil engineer with a focus on construction management, I have long had an affinity for real estate. For about 20 years I was responsible for real estate funds at Deutsche Bank (5 years) and later PGIM (15 years), which invested in all major economic areas or economies of the world. This allowed me to gain extensive knowledge of the real estate markets and economies in Asia, Australia, the USA, and Europe. As a result, I can evaluate economic developments in a global context and identify the potential impact and opportunities on the real estate sector of a specific economic area at an early stage and implement them strategically.
Hill: Why are you so closely involved with the U.S. real estate market?
Stoss: In my view, the US market continues to be very interesting due to the following points. The U.S. is the world’s largest economy, with a gross domestic product of $21 trillion (2021) and the tenth-highest per capita income (2020). With over 330 million inhabitants, this makes it the country with the third largest population in the world, after China and India. In the U.S. you will find the largest commercial real estate market in the world with very high transparency (JLL Transparency Index: 2nd place), excluding condominiums as a category. The country has a tax system and a currency that is the world’s reserve currency. According to the Global Firepower Index, it has the strongest army in the world. The population there is growing at a rate of one percent per year. It is also worth noting that the U.S. is in an excellent position in terms of demographics; the country is characterized by a young population structure. We are not so well positioned here. At 47.8 years, Germany has the oldest average population after Japan at 48.6 years. 18.5% of the population in Germany is younger than 20 years. The population of the USA is on average 38.5 years old, almost 10 years younger than in Germany. Likewise, 24.8% of the population is younger than 20.
Hill: Why invest in the residential segment in the U.S.?
Stoss: The USA currently lacks around 2.5 million apartments. Annual new construction activity is not sufficient to close this gap. We are building apartments in the high-end Multifamily Class A segment, where there was a shortfall of around 500,000 apartments in Q1/2023. Demand for rental housing is rising steadily in the USA, particularly in the East Coast and Sunbelt markets. Reasons for this include steady population growth, social change, and significant increases in home prices. Due to the sharp rise in interest rates, purchasing a home has become unaffordable for many potential buyers. This is increasing the demand for rental housing. It should also be borne in mind that on average around one million new households are formed here every year. We also find the very high liquidity in the market interesting, with a transaction volume in the multi-family sector of around USD 350 billion (02/2021-02/2022). One also finds a form of “inflation protection” through lease terms of around one year in the residential sector. Returns here are in the range of 11% to 13% p.a. Multi-family has outperformed all other commercial real estate classes (hotel, industrial, office, and retail) for more than 15 years. According to NAREIT as of Q2/2023, apartments with a total return of +6.27% are far ahead of the common asset classes office with -18.1% and retail -2.0%. (For office and retail the return is negative!). These are REITs. When reviewing potential new investments, we are strongly research-driven and put the potential investment through its paces. What are the key points for us in this approach? We focus on markets where we have a high level of expertise (East Coast: Greater Boston., Washington, Orlando, Atlanta). The supply vs. demand factor in these markets. Here, we closely examine how many new projects are planned and under construction in the surrounding areas. It is important to know how many apartments have historically been built and leased per year (absorption rate). In this way, we want to ensure that a sufficient number of tenants can be found for the apartments that have been built. We monitor population trends very closely. We also monitor the areas of employers (number of jobs and industries) and the distance to the largest employers. The segments that seem most attractive to us are high-tech, med and ed (medicine and education), aviation, public administration, and large military institutions (research, medicine). What other factors are important for us to analyze? The quality of the housing stock and the planned residential buildings, analysis of the ACTUAL rents of the competing properties, verification of the achievable rents after completion, transport connections, and an attractive environment for the potential tenants (gastronomy, sports facilities, leisure). In our analysis, we also consider points such as the local school system and universities and the “convenience” for tenants, keyword: goods for daily use (proximity to retail). Of course, we also look at the average household income and the age structure in the catchment area. To round off the picture with the comments I made earlier, I would also like to refer you to our joint panel discussion in May of this year. Together with Alexander Scholz (TELOS), Sebastian Thürmer (ARTISICM), and my colleague Martin Krause, we had the opportunity to point out the special features, challenges, and opportunities of the US market. (Thanks again for the moderation). The study had yes additionally as an interesting result, besides the discussion of other asset classes: A very high percentage of institutional investors are currently intensively involved with the topic of US real estate.
Hill: What are you doing when you’re not dealing with the U.S. real estate market right now?
Stoss: In my free time, I spend as much time as possible with the family – cycling, hiking with the kids, or sporting events, both children play basketball in competitive squads. In addition, I am a passionate road cyclist, I just enjoy nature and the peace as a balance to office work.
Hill: Thank you very much for the interview.
Martin Stoß, Managing Director of BVT Holding Verwaltungs GmbH, is responsible for the Real Estate USA division of BVT in Munich. Mr. Stoß has more than 20 years of experience in the conception of closed-end real estate funds under German and Luxembourg law as well as a portfolio manager in the international real estate business with investments in Australia, Asia, USA, and Europe.
REAL ESTATE, ALTERNATIVE INVESTMENTS & ESG. In May this year, Markus Hill spoke with Alexander Scholz (Telos GmbH), Sebastian Thürmer (artis Institutional Capital Management GmbH), Martin Krause (BVT Holding), and Martin Stoß (BVT Holding) about the results of the study “Preferences of institutional investors in real estate and alternative investments”. On the one hand, the general contents and results of the study on real estate, alternative investments, and ESG were explained (real estate, infrastructure, renewable energies, etc.), on the other hand, the topic of internationalization & asset allocation was intensively discussed (example: US real estate). INSTITUTIONAL INVESTORS were again asked about the following developments (areas & keywords) in this year’s survey: planning to expand the real estate quota, types of use, allocation, regions, Alternative Investments (AI) quotas, AI segments, private debt, renewable energies, infrastructure equity, private equity, the attractiveness of asset classes, importance & strategy “sustainability”, ESG – guideline & analysis, impact investing, energy renovation measures in real estate. LINK TO VIDEO ( German Language) “REAL ESTATE, ALTERNATIVE INVESTMENTS & ESG”:
https://www.youtube.com/watch?v=30kUbZxERNA
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