[Original Source: IREI Europe, March 1, 2022: Vol. 16, Number 3 / The interview was lead by Chase McWhorther/Institutional Real Estate, Inc.with Pepijn Morshuis/CEO Trei Real Estate GmbH, and Keith Breslauer, Managing Director and Senior Partner/ Patron Capital Partners]
Pepijn, Trei Real Estate runs an international business in several countries. What effect did the COVID-19 pandemic have on your expansion strategy?
Pepijn Morshuis: We have two separate strategies, one for rental apartments and one for retail parks. To start with the latter, shopping centres were hit hard by a lack of confidence by customers or because they were forced to close down. What we noticed is that retail parks actually flourished during that time: there was open air, plenty of parking directly in front of the stores giving easy access to the stores, and we had relatively few closings in our retail parks. Since the pandemic, we have seen an increased interest in tenants that previously were predominantly either in shopping centres or in High Street locations that have now a great interest in coming into retail parks. If anything, the pandemic has stimulated the further growth of that business.
As far as rental apartments are concerned, from our perspective they were basically untouched by COVID-19, although we saw two unexpected influences of the pandemic. First, at the beginning there was a lot of uncertainty in the market, and as a result, we actually were able to secure a lot more land than we previously had, simply because a lot of investors were at a standstill. The second unexpected effect that we are currently experiencing is an increase in shortages of material deliveries to construction sites, so that is delaying construction a little bit, but we are still talking about weeks rather than months.
Trei Real Estate has branches in Poland, the United States, Portugal and the Czech Republic, with headquarters in Germany. What has it meant to you during the pandemic to be represented in many countries?
Morshuis: I would say it was a necessity in order to keep the profits going, construction sites moving forward, sourcing new land. If you wanted to keep that going, you needed to go to the location where things were happening. Since international travel was almost not possible, it was at least a big advantage to have local teams on the ground in all those locations. We found it was highly positive.
Keith, with Patron Capital Partners investing in real estate throughout Europe, what impact did the pandemic have on your investment activity in 2020 and 2021?
Keith Breslauer: As an owner/operator, we employ a hybrid model. We back groups like Trei and do joint ventures, and then we also do some direct investing, as well. But in the 34 years I have been doing this, we have had these momentary events, which are terrible and disastrous, but they also create pockets of opportunity. During the COVID-19 pandemic, we really went to town, and we raised an €844 million fund, our Fund VI. We then invested about 75 percent of it. We do believe that the markets have stabilised, and we didn’t take a pause as a lot of our peers might have. We have worked very closely with Trei throughout this pandemic to help them identify and move forward on opportunities.
Pepijn, have you noticed other investors focusing more on the home market during or in the wake of the pandemic?
Morshuis: No, not necessarily. In general, globalisation of real estate investments is unstoppable. It is going further and further. What we did see during the start of the pandemic is a general hesitancy investing money, simply because no one was really sure what was happening. Once that hesitancy was gone, everyone continued with the strategies they had. I have not noticed or heard people saying, “Hey, let’s not go abroad. We will stay in our home markets.”
Keith, did many professional investors from the United Kingdom focus more on their home market during the pandemic?
Breslauer: It depended on size. Domestic invests of larger size continued investing because they had to deploy capital that was in their funds. The smaller institutions, family offices and high-net-worth individuals all stopped, both in the United Kingdom and in Germany. We did a number of investments in Germany that would never have been available pre-COVID. The smaller investors paused, and even though the larger investors continued, the hunt for yield is very, very strong, so the transactions that were complicated had less demand, but demand stayed high for opportunities that had income.
Were there any investment trends in Europe in the aftermath of this pandemic that surprised you?
Breslauer: Yes. Greed. The venture market and the tech market have grown so dramatically that investors who invest across asset classes are now saying, “Wow, we have made 50 percent, four times, three times the money on tech, but real estate barely makes 15 percent returns. Why should we care about real estate?” When you ask the magic question, “Have you actually realised that money?”, the answer is, “Not really”. They realised about 70 percent of it. The improvement in growth-related companies and stocks has been so tremendous that it has warped, to some degree, investors’ ideas and thoughts about portfolio management. That has been surprising. What didn’t surprise us how quickly the rebound happened when the COVID-19 restrictions were lifted. We had just sold a very successful pub business. We had 1,500 pubs, and we were shut. I remember in the Delta wave lockdown, people were thinking, “It is over. We are never going to open.” But we saw consumer savings at record levels — in England there were €220 billion of excess savings; in Germany, €190 billion; and in France, more than €100 billion. We believed when the world opened, people were going to start spending money, and consumer confidence would be strong, and that is exactly what has happened. When the economy opened after the Delta wave, we were trading 20 percent above 2019 levels for 10 weeks. This enormous savings has been a very powerful tailwind.
Trei Real Estate entered into this joint venture with Patron Capital Partners, and within this framework, Trei and Patron plan to invest €140 million in Polish retail parks. Can you imagine similar joint ventures with other partners?
Morshuis: Not for retail parks. We really found a great partner in Patron Capital Partners, and we have the possibility to expand the current programme if the market allows for more than €140 million in new investments and developments. We are expanding our development business in Poland in terms of rental apartments, and we do intend to do that with a partner because it allows us much more rapid expansion than if we would do that on our own. We might team up with partners on the German residential and development side in the future as well.
Keith, what were the decisive reasons for investing in Polish retail parks together with Trei?
Breslauer: We have been investing in Poland for 20 years. It is a very interesting market, which continues to evolve and grow. It is tricky, though, because there is a lot of land, and as these consumers evolve and grow, we have to figure out how to best target them and provide the necessary services they need. You need a very, very strong partner who is both local, in terms of the Polish market and the local city market, and global, in the sense of understanding the current methods and approaches to construction, to design, to tenanting. With Trei Real Estate, we found both.
Any final comments?
Breslauer: Poland is a really interesting place. It is growing dramatically, it has a massive undersupply of probably every sector, and Trei has capitalised on figuring out how to meet that demand by creating the supply and the opportunity. Why invest in Europe versus the United States? In many specific product classes, the amount of growth is exponential, and that is really powerful. For us, investing is about the specific opportunity set, and that is why we invest in Europe, and Poland, in particular.
Morshuis: We develop both in Poland, as well as in the United States, and we are achieving approximately the same returns, but, interestingly, the risk profile in Poland is significantly lower than in the United States for the simple reason that the country is growing so rapidly and still has some way to go before it catches up with western Europe.