Jessica Hardman, head of European real estate portfolio management and UK real estate group at DWS, speaks to Montfort Real Estate’s Andrew Teacher about the asset manager’s confidence in UK living sectors as an investment class, reflects on lessons from the Great Financial Crisis, and adds nuance to the refurb versus rebuild debate.
As head of European real estate portfolio management and UK real estate group at DWS – a large global asset manager with €821 billion AUM (as of 31 December 2022) – Jessica Hardman has been responsible for some £8 billion of transactions across a variety of asset classes.
UK residential property, however, continues to offer a compelling investment case.
“We like residential strategies,” Hardman says directly. “Student, senior, co-living – these are sectors we think have already received valuation decline sufficient enough that we think there are opportunities out there that are appropriately priced for the risk. Money is likely to return the soonest and by the biggest amount.
“Residential adds reoccurring income, outweighed demand versus supply, and an ability to access a different type of operational net income – thousands of tenants compared to three or four in an office block, for example.”
DWS, which completed a partial IPO from Deutsche Bank in 2018, contains a wealth of expertise relating to residential property investing that Hardman drew from earlier in her career.
“Germany is the most mature, institutionalised residential market,” she explains. “About a decade ago we were starting to look deeply into resi when resi wasn’t even heard of as an investment class elsewhere in Europe.”
It was at that point that markets were making a recovery from the Great Financial Crisis of 2008.
“We started to buy around 2011 and we continued wholeheartedly until around 2013,” Hardman explains. “I don’t think we quite got the bottom of the market but we invested through the curve.”
Nevertheless, the smaller fund inflows following 2008 required many asset managers widen their investor base, and looking east was a natural option.
“A lot of Asian investors hadn’t invested outside their home country,” Hardman recalls. “It was really new ground for them. But they’ve built teams, they like real estate and it’s good for their portfolio.”
With regards to the current period of turbulence, Hardman warns against trying to time the market.
“You’ve got to be careful with trying to spot the bottom of the price market,” she says. “In real estate it’s almost impossible because we don’t do day trading. Deals take 3-4 months at best, and therefore things will change during the due diligence period.”
Still, there are significant advantages in Hardman’s eyes to strategies that seek to refurbish less valuable assets, and this is particularly true of offices, which are the target of increasingly stringent environmental regulations on energy performance.
“With offices we have a huge supply,” she observes. “But many are not reaching the standards we hope for and not answering the net zero pathway that a lot of us have signed up to deliver.
“If you just hold out for the shiny new building then you’ve shrunk your investable universe to something so tiny you might do one investment a year across Europe.”
Nevertheless, Hardman argues that refurbishment isn’t always the right answer. “The whole point about refurbishing buildings is to stave off obsolescence risk,” she says. “Some buildings might not offer great floor to ceiling heights, fenestration, or room for bike racks and showers to support green transport. Those might not be the buildings we want to take forward into the future.”
But to execute an ESG-compliant investing strategy, measurement is key. “Regulators, investors and ourselves have said that if we want to achieve certain KPIs with ESG, we’ve got to be able to measure them,” Hardman insists.
Ultimately, she remains upbeat about the potential for ESG investing to drive sustainable outcomes: “Where I am very optimistic is that there is a big drive in Europe on the importance of ESG KPIs. Measuring them, and investing in people and technology to manage that, and ultimately learn from it.
“In Europe in particular we’re striving ahead and setting an example globally for what this should look like.”