After writing up my yearly report last year, I realized my Cofinimmo investment isn’t moving as much as it did pre-corona. This made me wonder: are investments in office REITs (which Cofinimmo still is) in these remote working times still good? I looked into it and tried to figure it out.
Office space in crisis?
Now that the corona pandemic has turned endemic, numerous reports appear about the future of offices or lack thereof.
It has become clear that working from home is a viable solution for many enterprises. But, of course, this makes people leave major cities like Brussels or, in the case of the United States, states like California.
With less demand and a stable supply comes the apparent consequence of lowered rental prices on top of an increase in empty office space. Examples in Belgium are Proximus and Telenet, which are closing spaces. Another recent example is ING which has decided not to move into its new office space but rather sublet it.
The offices of the future? From home?
It’s clear things are moving in the office space. But it’s not all doom and gloom for the open room.
Locations to come together and meet will remain needed. As we move away from lockdowns, a distinct divide forms between those wishing to work 100% from home and those missing offices. Not everyone is willing to only work from home.
So it’s dangerous to make it seem like there is no future at all for offices. However, the future will be different.
Companies will most likely look for modern, ecological, and environmentally friendly offices geared towards part-time office work instead of part-time working from home.
Besides this, offices can implement different functionalities for the same space and more communal areas spread across other locations.
What will remain is the essence of the location. What will change related to this is how to reach said location. Optimal reachability will be necessary for offices of the future. Brussels should remain the default choice because of the many European instances in the capital. However, other companies might start to look elsewhere.
Finally, the cost will still play a critical determining factor in the final choice. Here, Brussel is a good option for many European companies due to its relatively low rental prices (compared to many other locations).
What are the consequences of this shift?
Putting all of the above together, what can we conclude?
- Many older buildings will lose appeal. These outdated spaces are not styled to shift towards more working from home and offices becoming, more than ever, meeting spaces. Owners of such buildings can either renovate them thoroughly or demolish them and rebuild them from scratch to put them back on the market “as new.” They can also give their buildings a new purpose.
This can be done in-house or bypassing the torch to a property developer. They can then do it at their own risk or wait until they have a buyer or have found one or more potential tenants. Developers can, by the way, adapt to the new office reality quite easily and quickly so that their activities and results do not fluctuate much.
Owners, in turn, will sell their old buildings. As a result, they will more often than not have to go below the purchase price and thus sell at a loss and enter a negative value in their books.
- The oversupply will pressure rental prices. However, this will also be the case for older office buildings in particular. This will be much less of a problem for top office buildings, where demand is sustained, especially as rents in Belgium are certainly not excessive.
Who will still want to invest in office spaces?
In addition to private individuals, who often see real estate as a stable investment, many professional parties are also keen on real estate.
For institutional investors, for instance, real estate is often a good diversification of their investment portfolio.
This includes insurers and, to a lesser extent, banks that have masses of premiums or assets from their policyholders/clients and are looking for a profitable investment without taking too much risk. Shares may be more profitable, but they are also riskier because of their volatile price movements, while bonds are virtually worthless in current times.
It isn’t easy to offer the insured an excellent return.
That is why these parties often include real estate in their portfolio. After all, such investments offer a golden mean between return and security. The parties are also constantly looking for opportunities to invest their ever-increasing flow of funds with due diligence. Of course, they do not all put their eggs in the same basket. New modern offices are therefore still in demand, even in these changing times.
How do Belgian REITs fit in this story?
On the Brussels stock exchange, there are 18 REITs. A couple of them invest in office spaces and thus feel the impact of the corona pandemic.
When we look at their details, the following REITs are mainly invested in offices:
- Intervest Offices & Warehouses
- Leaseinvest Real estate
- Befimmo (only one with 100% offices)
The first one I’ll cover is Cofinimmo. It’s immediately also the biggest REIT in Belgium with a portfolio of 4.9 billion and the oldest.
Initially, this REIT mainly focused on offices, but since the early 2000’s they grew into the biggest care properties owner in Europe. They have reached almost 60% in this sector. Once that threshold is reached, a lower dividend withholding tax (from 30% to 15%) is possible. this shift has is important as care property usually has a longer rental contract duration (on average 16 years).
The other 40% consists of pubs and restaurants under AB Inbev in both Belgium and the Netherlands. Next to that, they also took in insurance agencies in France, which they now rent out to the group MAAF.
The remaining offices of Cofinimmo are all located in Belgium. The 77 locations it has, have an occupation percentage of 92.8%. Their average rental period is five years. They are dividend 69% private and 31% public.
The move out of office space continues. In the past three years, they disinvested 553 million from offices and repurposed it into more high-profile business locations.
Cofinimmo is planning to go even further and will put its offices into a separate sub-enterprise.
This Belgian REIT is specialized in offices and, due to the pandemic, is available at a decent discount.
Whether this is warranted is unsure as most of their renters are governments/public sector (~60%) on prime locations. On top of that, their future projects are finding renters with ease.
The occupancy rate remains high at 95.2%, and the average rental period is 7.2 years.
Befinimmo is busy winding down sub-optimal locations, resulting in a temporary drop in rental income and dividend. They want to use the money for new investments in better-located projects.
There are 7 new investments ongoing. 3 are under development and are already 83% leased. 3 others are about to start and the final one will only start once they find an interested party.
Intervest Offices & Warehouses
Just like Cofinimmo, Intervest started its career as a canteen investment company (the old name for GVVs). In 2002 their adventure started towards logistic real estate, and at the end of 2011, they thought it was extensive enough to add ‘Warehouses’ to their name.
The main difference between the two is the logistics real estate, the quality of this real estate, and the associated occupancy rate. This is much lower, only 88%. What is also different is the location. It is not mainly Brussels, but rather Antwerp-Mechelen-Brussels with some offices in Leuven.
Finally, the average rental periods are also significantly lower at 2.9 years.
Leaseinvest Real Estate
Leasinvest Real Estate, a subsidiary of the holding company Ackermans & van Haaren, originally started out as an office investment fund, but later concentrated on retail parks and shopping centres, particularly in Austria and Luxembourg. Including a 10.5% interest in GVV Retail Estates, these now account for half of the portfolio.
The office portfolio (±535 million euro; 14 buildings of which 4 in renovation, extension or redevelopment) is spread over Belgium (Brussels +1 building in Mechelen and 1 in Antwerp) and the Grand Duchy of Luxembourg.
The occupancy rate of the offices is low (only 82.8% in Luxembourg, 91.5% in Belgium) and the average duration of the current leases until the next expiry date is only 3 years in Luxembourg and 4.9 years in Belgium.
In recent years, several obsolete and non-strategic office buildings have been sold and efforts made to make the office portfolio sustainable and to renew it.
Still, this cannot really be called top-notch and there is still a lot of work to be done. Furthermore, it remains to be seen whether tenants will be found for the new and renovated buildings and under what conditions.
Looking at the four mentioned REITs, the overall trend is clear. Offices still have a space in the real estate market but it won’t be the same as before the pandemic.
Two of the four REITs are even shifting their focus away from offices and towards care properties (Cofinimmo) en logistical real estate (Intervest Offices & Warehouses).
Of the four I’m only invested in Cofinimmo. Befimmo looks like a possible buy though with their main focus still being offices I’m hesitant, even with their excellent stats.