Agefi Luxembourg (03.2022) - At a time when financial markets are seeing highly volatile securities prices and the prospect of higher inflation in the short and medium term, alternative investments in private markets, and particularly in government real estate, make a lot of sense.
This asset class has a number of advantages for institutional investors looking for a long-term home for their money that combines excellent visibility and competitive yields.
If visibility is a crucial criterion when selecting an investment, government real estate has attractive features for investors who are also looking for diversification, security and yield. Properties rented by governments represent an asset class that is too often overlooked by institutional investors, and one that offers several advantages: tenants are sovereign entities with good credit quality, fixed lease terms are longer than with corporate tenants (over 15 years on average), and yields are attractive compared with standard commercial real estate. For investors wanting to diversify their real-estate holdings while investing in assets with little cyclical exposure, government real estate is a particularly good place to look.
The market remains relatively fragmented at European level, in terms of both users – each country has its own state property agency – and investors, because currently there is no pan-European strategy focusing solely on this asset class. This is why government real estate presents attractive opportunities for those that have the means and the access. It is also possible to increase diversification and stability by focusing on countries whose credit ratings are high – like France and Belgium (AA), and Germany, Luxembourg and the Netherlands (AAA) – and unlikely to change significantly in the medium term. In addition, governments need to reduce public debt levels after the spectacular jump in debt/GDP ratios in 2020, and this should prompt them to speed up disposals of real-estate assets in the next few years, providing new investment opportunities.
Higher probability of lease renewals
Not only do inflation-linked rents secure investors’ future incomes against overall inflation, but also, and most importantly, government real estate offers stability because of the very nature of the tenants. Commercial tenants can sometimes restructure and relocate, whereas these risks are less pronounced with public-sector tenants. Although governments are seeking to optimise their expenditure in response to rising land prices and construction costs, public-sector entities are less likely to relocate because of specific building requirements, approval processes that take longer than in the private sector, and constraints relating to site security. This means that the average government lease is more likely to be renewed than a traditional commercial lease. Similarly, an increasing number of private-sector companies are permanently adopting remote working, and so are planning to reduce the amount of floorspace allocated to each staff member. This is less likely to be an issue with government employers, which are subject to constraints that sometimes make it harder for their employees to work remotely.
Government real estate remains a highly specific, niche asset class, but one that deserves to be more accessible to investors and is undeniably attractive against the current backdrop of rising market volatility and uncertainty.
