a.s.r. real estate

ASR DCRF enhances direct returns through individual unit sales

Over the last three years, the Dutch residential sector experienced rapid increase in value after a long period of stagnation. Even though capital growth over 2015-2017 is still lower than the historically high performing years between 1998 and 2002, Dutch residential funds, such as the ASR Dutch Core Residential Fund (ASR DCRF) experience diminishing direct returns due to yield compression.

ASR DCRF’s portfolio has been built up carefully over the 200 year history of a.s.r. real estate, with a strong mix of newly developed assets and a large pipeline of c. € 258 million, as well as historically well located assets, which have been in ownership for more than 50 years.

Over this period the fund has developed and deployed an active asset management strategy, focused on an individual asset approach. Integral to this approach is a yearly hold/sell analysis, through which the strategy for every asset is (re)determined, based on asset and location characteristics and its return perspective. This allows for optimization of the income return, through different economic cycles, one of the main objectives of the fund.

This tailored asset management strategy fits ASR DCRF’s portfolio, as assets which have been in ownership for a longer period of time have accumulated value in various ways. For example, many well located and attractive assets in established suburbs or city centers, which would be very challenging to purchase in current market conditions, have been renovated (asset enhancement) towards sustainable, modern dwellings such as the Couwenhoven property in Zeist.

Renovating well located assets in a sustainable manner improves returns and enhances CSR performance, while selling assets contribute to the continuous rejuvenation of the portfolio, which also happens by acquiring new assets. ASR DCRF sells assets, depending on their characteristics and return perspective, either through portfolio sales, in which assets are sold separately or in a “basket”, or through individual unit sales, in which individual residential units are sold to owner occupiers.

Assets can have a different return perspective when sold as individual units, as some assets have accumulated substantial reversionary potential (the spread between vacant possession value of a dwelling and its fair value) as cities and neighborhoods have developed. This is illustrated by the reversionary potential of 20% (as at 31 December 2017), above current fair value, for the part of ASR DCRF’s portfolio which has been earmarked for individual unit sales.

Individual unit sales are a crucial part of ASR DCRF’s strategy towards maximizing net result. Sales results (sales proceeds above fair value) are distributed as direct returns, which supplements the fund’s direct return steadily, through different market scenarios. This is exemplified in both 2016 and 2017 when individual units were sold for an average of respectively 34% and 33%. In both years sales results were higher than the appraised reversionary potential of 16% in 2016 and 20% in 2017.

Compressed direct returns are expected to last as long as demand for high quality residential assets in attractive cities from tenants, investors and the owner occupier market remains high. The same market forces are expected to continue to drive up results on individual unit sales.

The unique nature of ASR DCRF’s portfolio with its accumulated historical value will therefore continue to add significant value through individual unit sales. In its Three Year Business Plan 2018-2020 ASR DCRF has earmarked 17% of its portfolio for individual unit sales, which is expected to enhance its direct return by 0.5% annually. As the fund grows through new acquisitions, existing assets will continue to be added to the individual unit sales program. This will provide investors with higher direct returns, compared to residential core funds without individual unit sales programs, during varying market conditions such as the expected low yield environment of the coming years.

For more information on the ASR Dutch Core Residential Fund and its (individual unit sales) strategy, please contact Olle Overbosch.

Olle Overbosch
Associate Fund Management
ASR Dutch Core Residential Fund
M: +31 (0)6 30 50 68 41
E: olle.overbosch@asr.nl