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Insight | 3 minute read
In January, Pertti Vanhanen joined Cromwell as Managing Director, Europe. As a member of the Group Leadership Team, he is responsible for Cromwell’s European platform, which manages €3 billion of real estate, encompassing more than 150 assets and 2,250 tenants. The platform comprises over 210 people in 11 different countries.
A Finnish native, Pertti is based in London and has more than 30 years’ real estate experience, having held senior roles at a number of leading European management organisations throughout his career, most recently as Global Co-head of Real Estate at Aberdeen Standard Investments.
In this ‘In conversation’, we ask Pertti about his first impressions of Cromwell, the challenges of working remotely, ESG investing and his views on emerging opportunities in real estate markets.
Real estate is obviously a big industry and while Cromwell is well known in Australia, it doesn’t quite have the same level of brand awareness in Europe. I made a few calls and talked to some of my contacts to check out the company, its people and reputation.
The feedback was universally good and also consistent. Good people, good company and, in Europe, a quality asset management platform historically focused on servicing private equity funds.
I then went and met the people and, I have to say you get an immediate understanding of the culture and, as we talked further, a view of the opportunity ahead. That’s when I started to get excited. After working in a large organisation like Aberdeen, I was looking to use my experience, skills, contacts and product knowledge to help make a company like Cromwell grow. I think it is a good match.
I am very impressed with the people. There are a lot of quality people in the business, as good as any other company out there. I have also been positively surprised with the systems and technology infrastructure.
Cromwell has the footprint and investment and financial capabilities of a much larger firm, particularly in terms of investor and fund reporting, for example, but the nimbleness of a small company when it comes to decision making. The investment management process is as good as anywhere I have seen in my time in the industry. Naturally, however, we need to make sure we continuously improve all parts of the business.
I also didn’t quite realise how deeply sustainability is ingrained in the DNA of the business. Cromwell issued its first Sustainability Report 12 years ago, years before most of its peers. Environment, Social and Governance (ESG) considerations are important for a lot of investors and it’s great to be part of a company that has embraced it so wholeheartedly.
Cromwell has also been adding value through proactive asset management, repositioning and development strategies for a long time. Larger firms often tend to focus more on core assets and being able to add value to our investors in this way is a huge plus. The recent appointment of a Head of Development is a great step forward in increasing our capacity and capability in this area.
If anything, I would say Cromwell needs to be more visible and make institutional investors aware of our capabilities. We have great people, a good track record, an advanced platform and broad capability. We can do so much more so let’s get out there, talk to our investors and capital partners and work out what we can do for them.
Technology has been a great enabler and it’s a testament to Cromwell’s platform and infrastructure that everyone is still operating smoothly after nearly a year working remotely.
Generally, it is challenging to keep people focused, motivated and engaged in an environment where they may have to worry about friends, family and loved ones, especially if elderly. Safety always comes first of course, but I think there has been a cost in terms of human interaction and mental health.
Real estate is a people business. People build the culture of a business, make the investment and operational decisions, innovate and create ideas on how to grow a business and you need to meet and understand the people in it. You can’t understand the nuances of personal interaction on a screen. Meeting people face-to-face and understanding how they interact and react makes a huge difference.
We have 17 offices throughout Europe and not being able to physically visit all of them is difficult. I am very much waiting for restrictions to be lifted so I can meet the team and investors in person!
I believe people are social creatures. They are missing talking to colleagues, sharing ideas, meeting clients, business partners and friends and going to the pub after work. Offices will not go away, but their look and feel will be different in the future. The transformation is being driven by four key trends: flexibility, technology, sustainability and wellbeing. People may go into them less often, perhaps three or four days a week, but that optimal balance is yet to be worked out and will differ depending on the type of business. They may then work from home or there may be more ‘local’ working, particularly in larger gateway cities.
After the Spanish flu in 1918-19, people fled cities but within a couple of years they were booming again. Cities will bounce back, supported by years of government and private investment in their make-up from hospitals to schools, roads and railways and offices will be a part of that. But, there will be a ‘survival of the fittest’ process. I think we will see fringe stock convert into other uses perhaps for residential or student accommodation.
Whilst the office sector was already evolving to meet a raft of changing cultural, demographic and business demands, COVID-19 has only acted as a catalyst to the changes. An increase in flexible working in particular, will impact how and when employees use the office and force many businesses to reconsider the composition, distribution and specifications of their real estate and office working requirements. The biggest change I think will be to building systems and fitouts. More sophisticated heating, ventilation and air conditioning (HVAC) systems, zero touchpoint entry, more spacious socially distanced fitouts, and even more of a focus on wellbeing and amenities.
There are always investment opportunities, sometimes you just need to dig a little deeper!
Logistics, driven by the growth of e-commerce, obviously continues to be popular and, as mentioned, I think offices - good quality offices in well-connected locations - with long leases will always be in demand.
Even retail, which has been the most maligned sector recently has provided opportunities. Essentials and grocery-dominated assets have traded strongly throughout. Even in a lockdown people have to buy food and these assets provide good security of income.
I think it also depends on the fundamentals in a particular country. The UK probably had too much retail before COVID-19 and has been hit hard, but that’s not necessarily the case for other countries. Poland, for example, doesn’t have ‘high street’ retail like the UK, and in the Nordics, where we have extreme cold weather in winter, people want to go to shopping centres to spend a day being entertained and enjoying the services. Fundamentals matter and retail square metres per capita is always a good way to analyse markets.
There are a number of other sectors experiencing different demand drivers that are interesting. The exponential growth of data is only going to continue and that means data centres will remain in demand. Build-to-rent, PRS and the ‘living’ sector in general - student accommodation and retirement living - are also attracting the interest of institutional capital.
Ultimately, however, it depends on what each investor wants and where they are comfortable on the risk spectrum. The key is to understand who is looking for what and to match our capabilities to their needs.
I think ESG will play a much bigger role in the future. Investors really take governance (G) as a given. To be in the business, you must manage your company and investments appropriately and according to the highest standards.
Investment itself is becoming more focused on the environmental (E) and social (S) factors. Before we deploy capital, are we doing appropriate due diligence? Other questions can include whether or not there is asbestos in the building? Polluted soil? Cladding problems? Out-of-date building systems? The list is long, but it’s all about understanding risk and making sure you have priced it appropriately.
Once you have acquired the asset, we then need to proactively identify potential environmental and social improvements. For example, can we put solar panels on the roof? Reduce water consumption? Reduce heating costs? Buy green energy? What about the building materials themselves? Are they recyclable? There are lots of different ways of improving the ‘E’.
And then there is the ‘S’, which often gets overlooked, but the impact a new development can have on the local area, community, jobs, suppliers, infrastructure and quality of life can be sizeable. That’s why we need end-of-trip facilities that considers bike storage and showers. We can also look to collaborate with the community and neighbours on social events.
Ultimately, it still depends on the investor and where they are on their own journey. Different countries have different standards. Dutch pension funds, for example, are very advanced and for them ‘it’s all about impact investing’, while some new sovereign wealth funds are only just beginning to build their ESG strategy and teams. What is common though, is the role ESG has in all future investment decisions.
It’s hard to predict the long-term impacts of change and how it will affect the industry or your company. I think it is imperative to have an inquisitive culture, be open to change, be nimble and flexible and to adapt to what’s happening in the environment around you.
There are a number of things you can do to facilitate this. Attract good people, have a good learning culture and diversity are all important. A diversified employee base brings multiple decision-making approaches to problems and that’s becoming ever more required given the complexities we face.
That said, I don’t think the key principles of real estate investing will change. Investors will invest together with people and organisations they trust, who can find good opportunities, be an active manager and deliver solid performance and good client service.
It’s encapsulated in our purpose, which is that ‘we exist to look after people’. We have good quality people who are totally focused on our investors. We are nimble, quick, with the capabilities of a much bigger firm and can deliver on the deals that others may not.