How did your retail fund come about?
To begin with, it was a fund for qualified investors with a duration of four years. It functioned as a pilot project which we used to check all the internal procedures. By the end, when we confirmed we were ready, there was interest coming from our distributors and from the market. We finally decided in 2019 to establish a pure retail real estate fund for retail investors, but as a group, we’ve invested for decades into the asset class.
Is it for anyone or do you mainly just target your own customers?
It’s for everybody. People believe there’s long-term value in real estate, but for a lot of people it’s difficult to make such investments because flats cost millions of crowns. Whereas through this fund, you don’t need a huge amount of capital. You can invest just CZK 500 at a time.
It’s offered around the region?
The fund is managed by Generali Investment CEE but it’s currently offered only in the Czech Republic, via several distribution channels. This means especially by Generali Česká pojišťovna and our external distribution partner Moneta Money bank.
Did you decide to focus on residential and retail assets because they’re properties that retail clients have experience with?
We all live somewhere that we either own or rent and we go to shops every day. From a marketing viewpoint that makes our investments easier to explain, because we’re focused on basic needs. These assets are easier for our customers to understand compared with a huge office building where the price can be CZK 1 billion or more. Clients don’t understand how they work.
The assets you’re targeting are also easier to sell, if needed. Don’t you have to take that into account in order to be prepared for potential redemptions?
Liquidity is definitely very important. We’re talking about buildings worth CZK 100 million to CZK 200 million. That makes them more liquid. In the worst case you can even sell apartment buildings flat by flat.
You actually have a legal structure set up for that?
For some of them, yes, even though from an administration perspective it’s a worst-case scenario. Ultimately, it’s all about liquidity and about understanding. Because we’re talking about a retail fund.
You set up the fund in 2019, a year before the pandemic made remote work the new norm and retail parks took off in value. Is it fair to say you were fortunate with your choice of asset classes?
We were a bit lucky, but the investment strategy was settled before the pandemic. Our clients’ familiarity with the asset classes was one of the main reasons. But another was that other funds — our competitors — were focused on classic segments like office buildings, shopping malls, and so on. Residential is more demanding, with hundreds of tenants, all of them with different expectations, but our competitors weren’t focusing on it. We saw potential, partly because were thinking from a future perspective. Prices were already so high that we were thinking change would have to come, because it’s almost impossible for younger people to buy a flat. We expect the situation to become more like Western Europe where 50% of people live as tenants.
Your investors expect the fund to act as a hedge against inflation. How is rent indexation working for you?
Our fund is denominated in CZK, and Czech inflation it was 15.1% last year. But while there’s always an inflation clause in our lease contracts, a 15% rise, plus huge increases in energy prices could have meant the end for a lot of tenants. So, in most cases we held negotiations and reached a consensus on reducing the automatic indexation clause. But it was always compensated for with something else, like a longer lease period.
Your income is in CZK, so it’s the same for your loans?
Our fund has zero external leverage. We’re all-equity, which is good in today’s conditions. In the past we were growing relatively quickly (in terms of AUM), so we were careful about spending money. We were under pressure then because interest rates were close to zero. Now it’s the opposite because cash is generating 6.95%, meaning it’s even better than holding property. Not many properties are going to generate a 7% net return for you. For now, it will be challenging because we are a bit more conservative.
Do you expect to see increased levels of distress?
It’s very difficult to say. I believe it will be stable in the Czech Republic. Funds and other owners shouldn’t be under huge pressure to sell at any price because of liquidity issues. I don’t expect a huge amount of distress.
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