The big data and artificial intelligence building blocks
Maarten Ende, Head of Artificial Intelligence and Innovation at Catella Investment Management Benelux, said the size and uniformity of assets within the European residential investment universe made them ideal for the application of data sciences compared with other property sectors.
The new AI tools Catella is developing in conjunction with Maastricht University, the leading Dutch centre for research into this ‘deep tech’ sector, are already generating huge gains in productivity, a vital cost advantage in an investment world where sheer weight of capital is compressing yields and returns on capital to levels where it is increasingly difficult to achieve real returns and exposing the padded fee structures of private equity property investment managers who are not providing any added value, he said.
Investment analysis that used to take between half- a-day and two days per analyst can now be done in 20 minutes to two hours. So, a productivity gain of 50%, and at the extreme of two days, or 16 hours, a leap of 800%, which is “enormous,” Ende noted.
He said that the majority of return in residential real estate investment is generated during the acquisition process, which is far less automated, rather than in later asset management where standardised tools are more commonplace.
“Most investment managers work with excel sheets rather than software and this is quite inefficient and an organisational nightmare when you’re comparing acquisitions in different countries,” Ende said.
Catella is developing its own AI acquisition tool, which processes a wide range of public and private data and inputs to automatically produce very detailed local location analysis, that goes far deeper than the big city and regional that most managers use, he added.
The Covid-19 pandemic has proved to be a very different big tail-risk event for European real estate investment markets than the GFC. Xavier Jongen said the pandemic had accentuated Catella’s questioning of another fundamental ‘Bible’ of the investment industry, economics Nobel prize winner Harry Markowitz’s pioneering work on ‘Modern Portfolio Theory’ from the 1950s that led to the famous adage that “diversification is the only free lunch in finance” and which only went mainstream in the European real estate industry in the early 2000s.
He said an example of where the standard models of portfolio diversification have broken-down during the Covid-19 big tail risk event, is in the ‘hotels for students’ concept, of which Catella has a couple in its portfolio:
“What was the basic idea? Hey, if the students are not there it’s not a problem because the tourists are there. And if the tourists are not there, it’s not really a problem because we have a restaurant. And if the restaurant is not full it isn’t really a problem because there are also co-working spaces. So, we have a fantastic asset, right? It can’t be better. But then Covid happens and you see that you are hit at the same time all across the board. There are no tourists. There are no students. Nobody’s working in the office. Nobody’s eating in the restaurant. What you mixed up was that you didn’t really understand the concept of ‘causality,’ “Because the causality affected all the kinds of functionalities in your building at the same time,” Jongen said.
“You need to understand that your correlations are dynamic and can change dramatically.
This is a real issue for us, because we want to protect against those worst-case scenarios by calculating real option values and think about flaws in portfolios and quantify them, so they are resilient for these tail risks,” he added.
Global climate change’s Swan Lake: the battle of the black and green swans
In his book: ‘Green Swans: The Coming Boom in Regenerative Capitalism,’ John Elkington, described as the “Godfather of Sustainability,” says that if Nassim Taleb’s ‘Black Swans’ are problems that take us exponentially towards breakdown, then ‘Green Swans’ are ESG solutions that take us exponentially towards breakthrough, in a Global Climate Change twist to Tchaikovsky’s tale of the ballet of Swan Lake.
Elkington identifies the European Commission’s ‘Green Deal’ as a potential Green Swan. The EC’s plan is designed to attract at least €1.0 trillion worth of public and private investment over the next decade and to turn Europe into a climate neutral economy by 2050, which will require massive investment in clean energy technologies.
Catella’s ‘Green Cygnet,’ or baby swan, is the ‘Elithis Tower,’ the world’s first energy-positive residential building at scale, created by its partner French engineering design company Dijon- based Elithis, which produces more power than it consumes, at development costs comparable to non-positive buildings. The first in a planned €2.0 billion investment rollout of 100 Elithis towers was acquired in March in Saint-Etienne near Lyon in France, by the Catella European Residential Fund III (CER III). These projects will be delivered between 20-to-30 years ahead of the EU’s ambitious 2050 carbon-neutral timeline target for the built environment and already outperform Europe’s climate goals for cutting CO2 emissions.
Managing Director Catella Residential Investment Management
Head of AI/Innovation at Catella Investment Management Benelux
“The Elithis towers are the blueprint for the future of affordable and sustainable residential living in Europe and we are starting the roll-out of a planned 10-year investment programme, beginning in France and then moving into other major markets such as Germany, the Nether- lands and the UK. The revolutionary energy- positive design of the towers means tenants can potentially eradicate their annual energy bills, while investors don’t need to sacrifice returns for a sustainable and low-risk stable income product offered at an affordable rent. Everybody and the planet wins. ‘Future-proof’ is an over-used term in the real estate market, but the Elithis towers are genuinely exactly that and the Catella residential investment platform has the reach, and the resources from the capi- tal backing of our investors, to scale-up this technological breakthrough across Europe,” Xavier Jongen concluded.