Resilience, Leadership and Future-Proofing Real Assets: Catella – Xavier Jongen

Welcome to the third instalment of our Real Estate Private Equity interview series. Amanda Floyd from Beaumont Bailey’s Investment practice speaks to leaders from across the private equity space to learn more about the importance of personal and business resilience in the face of tumultuous and unpredictable market conditions.

Throughout 2023 it has been a turbulent time for real assets investors. Overall, there has been a slowing rate of deal activity over the first 6 months of 2023 mainly because of rising inflation and interest rates affecting the sector. The uncertain future of the market has led to increased competition among managers for fundraising and ESG credentials have become a major factor of investing across multiple asset classes.

Despite the well-reported challenges, we are expecting activity to pick up towards the end of the year and into early 2024. We are conducting these interviews in order to share insights from leaders who have navigated challenging cycles in the past, from which they have gained experience and resilience. As one of our leaders eloquently summarised: “you don’t want to sit on the side-lines and miss that opportunity to invest at or around the bottom, you need to have the bravery to invest.”

About Xavier:

Xavier Jongen is the Managing Director Residential Investment Management at Catella, overseeing the 7 billon EUR third party residential investment portfolio across Europe. Xavier graduated at Sciences-Po Paris, the College of Europe (with honours) and Harvard Business School GMP. Xavier started in housing markets when liberalising former socialist housing markets in CEE and Russia after the fall of the Berlin wall. He later set up the first pan-European residential investment fund in 2007 and is a strong proponent of anti-fragility and dual materiality in investment strategies (where financial and ESG returns are in balance).

How do you build resilience into your business culture and operations?

At Catella, we’ve made a point to think about resilience and how we can include this in our investment strategy. When we analyse residential markets and real estate in general, these markets do relatively well compared to other investment options. Despite this, residential investments can drop on average 33.5% in value over a 6-year time frame when those tipping points start to shift, so it can be a long and sometimes painful process. It’s important to think about how you can protect your investments and whether there is something more you can do beyond a diversification strategy. An important concept that we’ve adopted was first coined by Nassim Nicholas Taleb, anti-fragility thinking, the idea that something can withstand a shock and sometimes improves because of it. We’re able to translate and include this into our investment strategies.

Climate change and energy dependency are our defining topics. In many cases, assets are not properly valuated because they don’t include decarbonisation costs, so the pricing system doesn’t work well. This introduces another set of risks to manage and the fundamental question of what the actual value of a building is or should be. However, if you have an early pattern recognition of how these things are evolving, then you can make better investment decisions.

How do you build resilience into your team?

We have a variety of senior staff across our business as well as some junior staff who haven’t yet experienced a period of downturn. Looking at the senior management, it’s important for them to remain fact based and always challenge the decisions we make and why we are making them. With this, it’s also important to have a trustful relationship amongst the team and know that being challenged isn’t personal, it’s to ultimately work together to achieve the best outcome, based on the facts presented to us. With the younger individuals on our team, communication and transparency is key. We’ve found that using anecdotal stories are well received amongst our younger team members and it gives them insight into learnings from previous experience. Even if our key staff has been with us since 2007, we know we can do much better in terms of HR management. It is not easy.

Do you see any similarities between the global financial crisis and what we’ve been through in the last 12-18 months?

On the contrary I think it’s very different. The global financial crisis brought us to a period of quantitative easing and interest rates going down and that was prolonged and created some kind of paper value versus an intrinsic value. Whereas now, you see that inflation is coming up, probably because of that as an undercurrent. I also think we’re experiencing a new kind of crisis, where political and climate instability are prominent, which add new complexity to decision-making.

Where do you think the opportunities lie in the next 6-12 months?

One of the things we want to continue developing is energy positive assets. We recently partnered with a French residential developer called Elithis that builds energy positive residential towers at a standard cost price, where the energy produced by the building outweighs the energy the building and its tenants consume. Additionally, the power generated by the buildings removes the requirement to pay energy bills due to the energy self-sufficiency for about 6 out of 10 tenants. Organisations and projects such as these are tackling both the climate issue and the issue of affordability, and it is investments such as these that we want to focus on moving forwards.

If you would like to discuss any of the topics raised in this piece or if you need support with your leadership resourcing strategy, please get in touch with Amanda Floyd on amanda.floyd@beaumontbailey.com.