Avignon Capital’s view on property developments

Doug Burton-Cantley, director of Asset Management at Avignon Capital, recently caught up with InvestmentEurope to give an oversight of how the property asset class has been performing in the wake of the Brexit.

A number of UK open ended property funds fell into a trap of offering liquid access to an illiquid asset class, and were caught out by the market reaction in the wake of the UK referendum on leaving the EU. What is your view on the suitability of commercial property as an asset class for professional investors versus retail investors?

I think commercial property is an important asset class that offers a balanced mix of capital growth and income that has a place in many investment portfolios, professional or private. However, whilst many private investors can see the benefits and balance that property offers as an asset class, they may not fully understand the risks and illiquid nature of investing in commercial property retail funds. The suitability I think is therefore dictated by the sophistication of the private investor and it is not for all.

Does commercial property in the UK offer good returns over the near to medium term?

Yes, I think there are still opportunities out there but certain sectors are looking expensive now and we are yet to really understand the impact of Brexit. However, buying good quality stock at the right levels with a smart strategy I think is always going to work over the medium to long term but it is certainly getting harder to find those opportunities.

How would a UK recession affect the values of your UK holdings?

A UK recession would no doubt have a negative impact on our UK holdings just as it would to others – we all know too well what happened last time. However, I think the impact on our holdings would be dampened to a degree due to the fact we have built a portfolio with a strategic focus on high-quality real estate; we don’t chase yields, and we’re not defined by income. We buy at sensible prices in growth markets with modest gearing and always have an eye on protecting our downside risk and not just focussed on the upside.

Where across Continental Europe do you see most opportunity in commercial property?

We continue to be most active in Berlin, and we see a lot of opportunity there, having transacted on around €100m there over the past 18 months. Berlin offers strong returns in the long-term, and we see it as massively undervalued compared to other core European cities. Moreover, we like the fundamentals and what we see on a capital value and rental basis. Berlin is a great place for tourists, and a great place for innovative and progressive industry.

Outside of Berlin, we are also currently in Copenhagen and Barcelona where we got in quite early. We also have started to look slightly further afield, in places such as Lisbon and Budapest.

Are the sorts of properties you invest in getting a boost from ECB quantitative easing policies?

I think that most properties are, to be honest. It’s making debt cheaper and bringing yields in, and is certainly helping in terms of values and the availability of debt on assets.

However, we don’t typically invest in institutional properties; for example, one of our key projects is the Berliner Union Film site, which is centred around a very different industry. As a result, our correlation to economic policy may not be as strong as others.

What makes you decide to sell a property?

We will sell when we’ve maximised value and there’s opportunity to recycle capital, allowing us to do it all again really. Firstly, if we feel that we’ve extracted all the value that we can and we don’t really see much more scope to deliver return, then that’s one reason. At the same time, it’s about recycling capital and what we can replace it with. We always go in with a plan, over a defined period of time, which is usually between five and ten years. For certain clients and investors, however, we are buying properties to be held on a generational basis, sometimes with a view that we’ll never sell it, unless their circumstances change.

Looking ahead, do you feel there is enough new commercial property coming on stream to serve the market, or are values set to be affected by imbalances in supply and demand over, say, the next three years?

Things held back a bit pre-Brexit, and the expectation was that there would be a flood of new stock coming to the market post-Brexit and we were going to see massive transaction volumes in Q3 and Q4. However, with the outcome of the referendum coming as somewhat of a surprise to many this hasn’t happened in the way many expected and the flow of stock coming to the market is certainly subdued as those who don’t need to sell look to be waiting until the dust has settled some more. However, I think the subdued levels of supply have been matched by a temporary fall in demand as many investors are taking the same stance so it hasn’t really created much of an imbalance. I think in the immediate aftermath of Brexit, it was certainly a buyers’ market and some deals were completed below sellers’ expectations but I think this window has closed now and a degree of stability has come back. We’ll know more once transactional data for this quarter has been published but I would expect a slight fall in values but nothing major.

I think there is still a great level of uncertainty but people are coming to terms with Brexit and confidence is coming back but I think it will take some time to really understand the impact on what the future holds.

In many ways, the current market has benefited Avignon Capital, as we are much more dynamic and agile in terms of how we go about our business compared to many others. We don’t have strict mandates that would prevent us from doing things so it has very much been business as usual and we have been hugely acquisitive both in the run up to the referendum and after. Another positive aspect for us regarding the UK market is that 90% of our investor base is overseas, and their funds are held in dollars and euros. So, at the moment, they are looking at the UK market as a prime buying opportunity, with the devaluation of the pound being seen as a positive rather than a negative.

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