Floris, Nick, Craig, thank you for taking the time to speak with me today.
Please can you explain a bit about Avignon’s investment strategies and why the company has chosen these particular themes.
Nick: We’ve looked at various sectors across the market, having previously been more sector agnostic. We wanted to create more direct focused investment strategies where we can hone in on our expertise and where we, as a team and a collective believe in the future of, but equally where we can create value and find the right opportunities.
We work closely with our clients to understand their requirements, return profile and this then gives us the basis for what we want to establish as our strategies.
We currently have three main strategies: Project Re-Work which is Value-Add Offices, Project Nest which incorporates areas of Commercial Living and Project Keys which is Value-Add Hotels.
Thanks Nick. You’ve mentioned Value-Add Offices. Hasn’t the office market dwindled in recent years due to most companies now offering Hybrid and remote working?
Nick: We’re still big believers in the office as a sector, but selectively at the right size and, crucially, in the right location. Whilst the debate around the role of the office continues, there are clear signs that the return to the workplace in the UK is still in motion. As such, there’s still evidently very strong demand from the occupational side for the West End in particular, and we believe that this is not going to go away.
As the macroeconomic circumstances stabilise, we see this as a good opportunity to source and underwrite deals at good value, where there are strong fundamentals in the underlying real estate and the underlying locations, but with substantial scope for growth from both a rental and capital perspective through high quality refurbishment, strong ESG initiatives through our brown-to-green capabilities, and proactive leasing and exit strategies.
Floris: In Netherlands, there is an under supply of office space in good locations and even despite the hybrid working trend we’ve seen over the past 3 years, more companies are now starting to demand the return to the office due to their own performance coming under threat. Therefore, we think the office market will bounce back and we are already seeing trading at either very low price levels or very high yields.
Thank you both. What is Project Nest?
Craig: In Germany, historically, the focus in the main markets was always retail, office and logistics. Residential was more of a traditional institutional investment, but through time, the office market has taken a dip and the trend we are seeing is to re-purpose office buildings into residential, commercial living and/or hotels
Our Project Nest strategy focusses on Value-Add opportunities, exploring PBSA and micro/co living refurbishment or repurpose. Our view is this sector fulfils the needs of the new generation, creating a long lasting asset class against the highest ESG standards. If we look at Micro-Living as an example, the demand for smaller, more affordable housing options is increasing in urban areas, where housing costs are often high. Micro-living can cater to this demand by providing compact, well-designed living spaces that are more affordable than larger apartments or houses. Micro-living units are generally more affordable than traditional apartments or houses. This affordability can attract a wide range of tenants, including students, young professionals, and singles looking for a budget-friendly housing option.
Nick: The PBSA market is experiencing a chronic undersupply, whilst the demand is growing as universities take on more students both domestically and from abroad; in the UK alone, StuRents expect the shortage of student beds to reach 450,000 beds by 2025. This has created a compelling supply/demand imbalance which is driving rents upwards.
Thanks, that sounds like a really interesting concept.
Avignon has a strong track record in investing in Hotels. Can you explain a bit about why you still see Hotels as a good sector to invest in?
Floris: Project Keys is our Hotel Strategy. Hotels are a counter-cyclical investment. When the economy is doing well, more people travel for business and leisure. If located in tourist destinations or high-traffic areas, hotels can benefit from the growth in the tourism and travel industry. As people continue to travel for business and leisure, there’s a consistent demand for accommodation.
Hotels can provide a consistent stream of income through room bookings, event hosting, and other services. If managed well and located in high-demand areas, hotels can generate regular cash flow, where success is often determined by a hotel’s ability to identify and capitalize on emerging trends and untapped markets. One such strategy that has gained significant attention in recent years is the pursuit of submarkets where there is more than 100 days of unconstrained demand. This approach has proven to be a game-changer for hoteliers looking to maximize their revenue and occupancy rates and is an area we focus on when looking at new opportunities.
Hotels thrive in locations with strong demand, such as Amsterdam and we are also seeing positive developments in The Hague and Rotterdam. As you’ve rightly pointed out, Avignon has a strong track record in Hotels, particularly in the Netherlands and with our ability to tap into off-market opportunities through our network this gives us a competitive edge.
The recovery since post pandemic has been interesting, particularly as some of our assets have had record months in room revenue, even since pre-Covid. The benefit of management agreements, involvement in the running of the hotel is driving the bottom line performance and consequently achieving superior returns.
How do you adapt to the market conditions and how does this set you apart you’re your competitors?
Craig: When sourcing deals, everything that comes on the open market, particularly in Germany, has always been through an advisor or agent and therefore have a slightly higher price expectation. We are therefore seeing slight disconnect with where the values are from the quoting prices, so as Floris has said, this is where our network sets us apart as we can source off-market opportunities at various stages of the investment process and have the ability to act on them quickly.
Nick: It comes back to the importance of sourcing the right deals and being as flexible as possible. Its about being creative but equally realistic in our underwrites to ensure that we are meeting those return hurdles without being too over enthusiastic and looking for those unique opportunities and having a different angle that others can’t see.
Craig: I also think it comes to investor confidence as well. Us and them believing enough in a deal to actually commit to it, and almost putting the economics to one side and instead look at the sentiment and the actual deal itself.
Previously Avignon has spoken about how it approaches ESG through value added focus. How important is ESG in Real Estate in today’s market.
Craig: ESG has lodged itself firmly in the acquisition, financing and the various processes we have.
Most crucial is in the Bank/Financing appraisal and their lending criteria of the actual project itself. If it doesn’t have the highest standard or close to the highest, standards then the Banks will simply say they’re not interested.
Nick: I think you’re seeing greater differences in assets trading which have the best ESG credentials compared to those which aren’t, and equally on the occupational side the rents achieved on the best assets can be 5-10% higher than those with which are still in the ground category in exactly the same location. It is becoming more and more important, particularly from the tenants perspective, to have well-being facilities on-site, as employers requirement to attract and retain the best talent is becoming even important which is why its important we can deliver this through our through our ESG programms.
The qualifications and credentials of a building are extremely important, as one of the primary things occupants want to know is whether this is a green building or is it close to being what you could term as being a green building and whether it conforms to their own corporate ESG policy.
According a recent Deloitte report, 80% of buildings in London are still not compliant with the MEES targets of buildings having a EPC B Rating by 2030. So there’s clearly an awful lot of work which has to be done before then.
We envisage there will be a substantial number of landlords who are unable to do the required refurbishment due to capital constraints, lack of ability or lack of knowledge and without some form of government intervention or some form of incentive for people to do it we could end up seeing a lot of buildings sat empty.
That is an interesting perspective and certainly one to keep an eye on.
Finally, what are your expectations for the upcoming Expo in Munich and Outlook for 2024.
Craig: Upbeat, constructive and progressive with a renewed hope about the forthcoming years, as long as we have realistic expectations about financing, construction costs and all the elements in our projects, we should see more activity in 2024.
Thank you for taking the time to speak with me today
If you would like to speak with a member of our Investment Team to delve deeper into our strategies or explore how we can enhance the growth of your portfolio, please get in touch with us via investment@avignoncapital.com