Stockholm (HedgeNordic) – With inflation on the rise, investors big and small should take notice and, more importantly, take action. Although no single investment strategy, or asset class is a panacea for inflation, real assets, including real estate, have historically performed well in a higher inflationary environment.
Some of the most attractive risk-reward opportunities in real estate involve transitional “manage-to-core” situations. These renovation or repositioning projects represent attractive value-creation opportunities with the possibility to minimize and control risk through own repositioning efforts. The caveat, however, is that the value-add strategy requires significant market expertise.
To launch a Nordic-focused real estate fund, Finnish asset manager Helsinki Capital Partners believes to have found this expertise in a real estate advisory firm Cobbleyard Real Estate. Cobbleyard’s founder Christoffer Sundberg was an early investor in HCP’s multi-strategy fund HCP Black and has been an HCP partner and board vice-chairman since 2020. His team now joined forces with Tommi Kemppainen’s team to launch HCP Bricks – a Finnish open-ended alternative investment fund that will focus on real estate opportunities in the largest cities in Finland and in Stockholm.
“After several years of co-investing in HCP Black and years of knowing each other, Tommi and I decided to join our forces to launch HCP Bricks.”
“After several years of co-investing in HCP Black and years of knowing each other, Tommi and I decided to join our forces to launch HCP Bricks,” says Sundberg about the HCP-Cobbleyard collaboration. “We are combining my team’s experience in direct real estate investing and management with the HCP team’s background and skillset in investing and fund management under the same umbrella,” he continues. “There is a good match between HCP’s top-down analysis skills and our hands-on entrepreneurial approach to real estate investing.”
HCP Bricks will be managed by a team of three including Mattias Lindfors, Timo Vertala and Christoffer Sundberg, all with specific areas of expertise and geographical area focus.
“One of our main objectives is to be able to bring the institutional-grade commercial property asset class to smaller investors such as tier-2 institutional investors, family offices and high-net-worth individuals,” explains Sundberg. Commercial real estate is an inaccessible asset class for many of these investors due to an array of factors, including high investment volumes and the skillset required to manage these properties. “The other main objective is to create value through the repositioning of rundown real estate by smart real estate management not only by improving the ESG impact of a property but also the commercial characteristics and risk profile,” Sundberg continues.
“One of our main objectives is to be able to bring the institutional-grade commercial property asset class to smaller investors such as tier-2 institutional investors, family offices and high-net-worth individuals.”
“Investment volumes in this asset class are high for many institutional investors, with single investments starting from €5 million upwards and the sky is the limit from there,” says Mattias Lindfors. “But the skillset one needs to manage the properties in this asset class is different from what one needs to manage properties in the residential market, for instance,” he continues. “There is also a different network that is needed to source investments.” The HCP Bricks fund born out of the HCP-Cobbleyard partnership can meet investors’ desire and need for commercial real estate.
Flexible and Evergreen
Due to its Finnish AIF structure, HCP Bricks has a very flexible investment mandate that enables to fund to invest in a wide range of properties to capture the opportunities with the highest value-creation potential as well as stable long term cash flow. “There is a fairly wide range of properties that we can invest in. We are not specifically targeting one property type such as offices, hotels, or shopping centers,” Lindfors points out.
“With the world constantly changing and evolving, the ability to be tactical between the different property types is very important in our goal to structure an evergreen fund,” emphasizes the fund manager. Following a specific niche or a specific strategy in a constantly-evolving market environment can put one on the back foot, according to Lindfors. “We want to be able to follow the trends, target the right sectors and get the timing right, and we want to be ahead of the curve to generate attractive returns.”
“With the world constantly changing and evolving, the ability to be tactical between the different property types is very important in our goal to structure an evergreen fund.”
The flexibility inherent in the AIF structure also enables HCP Bricks to apply conviction when choosing the location of properties. “The location is crucial in commercial real estate investing,” says Lindfors. “Our mandate allows us to be brave and apply our unconventional vision by investing in areas that may not be very sought after today but perhaps very attractive tomorrow and the years ahead,” he elaborates. Location risk can represent a lucrative source of attractive returns for HCP Bricks. “Our culture to foster a strong vision and apply strong conviction can enable us to deliver on our ambition.”
Targeting “firepower” of €100 million for the upcoming launch, HCP Bricks seeks to build a portfolio containing a minimum of five assets. The team running HCP Bricks will strive to maintain a portfolio of five to ten different commercial real estate properties. “Diversification is important, but we will not be over diversified,” says Lindfors. “When funding grows, there might be more properties in the portfolio. But we will more likely look into investing in bigger assets and into investing in larger markets with higher investment volumes such as Stockholm,” he explains.
The Core: In-House Efforts
Transitional “value-add” situations in commercial real estate can represent value-rich, attractive risk-reward opportunities for investors. Significant market expertise and experience are required to unlock value in such situations. The already complex – and increasingly complex – marketplace for commercial real estate is pressuring managers to rely on outsourcing to third parties to improve efficiencies, reduce costs and access specialized competence. However, Cobbleyard Real Estate’s founder, Christoffer Sundberg, opposes the idea of outsourcing management and value-add functions to only focus on property selection.
“Many managers only perform the investment function and outsource big parts of the real estate management to third parties,” says Sundberg. “We think this is fully wrong, especially when we want to improve or reposition the real estate,” he emphasizes. “Many talk about their active management strategy, but still outsource many different managerial operations. If you outsource some of these functions, real estate management is not the core of your business,” considers Sundberg. “Keeping in mind that the tenants’ main point of contact usually is the technical manager, not the investment manager, you need to own your customers, not outsource those to third party.”
“When outsourcing operations, the quality is not there and the speed is not there. With us doing most in-house, our quality will be very high and we will do our operations quicker.”
“When outsourcing operations, the quality is not there and the speed is not there,” argues Sundberg. “With us doing most in-house, our quality will be very high and we will do our operations quicker,” he adds. “Because we are in the business of repositioning and renovating commercial real estate properties, timing and speed are very important because we are measured in terms of internal rates of return.”
“Since creating value is our core business, we want to produce all important managerial operations in-house because this allows us to manage the real estate more efficiently.”
“Since creating value is our core business, we want to produce all important managerial operations in-house because this allows us to manage the real estate more efficiently,” argues Sundberg. Drawing from the expertise and experience of the Cobbleyard Real Estate team consisting of engineers, project managers, commercial managers, among others, HCP Bricks has a platform that can unlock value in value-rich opportunities. Value-rich opportunities such as Cobbleyard’s 2016 acquisition of historically significant building called Leipätehdas in Sörnäinen, a former industry area east of Helsinki city center. Although the area was known for run down properties with low rent levels and unattractive on the investment market, the Cobbleyard team was convinced that Sörnäinen was about to see greater appreciation from investors in the near future.
“The property was badly managed and at the time of purchase had some 10% vacancy and short leases,” recalls Sundberg. “During the holding period of five years, we managed to extend one-fourth of the total leases (3,500 sqm) from an average of five years to an average of ten years and managed to vacate three-fifths of the property (8,500 sqm) only to lease out to new tenants securing some 23 per square meter instead of 15,” he continues. Cobbleyard managed to give back over six times the investor capital.
With inflation on everyone’s mind, commercial real estate can serve as an inflation hedge for investor portfolios. “Commercial real estate is an excellent hedge because we see that it is not only material construction prices that are becoming more expensive, but also wages for project managers and construction workers due to a shortage of workers,” says fund manager Timo Vertala. Projects involving refurbishing and repositioning can add an additional layer of hedging for inflation-wary investors. “With leases in the Nordics linked to inflation, especially in Finland where leases are inflation-linked upwards only, commercial real estate offers very good protection against inflation.”