Stockholm (HedgeNordic) – Over more than a decade, real estate investments have transitioned from simply an “alternative” asset class to a material recipient of total allocations. Core real estate assets – that is, safer higher-quality, long-lease assets – are considered the safest and closest investment alternative to bonds in terms of risk and potential returns, and can build the foundation of an institutional investor’s real estate portfolio.

This quality is generally priced in core real estate assets, which can mean expensive valuations and lower returns than other options. But that is no reason to avoid the “core” segment of the real estate market altogether. Transitional “manage-to-core” situations that can turn undervalued rough diamonds into core real estate represent some of the most attractive risk-reward opportunities in real estate. The caveat, however, is that this type of value-add strategy requires significant market expertise.

“There is a good match between HCP’s top-down analysis skills and our hands-on entrepreneurial approach to real estate investing.”

To launch a fund that employs a “manage-to-core” real estate strategy, 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 and 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.

“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,” says Sundberg about the HCP-Cobbleyard collaboration. “There is a good match between HCP’s top-down analysis skills and our hands-on entrepreneurial approach to real estate investing.”

The Objectives

The HCP Bricks fund born out of the HCP-Cobbleyard partnership is designed to meet investors’ desire and need for commercial real estate. “With HCP Bricks, we want 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, who manages HCP Bricks alongside Mattias Lindfors and Timo Vertala. “Our objective is to offer a vehicle that can suit anyone looking to add an alternative investment to their portfolio, an investment that is not fluctuating as much as traditional asset classes and that can provide stable income and stable value both in the short and long run,” adds Lindfors.

“With HCP Bricks, we want to bring the institutional-grade commercial property asset class to smaller investors…”

“The other main objective is to create value through the repositioning of run-down real estate using smart real estate management, which involves improving the ESG impact as well as the commercial characteristics and risk profile of a property,” says Sundberg. “But the skillset one needs to manage the properties in this asset class is different from what one needs to manage other properties,” he continues. “There is also a different network that is needed to source investments.”

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 and a stable long-term cash flow stream. “There is a fairly wide range of properties that we can invest in. We are not specifically targeting one property type,” Lindfors points out. “Our broad mandate allows us to find and invest in the most attractive opportunities available in the market.”

“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.”

“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,” he adds. “We want to be ahead of the curve.”

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.

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.

“Buying the first property is very important for the ongoing fundraising process. Investors need to understand what they are buying into.”

The HCP-Cobbleyard team behind HCP Bricks is simultaneusly chanelling its efforts and time on both asset raising and doing the first acquisition. “Buying the first property is very important for the ongoing fundraising process,” emphasizes Lindfors. “Investors need to understand what they are buying into,” he adds. “In the long run, we will have multiple assets in the portfolio, but from the start, we want to have a flagship asset and a first story that depicts what type of assets we want to buy.”

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. “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,” 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. “The key to success for our strategy is the collaboration between HCP and Cobbleyard,” says Lindfors. “They come in with the fund management experience and we have the actual property and real estate knowledge, where we have the know-how of all the small components in the process of creating value through real estate development.”

“We are focused a lot on value add and on doing active development of our assets, but at the same time, avoiding the development of properties from scratch.”

HCP Bricks will employ a ‘middle-ground’ value-add strategy “where we are focused a lot on value add and on doing active development of our assets, but at the same time, avoiding the development of properties from scratch,” according to Lindfors. “Becase of risk management reasons, we want to have assets that already generate some cash flows that limit the risk associated with the investment,” he continues. “But we also want to have upside potential by perhaps leasing up vacant space or developing or renovate space for more suitable activities and finding more value and return for the fund through property development.”

This article features in HedgeNordic’s “Private Markets” publication.