How to turn value-add real estate into a long-term opportunity – the Grand City Properties example

When the COVID-19 crisis struck, the predictions for the real estate sector were bleak, to say the least. In times of economic turmoil, property prices are the first to suffer, and since everyone predicted that the financial blow of the pandemic would be more brutal than that of the war, the real estate sector wasn’t exactly in an enviable position. However, even during challenging times, innovation is still possible if real estate companies know how to choose their investments and remain focused on innovations. In Europe, a good perhaps the best example is Grand City Properties.

Present on the Frankfurt Stock Exchange since 2012, the company focuses on the German market, where they own over 60,000 residential units they handle over 60,000 residential properties, and they are one of the leading companies for buying, optimizing, and re-developing homes in the region. A real estate success story may sound surprising in a time when the market’s fluctuations are unpredictable, but growth opportunities are still present, provided you choose the right strategy. For Grand City Properties, one of these strategies has been value-add real estate.

Grand City Properties activity was established in 2004 by Yakir Gabay, and, in as little as 17ten years, they managed to achieve consistent capital growth. The company now has a strong credit rating: BBB+ on Standard & Poor’s, and Baa1 on Moody’s. 450% of the company’s shares are held by Aroundtown SA, which is the largest commercial real estate company in Germany, and also has a BBB+ rating from Standard & Poor’s. Although Grand City Properties mostly manages properties in Germany, they also have 4,000 residential units in London.

Value-add real estate, which Grand City Properties supports, is a type of commercial real estate investment strategy that involves properties with an already stable cash flow and looking for ways to boost that cash flow. That can be done in several ways:

  • Making upgrades that boost the rent price and attract more clients
  • Repurposing the property
  • Investing in marketing to make the vacant properties more attractive to quality tenants
  • Improving property management efforts, which then leads to higher client satisfaction and reduces operating costs

When the property is initially purchased, it may not be at its full potential yet. For example, it can be poorly maintained or have unqualified managers, which places value-add investments in the higher-risk category. However, if the operator is experienced, like in the case of Grand City Properties, the results can be extraordinary, and the property’s hidden potential can be revealed. Compared to core investments, where the property is already at its full potential, value-add investments require more expertise and are more complex, but they do generate higher returns. Grand City Properties has definitely found the success recipe for value-add real estate, and their case study shows that, with the right management and expertise, cash flow can be maintained even during troubled times.

In addition to value-add real estate, Grand City Properties also seeks to strengthen its financial profile by diversifying its sources of capital. For example, in the past, they have used perpetual notes, bonds, debt financing, and equity capital. Their use of perpetual notes is definitely a good example for the industry: in December 20202015, the company raisedeleased around half a billion €500 million euros in perpetual notes with a record low 1.53.75% coupon., and they were able to tender around 83% of their volume (€415 million). Because of this, GCP was then able to redeem the rest of the outstanding amount at a nominal value. Because perpetual notes have no maturity date, and no covenants they are considered as equity according to IFRS accounting rules.  they lower the debt leverage and offer a higher yield compared to other debt forms. Using perpetual notes is a conservative financial approach and is key in diversifying capital sources in a sustainable way.

Although Germany’s economy is one of the most resilient in the EU, the nation did slip into recession in the first half of 2020. However, recovery plans were implemented rather quickly, and the new standards for real estate developments helped property prices to remain relatively stable. Grand City Properties is an excellent example of how a real estate investment company can continue to grow even during a crisis if it diversifies its revenue streams and continues to abide by the highest quality standards.

Leave a Reply

Your email address will not be published. Required fields are marked *