Avignon Capital, a boutique London-based European property investment firm and asset manager, has received a new mandate to invest in Australia, where it will focus on office real estate and hotels.
Having previously invested exclusively and successfully in Europe, Avignon Capital will target Sydney, Melbourne and Brisbane, where it is looking to expand its network.
Avignon Capital has enjoyed its most successful financial year to date, with 18 acquisitions and seven disposals across Europe totalling a record EUR565 million in deal volume.
Disposals have included a number of triple-digit returns, such as the sale of its Copenhagen retail portfolio, which secured a 154 per cent return on equity.
Discussing the record financial year, Patrick Flaton (pictured), CFOO of Avignon Capital, says: “Considering we have quite a small team it’s a great achievement. At the start of the process we really focus on making sure we close the deal, as soon as we make a bid and work with the client we look to ensure that we finalise it. That’s in our DNA. We take everything seriously and if we say we’re going to do something we make sure we do. There are some managers who are happy to make a bid for fear of losing out on information. We have a different angle.”
Having strengthened its footprint in Europe by expanding into the Netherlands and opening an office in Berlin, the next stage of Avignon’s evolution is Asia, with Australia the first key market to build its portfolio. As Flaton points out, the mandate it has received there will help to diversify the company’s risk beyond the UK and Europe.
“The principals for the Australian market are more or less the same as they are for Europe,” says Flaton. “Our investors are really keen on this market and we want to focus on growing that part of our portfolio. We will focus on commercial real estate – hotels, exhibition centres, offices and so on.”
The Australian investment market has experienced a buoyant 18 months and looks set to continue: there has been a 94 per cent increase in direct commercial real estate investment in the second quarter of 2017, compared to the previous quarter. PwC have reported that Sydney and Melbourne’s office real estate market has the highest projected rental growth of any city in the Asia-Pacific region at 3.8 per cent and 3.7 per cent respectively.
Flaton confirms that the team is already working on the mandate and hopes to announce its first deal in the near future. “We are working with partners in Sydney, Melbourne, Brisbane and as soon as we have enough people on the ground we will think about opening an office; that’s always been our business model,” he adds.
To date, it has been a business model that has proved highly effective. Avignon’s portfolio of UK investments includes a diverse range of properties, ranging from Curzon Cinema, Aldgate (London) to The Courtyard, an attractive cluster of retail shops in the up-market Montpellier area of Cheltenham.
“The valuation of this asset keeps going up every quarter. For us, the following things are always important: the location, the property’s condition, and the tenants. All three elements are there for this property,” confirms Flaton.
Europe is equally important to the team, with markets such as Germany and Denmark proving highly attractive.
“In the past we invested a lot in the UK,” says Flaton, ‘but in the last two years we have invested more in Europe than the UK. If you look at the portfolio it’s probably 50/50 now. We still believe in the UK market but we also see that a lot of our investors want to invest in European assets because they earn their money in euros and whilst they don’t see Brexit as a risk, they recognise the FX risk.”
In the case of Denmark, Avignon’s portfolio of Copenhagen assets has yielded some excellent results.
“Yes we were very happy with this investment. We assembled a portfolio of prime retail assets between 2012-2014 including the Louis Vuitton building. It was in a great location and we were able to enjoy a record-breaking yield in the Copenhagen market. It was a great journey for us,” confirms Flaton.
The Louis Vitton acquisition, held between 2012 and Q1 2016, delivered a 2.12X earning multiple, while Fontanella 6-8, a prime office and retail asset in Barcelona held between 2013 and Q2 2017, generated a 2.35X earning multiple.
“I still believe you can make very interesting yields for investors but you need to do a proper asset play. It’s not a case of simply buying a property and sitting on it as it generates an income. We put boots on the ground and manage each asset to generate a good IRR for our investors,” notes Flaton.
One of the clear benefits to being a boutique asset manager is flexibility. Avignon is highly selective about the properties it invests in but once a suitable target investment has been identified it is quick to act. This allows the team to construct a diverse mix of complementary real estate investments that Avignon manages, improves, and ultimately sells at the end of the investment cycle.
As Flaton comments, Avignon does not have internal committees and complex internal governance structures like the big real estate investment groups.
If Avigonon makes a decision, it goes for it. The firm has direct communication lines with the clients, with the banks and that’s it. There is no internal bureaucratic complexity to overcome.
With so much money flowing into real estate investment products, and with managers facing increased competition from sovereign wealth funds and large pensions choosing to invest direct, the net result is that there is a lot of dry powder in the market chasing fewer assets. As a result, valuations continue to bump up.
Asked whether valuations are becoming too high, Flaton considers his response, before commenting:
“It is very hard question to answer. You see in the market that prices are getting higher and higher while yields are getting lower and lower. The problem right now is that debt can be financed at very low interest rates, and offers the potential for leveraged returns. But it is getting harder to find good properties against an interesting yield at a risk that is acceptable. You can buy properties against a high yield but you’re also taking a higher risk for doing so.”
Hence why Avignon is excited by its expansion into Australia, whose vibrant, modern economy provides a perfect platform for Avignon to invest.
“Our talent lies in our ability to identify long-term trends and tailor our approach to clients’ specific needs. This is the key to our impressive returns, and we look forward to striking up good relationships with brokers whilst acquiring a portfolio of prime, cutting-edge commercial real estate.
“If you bring positive energy to something you will succeed. I’m not just looking forward to 2018. I’m looking forward to tomorrow,” concludes Flaton.
Since this interview, Avignon Capital has formed a strategic partnership with McCafferty Asset Management, a European asset and property manager; Platinum Property Management. Platinum will manage a portfolio of UK and European real estate assets and will be on the ground to provide a hands-on approach with offices in London, Manchester, Berlin, Munich and Zurich.
