March 7, 2019
With commercial real estate prices reaching record highs, aiming for profitability in the capital requires a disruptive investment strategy. Mata Capital identifies lower-cost assets off the beaten path, away from the crowded institutional market. It then implements unconventional value creation processes for these properties.
Small is beautiful!
Prioritizing small-scale transactions, under 15 million euros, is currently an excellent approach to seize the most profitable investment opportunities within Paris. While the Parisian market remains a favorite hunting ground for institutional investors, their significant financial capacity, corporate culture, and internal processes severely hinder them from positioning themselves on modest-sized assets. Yet, these properties offer the best prospects for returns and value appreciation in the medium term in the capital. This, in essence, is the first disruptive investment strategy followed by Mata Capital to develop its MCF Quality Street fund.
This vehicle, after attracting institutional investors who have endowed it with an investment potential of nearly 80 million euros, is now entering its investment phase in Parisian assets: commercial properties, offices, residential, business premises, and last-mile logistics.
Acquisitions at ultra-competitive prices in the small-volume segment
Why do small-scale transactions in the capital's streets offer the best potential for appreciation? "In a market where commercial real estate prices are reaching historic highs, performance necessarily comes from acquisitions at ultra-competitive prices, which only the small-volume segment can offer. Today, it represents a goldmine for the few players with the technical expertise, responsiveness, and flexibility essential to seize these opportunities and enhance their potential," says Jean-Baptiste Pracca, President of Mata Capital.
The capital's commercial real estate market is highly valued but has not yet reached a speculative threshold, so the risk of a sudden price drop is not on the agenda. Interest rates, which are not expected to rise sharply in the coming years, should continue to support prices. That said, extreme selectivity is essential in a market where transactions at extremely high prices are proliferating.
These "excesses" undermine rental profitability and pose a high risk of asset devaluation in the medium term. Regarding the most sought-after neighborhoods and properties for office and retail tenants, large-volume transactions are being concluded at prices undeniably disconnected from their true economic value. This means between 15,000 and 18,000 euros per square meter for buildings requiring complete restructuring, implying an additional construction cost of at least 3,000 euros per square meter.
Avoiding competitive tenders and their price inflation
These properties, put on the market by major national players through tenders, attract a significant number of potential buyers, leading to price inflation. "We have the flexibility and expertise needed to avoid this sector, which remains the preserve of large institutional investors, and to position ourselves in a much less competitive segment where we negotiate prices well below market averages," comments Jean-Baptiste Pracca. The secret to this counter-current approach lies first in the ability to identify these good deals. Gone are the tenders swarmed by major players: sourcing is fueled by a network of lawyers, notaries, local agents, property dealers...
Added to this is the efficiency of a digital platform, developed in-house by Mata Capital, which operates with a unique algorithm detecting Parisian asset sales offers off the beaten path for most investors. For example, 1000 square meters of a hotel-restaurant located on Boulevard Voltaire, in the immediate vicinity of the metro in a trendy area of the 11th arrondissement, was acquired by Mata Capital for less than 4,600 euros per square meter in early 2019. This transaction illustrates the very attractive financial conditions of the MCF Quality Street portfolio, where the average acquisition price of assets is 6,497€/m2.
Lower-priced assets with appreciation potential
This acquisition is coupled with the implementation of a procedure to uncap the current rent or evict the existing tenant. "Focusing on assets where we can create value is the second pillar of our investment strategy in Paris," explains Jean-Baptiste Pracca. "Indeed, our team's expertise allows us to master levers to improve the rental or intrinsic value of our acquisitions. Effectively negotiating a tenant's departure in exchange for eviction compensation is, for example, a very technical operation from a legal standpoint, which also requires strong involvement in the negotiation process with the business owner. Our entrepreneurial culture gives us the keys to create value through legal and commercial means that institutional investors typically do not master. We have proven experience in legal and notarial procedures. We do not shy away from the long-term work and negotiation required to optimize a transaction."
With an average current rent of 331€/m2/year for MCF Quality Street, Mata Capital thus aims to increase its value by 25% on these investments. Patience, ingenuity, technical expertise... three winning assets for investing in the less-traveled paths of the highly-rated Parisian market. Paths where the sheer scale of real estate investment behemoths prevents them from treading!