REACT news: Q+A: Trinova on following distress opportunities from UK to Sweden

 

Linus Forsberg and Edmund Costello talk about the similarities between the current market and the GFC

 

Trinova Real Estate launched its business in 2009 in the midst of the global financial crisis, seeing that UK office market valuations had plummeted and there was an opening to buy quality real estate.

Today, with £1.1bn in assets under management and a firepower of circa £500m to invest across sectors, the London-based real estate investment manager is following opportunities caused by distress across Europe.

Maintaining a focus on the UK while investing on the continent, mostly in Belgium, this year Trinova has raised capital for a special situations mandate in order to take positions for opportunities in Sweden.

“Over the years, we have grown from a boutique investment management firm focused on UK offices, to a multisector, full service real estate management firm active across Europe and the US,” says managing partner Linus Forsberg.

In an interview with React News, Forsberg and partner Edmund Costello speak about similarities between the GFC and the current market, and chasing opportunities in new markets such the Nordics.

What is the background of Trinova?

Linus Forsberg (LF): We set up the business during the GFC in 2009. We wanted to offer investors a more tailored and partnership-spirited investment management alternative that was not widely available in the market at the time. Our analysis back then was that much of the UK office market was oversold and that it was a great time to buy high quality real estate. There are meaningful similarities (albeit in a different macroeconomic background and differing occupational dynamics) between the early years of the business and what we’re seeing in the markets today.

Between 2009 and 2016 we invested on behalf of a couple of separate account mandates, as well as acted as an operating partner to a couple of large investors, primarily focusing on the UK office sector. In 2016 we started investing into other sectors and geographies, including launching our residential real estate platform and extending our coverage into the US and Europe. Following on from strong appetite from existing and prospective investors, we launched a discretionary fund in 2019 targeting the UK office sector.

We are fundamentally a strategy and data-driven investment management firm that looks to capitalise on asymmetric opportunities and market dislocation. This has been reflected in our most recent focus on pockets of the living sector that present attractive risk return dynamics, segments of the office, retail and leisure sector that we believe are oversold as well as special situations opportunities across the capital structure in the Nordics and the UK.

Over the years, we have grown from a boutique investment management firm focused on UK offices to a multisector, full-service real estate management firm active across Europe and the US.

What is your current assets under management?

LF: The current AUM is £1.1bn and this is split 60/40 between commercial and residential real estate. About 75% of our assets by value are in the UK, with the balance in Belgium, France, Switzerland and the US.

When did you start to invest in geographies other than the UK?

Edmund Costello (EC): By 2015/2016 our analysis was that much of the UK office market was fully priced, and we had successfully sold out of a large part of our assets bought since 2009, realising strong returns.

In 2015 we started to look for investment opportunities in continental Europe, and in 2017 we commenced a buying programme, acquiring core properties in Belgium. We had identified the Brussels office market, with the occupational dominance of European institutions and the Belgian government, as the most suitable target market. Since then we have built a portfolio of five assets and the stability of this market is proving a good decision given the current market turbulence.

In 2019 we started our activities in the US for one of our core mandates.

As you said, there are parallels between the GFC and the current moment, especially looking at the struggle of the office sector. Where do you see opportunities now?

LF:  On the office side, there are a number of similarities between what we saw during the GFC and what we are seeing now. These include unsustainable capital structures that are causing owners significant challenges. Another similarity is the mismatch between the number of owners looking to sell assets versus the number of buyers out there ready to buy.

But it is important to recognise and be humble to the fact that each cycle has its own features, drivers and challenges. A key consideration in the office sector looking forward are the changes to occupational demand.

Tenants have become a lot more focused on the quality of the space, location and overall service offering when they consider where to rent. We have always approached tenants as customers and looked to provide excellent service in the buildings we manage. Over the past couple of years that has changed from a positive surprise to tenants, to something they now demand.

 

On the residential side we are investing very actively on behalf of three mandates. Different subsectors of the residential market offer different opportunities, but what they all share is that they provide attractive buying opportunities for well capitalised investors. At the moment we are primarily focused on the UK and Sweden, but we are starting to see investment opportunities also in other geographies.

The way the past three to seven years have played out, and with the change to the interest rate environment since spring 2022, we anticipated last year that there would be very interesting opportunities to invest into distressed positions when certain markets unfold.

At the start of the year we successfully raised capital for a special situations mandate in order to take positions across the capital structure for opportunities in the UK and Sweden. We see this as a very exciting new area for the business where we can combine our understanding of real estate fundamentals with the financial structuring experience that a couple of my colleagues have from experience in the banking sector.

Are you still looking mostly at offices or also at other sectors?

EC: Offices are certainly going to be an important focus of our investments going forward. We are firm believers in the need for offices in the future and are actively bidding on opportunities in the UK at the moment. However, we are very selective about what we want to buy, as many offices are likely to find themselves on the losing side of the equation over the next five to 10 years. Asset selection will be key.

We have grown our residential investment and management team significantly over the past couple of years. This is a sector that we are very active in already and we see continued strong growth going forward.

We are also looking at other sectors. We think that certain segments of the retail and leisure landscape have been oversold. Here we have identified strategies that we plan to pursue over the next couple of years in both the UK, and parts of continental Europe.

Where in Europe?

LF: We are active in the Benelux region, and we plan to continue buying there when we find opportunities that fit what we are looking for.

We also see interesting market opportunity in the Nordic countries where we are currently making our first investments on behalf of our special situations mandate. We have also been looking at Ireland and Spain for some time and we’re just really waiting for the right opportunity to come along.

Tell me about the distress opportunity. What are you looking at?

LF:  We’ve already taken our first positions in this space. There’s a mismatch between the credit needed in the market and the quantum of credit available over the next three to four years. It’s part of what is causing the challenges for some owners across Europe and much of the world to be honest.

 

A number of large funds have raised capital to take positions in this space. Where we see our competitive advantage is firstly that we can look at smaller opportunities. The larger fund typically need to invest a minimum $50m and ideally $100m per position. We can target meaningfully smaller opportunities. Secondly, we have the ability to provide more flexible tailored capital solutions.

So what we are looking at is second- and third-tier size companies, where we can get comfortable both with the capital structures (which are often simpler for the smaller companies) and the underlying assets (which we find easier to effectively analyse and get comfortable with the underlying assets for the smaller companies).

How much investment you can deploy?

LF:  We currently have circa £500m to invest for existing mandates across sectors. In addition to that, we work as an operating partner to a couple of large investors who have very significant amounts of equity available for the right deals.

The majority of the capital is earmarked for the UK at the moment. The reason for this is that we believe the UK market is furthest advanced in the valuation cycle, and we see many of the best opportunities here. However 40% of the capital is available to invest outside the UK.

On the commercial side we look for individual assets in the range from £20m to £100m. On the residential side we look at individual assets from £5m to £100m. For portfolios we are able to look at significantly larger deals.

 

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