Grand City Properties Is Continually Improving Its Real Estate Portfolio, Says Executive Director

Grand City Properties (DE:GYC) is a residential real-estate company operating in Germany and London. The company invests in value-add residences in large cities and metropolitan areas. Headquartered in Luxembourg, Grand City Properties (GCP) is among the largest European real estate companies.

TipRanks interviewed Christian Windfuhr, GCP’s executive director, to learn more about the company. See the interview questions and answers below:

1. Grand City Properties has a strong focus on optimizing and repositioning real estate assets. How do you envision the company’s strategic direction evolving over the next five years, particularly in the context of the current real estate market dynamics in Germany?

We remain focused on our core strategy, which revolves around internal growth, driven by the continuous improvement of our portfolio through value enhancing measures – such as high-quality tenant service and community improvement activities and targeted capex measures, resulting in strong vacancy reduction and rental growth in recent years. In the past years we have also disposed of properties that we view as non-core or mature, where we have extracted most of the potential, and when we believe we can utilize the disposal proceeds more accretively.

The market fundamentals and demographic trends are very positive for continued operational growth, as the residential sector in Germany’s metropolitan areas as well as in London continue to have a widening supply-demand imbalance. This imbalance is the result of structural issues stemming from high regulatory hurdles, high construction costs and low supply of land and will thus continue to provide tailwinds for our operational growth in the mid-to-long term. 

2. Grand City Properties S.A. has reported a positive 9M of 2024, with a 3% increase in net rental income and a like-for-like rental growth of 3.5%, leading to an upward revision of its full-year guidance in mid-year. What key financial strategies have been most effective in maintaining stability and growth, especially during economic downturns?

We see a conservative financial profile as a key competitive advantage, as it provides the stability and certainty that allows GCP to focus on executing its operational strategy. A key part of our financial strategy is a good liquidity balance and pro-active debt management. By maintaining a strong liquidity balance we also have enough time to refinance using the optimal financing source, for example last year we managed to raise significant amount of bank loans at rates significantly below capital market rates. This process takes longer than issuing bonds and thus sufficient headroom is needed to execute this strategy. Having a diverse funding structure also provides GCP with a lot of flexibility in raising funds. The stability of our financial platform, with high headroom to covenants, has allowed us to maintain leverage stability in recent years, while maintaining high interest coverage ratios, despite devaluations and higher financing costs as a result of the current interest rate environment.

As a result of the financial stability GCP has been able to focus on executing its operational strategy.. In addition to the macro tailwinds, such as continued demographic trends and the expanding supply-demand imbalance, allowed us to benefit from strong rental growth. The supportive operational environment has not only resulted in higher rental growth, but also supported rental upside potential. As Germany is a regulated rental market, rent increases are more stable, allowing market rents to outpace rental growth. This difference between GCP’s portfolio rent and the market rent can be captured at a steady pace, and due to the strong increase in the upside potential in recent periods (standing at 24% as of September 2024), will result in higher growth rates in the coming years.

3. With a substantial portfolio in Germany, are there any new markets or types of properties that Grand City Properties is considering for future investments? What criteria do you use to evaluate potential new opportunities?

At this stage GCP remains focused on internal growth and is focused on keeping a strong and conservative financial position and is not seeking to significantly grow the portfolio externally. With the improvement of the macro-economic trends, expected positive portfolio revaluations and an increased transaction market, which would strengthen further our leverage and credit metrics, we would consider resuming and growing the portfolio externally.  Over the last 2 decades, GCP has built a strong deal-sourcing network, and a very strong transaction team, which could drive accretive external growth once the company decides to start acquiring properties.   

GCP remains focused on residential real estate with a focus on Germany. Within Germany we are present in the markets that we see as most attractive. As the ownership of the residential real estate market in Germany is very granular and mostly not in institutional hands, we believe the market has sufficient opportunities to facilitate external growth for the Company. That being said, we would also consider growing in other markets if we see strong fundamentals and attractive pricing, as we have done in the past with our entry into the London market.  Regarding asset types, our focus remains affordable housing, also for the future, but we will consider alternate uses if we see significant value creation potential for selected assets.

We review new opportunities based on a mix of macro criteria and asset- or portfolio-specific criteria. On a macro level we focus on cities and regions with positive fundamentals, meaning that they have strong demographic trends and supportive economic conditions, i.e. metropolitan regions with growing populations and/or amount of households. We focus mostly on the affordable housing segment in these regions, where we see the strongest and most resilient long-term demand, resulting in a good mix of cash flow stability and rental upside potential. On the asset level we look for opportunities with value-add potential which we can extract using our expertise. Examples would be undermanaged properties which have high vacancy as they have been mismanaged with weak tenant service and require targeted capex to lift them back up to market standard; properties with rental levels below market level; and/or properties with inefficient cost structures. For each opportunity we determine a business plan prior to acquisition and include a suitable margin of safety to determine the expected return on total cost, which should meet our internal return requirements for us to pursue the opportunity.

4. Grand City Properties emphasizes a strong commitment to community involvement. Can you elaborate on the long-term strategies and specific initiatives the company has implemented to support and enhance the communities where your properties are located?

As we are active in the affordable housing segment, we view social responsibility as a fundamental pillar of our business practices. We provide outstanding tenant service through our service center or digitally through our app. We have a tenant satisfaction policy that guides our approach throughout the tenant lifecycle. We view the local communities in which we operate as a key part of our social responsibility and at the same time see that healthy and lively local communities support the business in return, as it increases the attractiveness of our properties and thus supports our rental business. We support local communities through different means but mainly through tenant/community activities, supporting local organizations and initiatives and through direct community improvements, such as building playgrounds, community gardens, local art projects, and similar initiatives.

As part of our tenant activities we plan several fun events for our communities throughout the year. For example, this year we organized several summer cinema events, where our team organized outdoor cinema equipment and set-up an outside cinema, providing tenants with a free family movie night, including snacks such as free popcorn. These events are well received by tenants. Throughout the year we organize similar events, depending on the season and location, which enhance the community feeling in our locations.

We also support local initiatives and organizations, which we do mainly in two ways. Firstly, through the GCP foundation we provide financial support to local organizations. We aim to support organizations and initiatives that have a positive impact on the local community, such as support for children and youth sport teams, community festivals, music and other educational organizations, and support for people with special needs. We also support communities by providing areas free of charge for community use, for example for a tenant library, social meeting point, or community clubs.