There is a huge opportunity for bullish property investors in the distressed real estate market, according to Thomas Balashev, who launched the Monta Capital fund last June.
Balashev, founder of London-based property consultancy Montague Real Estate, said following the soft launch of the £100m fund, the team has decided to increase its target raise to £300m because ‘of the sheer number of opportunities’ in the market, which has allowed them to also increase their acquisition sizes.
The Monta Capital fund has been launched into a market that has been largely held up by unprecedented government support.
But as life returns to normal and government initiatives such as the stamp duty holiday, furlough scheme, loan payment holidays and CBILs end, Balashev expects many bounce-back loans and mortgages to default.
In his view, there will be an abundance of assets that need help in the short-to-medium term, including properties that will need to be re-adapted.
‘There’s always been this notion distressed has meant derelict,’ Balashev said, highlighting that this is not always true. The impact of structural changes in the market, such as the rise of e-commerce, and the stress brought on by the pandemic, have left many good quality properties in distress.
‘Every high street has seen a decline in physical trading for many years, and the pandemic has compounded that. The way our high streets look will change over the next decade and there is a big opportunity there.
With the UK breaking away from the EU, the flow of trade is a bit more opaque and e-commerce giants will need more space to operate in the UK. With us being UK-focused, there is an insatiable appetite for re-purposing these brownfield sites,’ he said.
In the UK, the real estate and property sector saw 11,000 businesses enter significant distress in the final quarter of 2020, according to data from Begbies Traynor, reaching a total of nearly 74,000 by the end of the year. This is an increase of 18% on the previous quarter, and a rise of 39% year-on-year.
According to the corporate restructuring specialist, this is just the tip of the iceberg, with partner Julie Palmer highlighting that government support only provided a stay of execution for many companies.
In this environment, the Monta Capital fund targets unique opportunities across residential, commercial and mixed-use markets in key cities across the UK. It focuses on acquiring assets with a core or core plus risk profile that are well located and have established tenants or are newly developed schemes.
The core investment strategy is acquiring properties below their replacement cost, locking in long-term fixed rate financing, and improving cash flows. The fund also looks for transactions where there is a dislocation in the market, or properties with below-market rents, mainly following a period of poor management.
Balashev said the fund has a strong pipeline of deals and over the next three months he expects to close several transactions. The fund will target deals valued around £10m to £15m with a gross development value of £25m to £40m.
The fund, which is raising capital from ultra-high net worth investors, pension funds, family offices and other funds, is targeting an annual internal rate of return of 12 to 16%, according to a person familiar with the strategy.
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