Increasing value of the property thanks to prolonged rental contracts, it is time to cash!

 

Article Vastgoed Journaal : Interview with Andries de Boer, Managing Director WVGH:

 

WVGH B.V. is one of the oldest companies to offer real estate investment funds. The company has recently closed or is will soon close most of its real estate funds. De Boer comments: “One part of the funds is at the end of their investment periods, for another part of them the closure will depend on market circumstances. Finally, there were good results for investors, as they have earned between 6.85%-15.3% (IRR) on a yearly basis. We have, for example, made use of the increased difference in value, occurring when rent contracts are valuable for a longer period. There is a difference between an office building, whose tenants have signed a 10-year contract and a building with an average of 2-years’ rent contracts, where the continuation of the contract is uncertain. In case of declining building occupancy the difference increases even more. In 5 years since the capitalization funds have barely started to develop. Many investors were happy with medium to long term rent contracts, having the expectation to be able to prolong them when increasing the rent at the same time.

Leisure scores high
“However, we’d seen an opportunity to sell funds in which the remaining period of the rent contract was short, for a reasonable price”, says De Boer. “The rent contract for the Endemol studio complex in Aalsmeer, for example, was only 2.5 years. When we received a reasonable offer, the closure of the fund was unanimously voted for, because the investors were certainly happy with an average yearly IRR of 7.3%. Similar is the situation with Partnership 4, which we will probably close at December 31st 2007, and will pay out an average of 7.7% to the investors.” The most of the actual returns, however, seem to be steadily higher. De Boer: “WVGH Limited Partnership 6 scores the best. This fund was established in 2004, but we received such an attractive offer for it, that we had to close it.
IRR of 14.8% is definitely high for an investment (in offices/commercial buildings?????). Our investment funds for SnowWorld (an indoor ski-center), phase 1 and 2, were also closed with a nice IRR. We’ve heard a lot of skeptical comments about these funds, but the investors were enjoying the wonderful outcome of nearly 15% IRR at the end.” De Boer definitely wants to do more in the leisure sector: “SnowWorld proves that you can earn a lot with a leisure project, if you select a good project and good entrepreneurs. We also have a tennis park in our Leisure Funds which is also achieving reasonable results, but it’s not easy to find new interesting projects to invest in. We are now researching the idea of an indoor diving center. It is a kind of a swimming pool, but 35 meters deep, where divers can train and receive a divers’ certificate. We are talking about an investment of about € 10 million. Diving is about to become a really popular sport. For now the only options are to shiver outside in the cold in Zeeland, or to “dive” in a swimming pool that is only 3 meters deep. We also hope to present a golf course project next year. For now we can’t say if we are going to do this through our Leisure Fund, make a separate Limited Partnership for the project, or issue real estate bonds.”

Service Apartments also an interesting market
Another niche market for WVGH B.V. is the elderly accommodation market. De Boer comments: “During the last 7 years we have established 4 funds in elderly services complexes, one of which is a public fond (Hoog Soestdijk). The other three we established with a limited number of investors. One complex has been sold to a housing corporation and it generated double figure returns. The profits in this case are mainly made at the closure at the fund, although you see that the cash profits of 4.6% for Hoog Soestdijk per year for a residential complex are pretty nice.” De Boer explains his concept: “We are focusing on rather old elderly complexes. We can do this in the structure of a cooperative association, for example. We buy the whole building, we reorganize, renovate and try to lower the service costs by dividing the service package and by working with a cheap service package linked to further tailor-made services. This way we create new life there.”

However, there is no easy market, points out De Boer: “There are also other players in the field. During the past year we had two bids in a pitch for service apartments that we just missed due to competition, TCN in this case. However, we are busy with 2 other complexes at the moment.” De Boer also adds: “It is a very labor-intensive market: for instance, it is not a market in which real estate traders will participate. You have to attend a lot of meetings, before gaining the trust of the service-flat apartment boards. And you must force everybody into one direction. Therefore, this means giving presentations in the apartment building. The inhabitants’ interest is continuity, a more beautiful complex, low service costs and increasing tenant occupation. Very often there are insufficient funds available for sub standard maintenance. And the money invested in the apartment itself cannot be used. By using this financial structure, the inhabitants’ money is released.”

Real estate bonds – favorite
WVGH B.V. is also currently working in cooperation with companies that issue real estate bonds, such as Caprice Finance. Why is that? De Boer: “Dutch real estate is very expensive, therefore it is difficult to establish new Partnerships or Limited Partnerships. That’s why we are also looking for interesting projects in Germany. We managed to close already in 2005 a 2004-issue of real estate bonds offering returns of 14.3%, with a German Home Depot super market We just finalized and closed Vastgoedcertificaten II (from Dutch: real estate certificates II), a fund that also owns German real estate projects. The interest for this bond issue was 300% more than the available certificates! And Vastgoedcertificaten III is coming soon!”

Why bonds, or certificates, and not LPs? De Boer: “The reason is mainly in the fiscal arrangements. In an LP you are a co-owner and you need to fill out declarations in the German tax office service. This is also the case in the USA. With relatively small value of the bonds (€15,000 for example) your returns are significantly less. Real estate bonds do not have this disadvantage. And with mixed structures, whereby the issuing partner offers a bonus or a profit-shaving arrangement on top of the fixed interest, investors still profit from an increasing value. Another advantage is that real estate bonds, or certificates, can be traded freely.

Andries de Boer will soon leave the WVGH organization : “I’ve sold my shares. The agreement for me is to stay 3 more years, after which I will probably be succeeded by KeesJan ten Hove, our new Commercial Director. Due to his personal network he’s had an important role in the successful closure of a number of LPs.” Meanwhile De Boer has shortened his workweek to 4 days. Is he going to enjoy the life of a rich pensioner? “This is not in my character. I’ve already said I believe in leisure. I don’t want to disclose too much, but I’ll say that I’m researching investment opportunities in the German leisure market.”