Harrison Street, the $56bn (€51.4bn) fund manager, prioritises risk management through conservative leverage, interest rate hedging and a focus on alternative asset classes, according to the firm’s European transactions head.

Speaking to IPE Real Assets at MIPIM, Josh Miller explained the company’s strategy, emphasising the high barriers to entry in these asset classes and their long-term growth potential, contributing to the strategy’s resilience even in challenging markets. 

Josh Miller

Josh Miller, MD and European transactions head at Harrison Street

“We consciously steer clear of traditional sectors like office, retail and industrial. Our strategy prioritises alternative asset classes such as student housing, build-to-rent, life sciences, data centres and senior housing,” he said. “These sectors have historically been viewed as niche within the real estate landscape. Our preference for these sectors stems from their inherent structural advantages.”

Miller said that, unlike traditional asset classes whose performance more closely mirrors the macroeconomy, these alternatives “benefit from embedded supply-demand imbalances”. 

This dynamic tends to foster high occupancy rates, rent growth, and lower overall volatility, he said. “Our central investment thesis revolves around targeting consistent returns with a reduced risk profile compared to traditional real estate sectors.”

Harrison Street which initially focused solely on the US market for a decade, launched its European operations in 2015. It has since opened four offices in Europe and invested over €5.5bn across 90 investments in various European countries, including the UK, Ireland, France, Germany, Spain and, most recently, Italy. The firm has headquarters in Chicago and London, and offices throughout North America, Europe and Asia. 

Rendering of Harrison Street's Viale Monza residential asset in Milan

Rendering of Harrison Street’s Viale Monza residential asset in Milan

In December last year, Harrison Street entered the Italian market through a joint venture with a local partner Artisa Group. The partnership acquired Viale Monza, a 260-unit residential asset in Milan, with a plan to scale the venture over time. 

Italy is a “great example of a country with attractive demographic trends in our sectors of focus and strong supply-demand dynamics”, Miller said. “These are all elements that exemplify our investment strategy.”

The European strategy maintains a consistent approach to risk management and collaboration with local partners originally established in the US – but there are differences and market-specific nuances to European geographies, Miller said. For instance, student accommodation in Europe is primarily located in city centres, contrasting with the US phenomenon of college towns.

“Our risk management approach is granular. We take a conservative stance on leverage, prioritising lower debt levels within our projects, whether it’s for core assets we’re considering or opportunistic investments,” Miller said.

“We primarily utilise senior loan financing, avoiding the potentially problematic aspects of mezzanine debt and other high-leverage strategies. While these strategies can be attractive in bull markets due to their return-enhancing potential, they can become incredibly challenging during economic downturns.

“Therefore, we’ve historically shied away from them. Additionally, we actively hedge our interest-rate exposure. This means that even when our loans have floating interest rates, we implement hedges at the time of investment. This ensures we have a clear understanding of the worst-case scenario from an interest-cost perspective.”

Even with a well-defined risk management strategy and a focus on high-barrier-to-entry asset classes, the company still encounters challenges. A challenge is that the markets are fragmented in some places. Finding operating partners that have a track record in our sectors of focus can be very tough, Miller said.

“Secondly, I’d say finding access to land sites can also be challenging, because in some cases certain asset classes are not considered the best use for certain land sites, so being able to find something that’s suitable for a project can take work.

“Recently, some of the volatility we’ve seen from government regulation of the residential sectors has added complexity and there have also been considerations around rent controls and ESG-related regulatory requirements.”

Miller sees a lot of these things are positives overall since they “inhibit long-term supply across the asset classes in which we operate”. But adds that it is also just an unknown in the market.

“And for us as an investor, it can be tough to underwrite unknowns. So, we’re focused on understanding the direction of regulatory changes in specific countries and have that guide how and where we invest. Ultimately, there’s significant and structurally embedded supply-demand imbalances. So an investor like Harrison Street is well positioned when we are able to overcome some of the challenges and deliver projects in sectors and geographies that have high barriers to entry. 

“So the assets themselves are generally going to perform very well once you can get a project delivered. And we’ve seen that throughout our existing portfolio and, again, despite a lot of the headwinds that are happening at the macroeconomic level.”

Miller said the last year and a half has been both challenging and interesting, and emphasised the importance of separating the macro and geopolitical headwinds from the underlying real estate market. “Interest rates and construction costs have spiked, making some projects less viable in the short term. Geopolitical issues like Ukraine and Gaza add to the uncertainty,” he said.

“However, looking strictly at the real estate itself within our alternative asset classes, performance has remained consistent. This reinforces our thesis that these sectors exhibit resilience and lower long-term volatility, as evidenced by our portfolio’s continued stability, low vacancy rates and exceptional rent growth. This underscores our belief that, over the medium to long term, these alternative sectors are projected to offer attractive risk-adjusted returns with less exposure to market fluctuations.”

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