A deal announced in February between Hines and listed French residential construction company, Kaufman & Broad (K&B), constitutes a blueprint for international capital that increasingly wants to add large-scale rental residential property to its investment mix.
Hines said it had agreed to acquire a 30,000 m2 portfolio across eight sites in Paris and French regional cities that would eventually provide 500 rental units when built. Hines is making the investment on behalf of its Pan-European Core Fund (HECF) – its first build-to-rent (BTR) investment in France for the vehicle. CBRE advised K&B on the transaction.
Forward funding
Thomas Westerhof, head of residential properties, Continental Europe at CBRE, said he had witnessed first-hand the increased focus upon build-to-rent among both developers and investors, a relatively new trend that includes some developers switching strategy from the traditional housebuilder model.
An important reason why investors want to access development is the paucity of standing investments available for purchase and also because of concerns over high valuations of rental properties in some hot locations. In partnering up with developers, investors sometimes seek preferential positions in the pipeline via programmatic JVs or even by buying the developer outright.
Forward sales
CBRE’s Westerhof said income-producing assets were strongly contested and ‘tricky’ or ‘very hard’ to get hold of at scale in most markets. ‘For developers, especially in uncertain macroeconomic times, it makes sense to exit in bulk rather than to develop and sell individually on the open market which might in some cases be the better financial strategy but possesses additional risks and takes much longer. We see more developers offering parts of their developments to block sales and build-to-rent.’
As a result, the number of forward sales and development transactions was increasing, Westerhof said. ‘Many investors would be very happy to step into new markets targeting income-producing assets, but they are coming to the realisation that it is pretty tricky to quickly build a sizeable portfolio at granular deal level.’
In another recent transaction in February, Invesco Real Estate said it was investing between €150 mln and €160 mln in a build-to-rent project at the major SeiMilano development in Milan encompassing 300,000 m2. Invesco is making the investment from US private equity firm, Varde Partners, and Varde’s local developer partner, Borio Mangiarotti.
William Ertz, senior director of fund management at Invesco, said: ‘While the market is still developing, there are currently almost no institutional-quality assets offering modern, well-designed and quality-build apartments.’ Invesco is making the investment on behalf of its new pan Europe living fund, in a joint venture with Germany’s Nordrheinische Arzteversorgung.
Hines deal
In the Hines deal, a French investor may have been the more likely winner of the K&B portfolio, but not in this case. Last year, a more predictable winner emerged from a contest when AXA IM – Real Assets declared it had created a long-term strategic partnership with French company Action Logement which gave it a 75% stake in 9,800 units in Greater Paris and envisages the development of a further 1,500 units per year.
For this reason, the Hines/K&B transaction is being viewed as a ‘first of its kind’ in France.
‘The amount of international capital that was looking at this and bidding on it was not unexpected, but it has been considerable,’ said Westerhof. ‘It is a really good example of when the product is there, the capital is there. It is linked to why I think the market might perform even better this year. It is only being held back because of the supply side.’
Peter Epping, fund manager at Hines’ HECF and Pavlos Gennimatas, managing director of Hines’ European Living Platform, explained the K&B deal represented the first time the firm had acquired a residential portfolio for the fund and the first time Hines had ever clinched a residential deal in France.
Describing the country as ‘hard to break into’, and citing pressure on prices, they added it was a complex transaction. Initially, K&B had planned to sell more than it eventually agreed upon with Hines.
The deal is said to be valued at more than €150 mln. The first of the eight residential buildings will be finished in the middle of 2023. Hines was faced with the tricky exercise of valuing the to-be-built portfolio, which required it to evidence current values from standing assets in each of the same locations with a similar quality.
