MAGAZINE Long Harbour ready to chart new waters

Fundraising is usually a difficult affair, especially for a new company, and even more so when the founders are in their 30s and it is just two years into a proper global financial crisis. However, in 2009-2010, William Astor and James Aumonier put their boots on and set out to build something new. Less than 10 years later, their company Long Harbour is the second-largest private residential landlord in the UK. It also has Hong Kong conglomerate CK Holdings as a minority shareholder, manages a total of 13 real estate funds focused on the urban residential environment, and looks after a portfolio valued around £1.8 bn.
But they are far from finished as the presence of experienced capital-raising expert Christophe de Taurines indicates. Since the veteran equity placer agreed to come aboard last October, a number of key fundraising initiatives have been implemented, such as the fund raising of an income fund dedicated to the private rented sector (PRS). But that is only part of the picture. A true global strategy is in place aimed at expanding Long Harbour’s investor base geographically.

Ground rent investment
Astor and Aumonier formed Long Harbour in 2009, having learned their trade at different companies. Astor cut his teeth at Vincent Tchenguiz’s Consensus Business Group for seven years during which he spent much of his time analysing investment opportunities and arranging finance or equity. Aumonier, meanwhile, held different roles at Pelham London, Parkwood Asset Management and Cityreal. Astor: ‘We were both in agreement that the time felt right to join forces and seize this once-in-a-generation opportunity.’ Historically, the UK ground rent investment market had been dominated by private investors and family offices but Long Harbour identified an opportunity for a new player given high demand for long-term income among investors – players such as Christ Church College, Oxford, which turned out to be one of the first limited partners in its maiden fund. Recalls Astor: ‘Upon meeting, we soon realised that these assets were a perfect match for this type of investor as their horizon is 100 years plus.’
Long Harbour’s first ground rent deal was a freehold acquisition by Ballymore in March 2010, and over a period of 24 months, the company was able to add more investors. It was Oxford Investment Partners (now Willis Towers Watson) that brought in Christ Church Oxford as Long Harbour continued to raise its first fund by word of mouth.
The ground rents business snowballed, growing from £10 mln in 2010 to over £1.3 bn which Astor believes has a lot to do with his former boss at Consensus, Richard Silva. Silva used to run the capital-raising activities for the business and agreed to join Long Harbour in 2011.  The freehold business is big but is only one of three business lines. The two others are an Income Fund series and its Real Estate Partners funds business.

Inflation-linked strategy
After successfully deploying the first ground rents fund, Towers Watson and Christ Church Oxford expressed the desire for Long Harbour to pursue an inflation-correlated strategy. Leveraging off its experience in the residential ground rent market, Long Harbour recognised that long-term institutional investment in the private sector residential space was negligible, and so devised a strategy to break down the barriers to entry into this asset class.      
The catalyst for this strategy was the sale by Lloyds Bank of a portfolio of 450 apartments that once formed part of a much larger HBOS buy-to-let joint venture with Imagine Homes. HBOS had taken over the distressed and highly leveraged business after the 2008 Global Financial Crisis. Now under Lloyds’ stewardship, the owner was looking to offload it. The £40 mln portfolio was simply getting too small for the bank to manage efficiently.
Long Harbour negotiated a discount to the break-up value of the portfolio with the bank that ‘back solved’ to a net yield that created liquidity within the portfolio. Long Harbour worked with Savills to perform due diligence on each individual asset. It took three to four weeks to examine every apartment from Glasgow to Kent but try as it may it could find no fault with this highly liquid tradable portfolio of apartments that was providing a 5% net yield and whose units could be sold at any point. In March 2013 it went ahead and acquired the 350 apartments (the package had shrunk from the original). As luck would have it, just three weeks later, UK chancellor George Osborne announced the Help to Buy scheme, which caused prices to shoot up. Suddenly, the discount looked even better as the units began flying off the shelf.
‘We had a sales call every week,’ recalls Astor. ‘There were 5 to 6 deals a week. We were going to leverage the portfolio, but we decided it was unnecessary as due to pricing we were unlikely to hold assets beyond the medium term.’ The investment hit a 26% Internal Rate of Return (IRR) and a 1.5x multiple on the original investment. ‘It was our first residential fund,’ adds Astor. ‘No-one was doing it and there was not that much liquidity at the time.’   Deals that followed for Long Harbour included Skyline II in Manchester, acquired from Morgan Stanley Real Estate Funds. The block contained 129 apartments and cost £27 mln to develop but Long Harbour acquired it for £18 mln. It also bought One Eighty in Stratford, east London. This was a messy situation as the Irish developer had started renting out units, but the property had no building insurance, meaning units could not be sold. Long Harbour worked through a protracted negotiation with an insurance company to get cover on the proviso the firm undertook a significant amount of works. The whole block was refitted in three months and was fully let two months later. Suffice to say, it has made money. This was for its Long Harbour Income Fund series, which is now onto the fourth vehicle for build to rent properties. Long Harbour is now deploying a major effort into the PRS sector. Backed by its in-house property management platform, Way of Life, the Long Harbour Income Funds are its flagship fund series.

Urban regeneration
The third strategy, Long Harbour Real Estate Partners, has a focus on urban regeneration including social housing. In 2010, the nascent Long Harbour met ‘anyone and everyone’ it could think of to investigate the potential social housing opportunity and ultimately decided to concentrate on local authorities as the strategic holders of land. Their first transaction was with Barking & Dagenham in east London in May 2011 to build 477 apartments and houses on land it owned. Having offered to lend the authority £100 mln, Long Harbour went off to talk to potential investors, one of them being CK Hutchison Holdings, whose operations span the globe. ‘We told them how we admired what they had done in the infrastructure space, and that we had a deal that didn’t fit at the time in conventional hedge fund or pension fund strategies.  They were happy to support us in our efforts and we proved the concept over a nine-month window, resulting in approval from the group to invest the totality of the funding round.’
Not only did the Hong Kong-based firm invest in the fund, it also ended up taking a stake in the company. In 2012, Long Harbour had therefore gone from a business with four people and a start-up feel to being part of a huge venerable listed company. ‘It forced us much sooner than we ever thought to be much more professionalised,’ says Astor.
Long Harbour is now nine years old and ready for its next steps. It has started to invest in Continental Europe, in Germany, and there will be more – again concentrating on the urban residential theme. Astor: ‘I think we have realised we are good at working in the urban environment. A big push for us over the next 6-12 months – and part of what Christophe is assisting us with - is expanding the investor base as the strategies evolve.’