Large investors are becoming international homeowners like never before. Florence Chong looks at a global allocation phenomenon
American and European multifamily real estate deals have reached unprecedented levels in the past two years. Indications are that records could be set this year – the only constraint is a lack of rental stock for sale.
Transactions in these established markets collectively totalled €164.3bn in 2016 – lower than 2015’s €168.8bn. In the US, JLL ’s 2015 record of $144bn (€131bn) was broken in 2016 with sales of $150.3bn.
Savills’ statistics show that transactions in the seven key European countries reached €36.5bn in 2015. Although still high, total sales slipped to €26.5bn in 2016.
Those seeking professionally managed rental housing will have to join a queue. The waiting time to enter UK residential funds, for instance, is up to 18 months and possibly longer.
Residential rental may be a new asset class for some, but for others it is a pillar of their portfolios. The asset class represents 20% of real estate holdings of Blackstone and Australia’s sovereign wealth fund, the Future Fund.
Outside Europe, Japan and the US, the institutionalisation of rental housing is yet to emerge. But American pioneers are driving into untapped markets, such as Australia and Asia.
Greystar has formed a platform with Macquarie Capital to bring residential housing to key cities in Asia and Australia, while Sentinel Real Estate is about to break ground on a 97-unit block in Perth, Western Australia.
Australia is seen as ready for institutionalised residential rental, and Australian groups, including Mirvac and Lend Lease, have expressed interest.
Some Australian superannuation funds say that, given the right environment and government support, they are ready to invest billions into the sector.
But it is in the UK where the action is. The revival in residential rental investment is due to the UK government’s push to develop build-to-rent (BTR) housing to resolve a shortage as well as affordability of supply.
The PRS REIT, the UK’s first real estate investment trust to focus on UK private-rented residential, began trading on 31 May. It secured £250m (€287m) in an oversubscribed fundraise, bringing in £25m from the government’s Homes and Communities Agency.
The UK is seen as prime for transformation into one more like that of the US multifamily sector, where institutional investors and listed property groups play a key role in supply.
Greystar and M&G Real Estate, the real estate investment management arm of the UK’s Prudential insurance company, are two early movers – one domestic, one foreign – positioning for a slice of a market dominated by private landlords.
Greystar, the world’s largest multifamily operator, developer and owner, has secured a pipeline of more than 2,500 apartments in London for purpose-built rental accommodation. This will run alongside its student housing business.
Since launching its M&G Residential Fund in 2013, M&G Real Estate has built up a portfolio valued at £318m. It holds over 2,000 residential apartments. The fund recently received a £100m commitment from a Northern Irish pension scheme.
The investment arm of rival UK insurer Legal & General, a manager of £24bn in commercial assets for pension groups, is also building 3,500-4,000 apartments for its Build-To-Rent (BTR) Fund, which launched in January 2016.
“There is nothing on the market that we would want to own for the long term, so we decided we have to spend the next four to five years building up a portfolio,” says Dan Batterton, L&G’s BTR fund manager.
“We have over 1,400 apartments in planning or under construction, and hope to double the portfolio this year. From 2019, our aim is to complete around 1,000 apartments per year.”
The first batch of apartments has just been completed at the BTR Fund’s Manchester project, the Slate Yard, with residents moving in from June.
Batterton says L&G intends to differentiate itself from its peers. It is in for the long haul. “We will hold our assets for the next 40 years. Our strategy has been developed for the long term,” he says. As an example, tenants will be offered five-year leases instead of the industry norm of 12-monthly contracts.
The long-term horizon, he says, is designed to provide stable returns to match the long-dated liabilities of its pension fund clients. L&G’s BTR fund aims to deliver annual returns of 7-9% – made up of 4% yield and 3-5% rental growth.
L&G has attracted four foundation investors, which include Legal & General Capital, which manages the insurer’s balance sheet investments, and Dutch pensions group PGGM. They have committed £500m which, with gearing, gives the BTR fund a purchasing power exceeding £1bn.
“The quantity of equity we have secured allows us to build larger schemes that can benefit from economy of scale and greater place-making opportunities,” Batterton says, adding that equity will be locked in until 2023, when the BTR fund will be converted to an open-ended fund.
“Anyone who wants to invest with us will have to be patient because capital will be drawn down as required to fund developments,” he says.
The British Property Federation estimates that the industry has £50bn available to invest in purpose-built residential housing in the UK alone.
Rockspring Property Investment Managers is another moving into the market and is developing two BTR projects in Southampton and Birmingham. Fund manager Richard Bains says less than 5% of funds under management are allocated to residential, but the asset class does offer diversification and he expects the allocation to grow in the medium term.
Robin Goodchild, LaSalle Investment Management’s international director for research and strategy, estimates that professionally-managed rental housing currently represents 5% of total UK rental stock. However, given current investment trends, he believes this proportion could rise to 20% in the next two decades.
Goodchild says that, traditionally, UK residential rental has performed better than commercial property in two of every three years because of shortage. He expects these returns to continue – until the UK builds more homes.
Goodchild believes BTR projects currently under way or planned will only satisfy 10% of underlying housing demand. The balance will need to come from traditional housebuilders, social landlords and extra government money.
Lessons for the UK
In contrast, the institutional residential markets in some European countries are well established. Germany is the most active, followed by the Netherlands, Denmark and Sweden. A notable investor in Germany is China Investment Corporation (see The full story behind CIC’s massive German housing deal), which bought a 16,000 apartment portfolio in 2016 with Morgan Stanley.
Savills Europe’s research team says the German residential investment market enjoyed a “very dynamic” start to 2017. The transaction volume in Q1 totalled €3.2bn, a 55% increase on the corresponding quarter of 2016.
Approximately 25,000 apartments changed hands – up 26% over the same quarter of 2016. Savills expects transactions to exceed €10bn in 2017.
Listed companies dominate the German market. Between 2012 and 2016, according to Savills, market leader Vonovia invested €14bn in the multifamily sector.
AEW, which currently manages about €60m of German assets, plans to increase its presence in the country.
It manages a €1bn residential portfolio for separate-account investors in France. In January, it launched a French residential fund known as RESIDYS, raising €100m in a first close. Rob Wilkinson, chief executive of AEW Europe, says he expects the fund to raise another €400m by early 2018. Encouraged by interest in RESIDYS, AEW may launch other country-specific or pan-European funds, he says.
The deepest and most liquid multifamily market is the US, where the NCREIF apartment sub-index totals $131bn.
The US multifamily sector has attracted sovereign wealth and international pension funds. Australia’s Future Fund has invested through both the Berkshire Multifamily Value Fund 111 and the Dallas-based Howard Hughes Corporation.
Future Fund’s head of property Barry Brakey says: “The US multifamily sector is one of the most important property asset classes in the US, and has provided the fund with strong, consistent returns over the past few years.”
Brakey says the Future Fund has invested 20% of its AUD7.8bn (€5.3bn) property portfolio in the global multifamily sector, mostly in the US.
The man often credited with institutionalising US residential rental is Bob Faith, founder and CEO of Greystar, which today manages 450,000 units valued at US$80bn.
“We have discovered that many global institutional investors love the lower volatility of the rental residential asset class,” Faith says. “Combined with increasing urbanisation and demand for flexibility, we are seeing an enormous global opportunity for apartments. What these potential investors do not have is a developer, operator and investment manager to help them invest across the globe.”
The vertically integrated Greystar co-invests with institutions in a portfolio valued at $16bn across multiple vehicles and strategies. It has $7.7bn committed to development.
Australia’s REST Super, an industry fund, has invested AUD300m with Greystar to build a portfolio of US multifamily assets.
Sentinel Real Estate also provides a bridge to the US market. It has seen an acceleration in investment into the US.
Sentinel’s executive vice-chairman Michael Streicker says: “Coming out of the GFC, there has been an overall increase in international investor appetite for US multifamily product.”
Sentinel operates an open-ended core multifamily fund, a series of value-added closed-ended funds, and segregated accounts for large institutional investors with varied investment strategies.
Over 48 years of investment, Sentinel has acquired and managed more than 145,000 apartment units, valued at $12.9bn.
“International institutional investors account for approximately 25% of our client base by AUM,” Streicker says. “We always co-invest with clients in our commingled funds. But certain segregated accounts prefer to have full discretion, so Sentinel does not co-invest in those.”
The AUD100bn AustralianSuper has mandated Sentinel to seek out multifamily investments for it in the US, and is evaluating two investment opportunities.
Blackstone allocates 20%
Blackstone, one of the world’s single largest owners of real estate, entered the residential rental sector in the wake of the global financial crisis. It acquired $10bn of distressed US housing, while also moving into Japan and Germany.
Recently, Blackstone has been looking to buy distressed homes in Spain, where it made a €125.5m joint acquisition in 2013 with Magic Real Estate. IPE Real Estate understands that Blackstone has more appetite.
Residential accounts for 20% of Blackstone’s total real estate portfolio. It owns 100,000 units – split between single and multifamily apartments.
A souce close to Blackstone says: “We like rental housing globally. It an asset [class] that produces current cash return, net of all expenses. The current cash dynamics are something that investors prefer. Residential [also] has a limited vacancy risk.”
Blackstone’s strategy is to acquire assets in high-quality locations and markets. He continues: “If you own a multifamily in such a location, it should run at occupancy of 90-95%.”
When an office building loses a major tenant, he adds, it can end up with 20% occupancy. “You won’t see this in multifamily.” This is a view commonly held by investors.
But Blackstone is trader. It sells assets when it can capture maximum returns. In January, it listed Invitation Homes, which holds a large single-family rental portfolio, on the New York Stock Exchange. The initial public offering raised $1.54bn. Blackstone retains a 70% stake, but expects to sell down this.
Also in January, it sold a Japanese portfolio to China’s Anbang Insurance for $2.3bn.
Recently, Blackstone spent $1.2bn on two transactions in the US, one of which involved buying a portfolio for $748m from a fund managed by Bridge Investment Group. Like Blackstone, Bridge Investment had acquired distressed assets below replacement cost.
Matthew Cook, who sits on Bridge Investment Group’s partner advisory committee, and is chief executive of Spire Capital, says the US multifamily apartments have been refurbished. “We updated the apartments, while communal amenities, such as tennis courts, have been converted to soccer pits to better suit today’s tenant needs,” says Cook.
Through Spire Capital, Australian investment amounts to about 10% of funds under management in Bridge’s ROC series of multifamily and commercial property vehicles, according to Cook. Investors in the ROC funds have enjoyed strong annual capital gains on the back of the US economic recovery.
But the Blackstone executive says the days of rapid capital appreciation – at least for this cycle – are over. Rents, though, will continue to grow as demand for rental housing grows in major cities around the world, he says.
It is this belief in continuing growth in both demand and rents that underpins the rising confidence in residential for rental.
The full story behind CIC’s €1.17bn German housing deal
The China Investment Corporation (CIC) is one of Germany’s largest residential landlords following the December 2016 purchase of the Australian-owned BGP Investment for €1.17bn.
Through a Morgan Stanley fund – which retained a 5% interest – CIC bought the privately-owned portfolio of 16,000 rental apartments in the cities of Berlin, Kiel, Rendsburg and Cologne.
Mark Dunstan, BGP Investment’s chief executive, says the attraction was the portfolio’s operating
platform, which could be leveraged to create more value. “Originally, this was a classic property fund, holding assets for third parties,” he says.
“We converted that into a fully-integrated real estate company. The fact that it is a self-managing package rather than just investment property is what made it attractive to Morgan Stanley.”
Against all odds, Dunstan established a fully integrated property management company to salvage the residential portfolio at a time when BGP equity in the assets had turned negative. Creditors were calling in loans in the depths of the global financial crisis.
Confronted with tough decisions in choosing which assets to hand to creditors, Dunstan, an ex-investment banker, made a prescient call to save the residential portfolio.
Dunstan says he chose to quarantine the residential component because he could see the investment case for preserving this portfolio intact. He sold shopping centres and industrial assets, which were in deeper water than any of the other assets, to reinvest in the residential portfolio and pay down debt.
In the end, he says, it was capital expenditure, funded by €60m in proceeds, that was the big driver of value.
Dunstan says the creation of a fully integrated in-house management company helped stabilise the residential portfolio, allowing a real turnaround in the business. Taking management in-house stemmed a source of revenue leakage and saved “an enormous amount” of money, he says.
“We went from 20 full-time employees in 2010 to more than 200 by the time we sold (in 2016). I think this is what made BGP attractive to investors.”
The portfolio – 10% of which is made up of ground floor shops – generates an annual rental income of around €80m.
To Dunstan and his team, the recovery story of BGP is a tale of six years of “brutalising” experience, dealing with unforgiving banks.
BGP Investment was the product of one of the worst examples of pre-financial crisis hubris displayed in any Australia. The now defunct Sydney-based investment bank Babcock & Brown embarked on debt-fuelled expansion overseas, persuading the Australian-listed REIT, GPT Group, to become its partner in the offshore adventure – or rather misadventure.
In 2009, GPT and Babcock restructured the joint venture, leaving GPT with the European assets. When the financial crisis hit, GPT, to protect its balance sheet and reputation, jettisoned the European business into a newly created vehicle, BGP Investment.
GPT wrote off the BGP business, spinning off BGP as an in-specie dividend to its own shareholders.
Dunstan was convinced from when he was first hired, that he could rebuild value in the investment. “Otherwise, I would have closed it down,” he said.
Sure enough, with the sale to CIC and Morgan Stanley, Dunstan has delivered a windfall of €600m to GPT and its shareholders.
Dunstan foresaw the day when institutional investors would clamour for residential investment again.
Another Chinese institution, Anbang Insurance Group, earlier in2017 closed a deal with Blackstone to buy a large residential portfolio in the Japanese cities of Tokyo and Osaka, for $2.3bn.
With a combined investment of €3.34bn, CIC and Anbang now loom large as global players in the new investment mantra – residential for rent.