GI 50: Principally speaking

This article is sponsored by Macquarie Capital Real Estate Advisors.

Formally naming Macquarie Capital’s real estate principal investment business Macquarie Capital Real Estate Investments (MREI) simply articulates a strategy that in reality has been an important part of Macquarie Capital’s activities for a long time now. MREI naturally evolved from sourcing institutional money and making the connection to transactions, to harnessing its capital raising expertise and using its own balance sheet to partner with specialist real estate platforms and help them scale up.

Closer to the action

According to MREI’s global head, Brett Robson, the evolution of MREI was driven by a desire to get involved with specialist real estate managers at a more grassroots level and at an earlier stage in their lifecycle, bringing with it strategic oversight and allowing the managers to leverage Macquarie’s financial markets expertise, global industry network and corporate infrastructure. The business had also been keeping a watchful eye on what institutional investors were up to.

“As investors grew larger and more sophisticated, we noticed they were more willing to provide LP capital to smaller specialist groups with a high level of expertise. We positioned our business to seek out these specialist businesses and match them with sophisticated LP capital,” explains Robson.

The transition was never going to be a huge leap. As a market-leading capital arranger, the firm already had deep relationships with real estate platforms. Securing skin-in-the-game was a logical next step.

“What we enjoyed most in our capital advisory and arranging capacity was our ongoing relationships with these groups, so why not align ourselves further by investing our own money and sharing in the value we help to create for them? We wanted to be the principal investor at an early stage in these platforms, helping them build their core skills, and source and create new assets,” says Robson.

Deal spotlight: LOGOS

Vertically integrated group with an in-house development and management capability focused purely on logistics real estate in Asia-Pacific

>A$9.8 billion ($7 billion; €6 billion) of target AUM*

> 3.2m sq m of logistics real estate owned and under development in LOGOS ventures

>145 employees

Operations in Australia, China, Singapore, Indonesia, Malaysia, India and New Zealand
MREI invested in 2014

* Based on full deployment of existing ventures

“It makes sense for the clients and also gives us an efficient entry point into owning significant stakes in what we anticipate down the line will become sizeable, high-quality real estate platforms that are institutional grade and can attract further capital from third-parties to take these businesses to the next level.”

Creating sustainable value

Playing an integral role in the development of new real estate assets is clearly a focus for the firm at a time when many managers and passive investors are struggling to source, buy and create value from standing assets. However, helping platforms acquire existing assets is not overlooked completely. Jelte Bakker, MREI’s head of principal investments, says: “Our role is often to help a developer fund assets and get their operations up and running before we invest the capital. Many of the groups we partner with are used to a private equity model, where investors are focused on creating value to sell. Our goal is to contribute to creating lasting businesses, with long-term capital under management, which produce sustainable income streams.”

But the skills of acquiring and creating assets are symbiotic, according to Bakker.

“LOGOS, for example, has a core strategy and acquires existing assets, but its ability to do this is augmented by its development expertise. In our experience, groups with the ability to create assets are generally better placed to underwrite the acquisition of existing assets.”

Eye on the megatrends

MREI is heavily focused on future value, having sought out investments in specialist platforms with best-in-class management teams operating in sectors supported by global megatrends – technology, e-commerce, changing demographics and urbanization – early on, before they became hugely popular. The firm identified how these trends had the potential to impact and reshape real estate and the long-term value opportunity presented for investors.

Deal spotlight: RHP

Partnered with RHP Properties, the largest private owner and operator of manufactured housing assets in the US, with a long track record of value creation

>$5 billion target total AUM*

>2,780 current households

MREI invested in 2017

* 5-year target

 

Deal spotlight: Investa Office Management

Australia’s largest specialist integrated office management platform

Track record of delivering some of Australia’s leading office developments

>A$12 billion AUM in Australia’s key CBD markets
38 assets

>200 employees

>760 tenants

MREI invested in 2018

 

Deal spotlight: PLP

Specialist developer, manager and owner of UK logistics real estate

PLP senior management team averages over 20 years of logistics development experience

Strong development pipeline of 7.5 million sq ft of logistics space with a completed value of £760 million ($993 million; €861 million)

Exclusive access to Peel Group’s consented land bank of over five million sq ft of developable logistics space

MREI invested in 2015

The penetration of e-commerce in the retail space, for example, is upping demand for logistics assets. Rapid urbanization, particularly across Asia, means there is an urgent need to build more affordable accommodation with the millennial generation in particular looking to the rented sector. MREI has partnered with multifamily specialist Greystar in Asia-Pacific to develop and manage rental residential properties throughout the region.

“We’re also working with a group in the US, RHP Properties, to acquire small independent operators in the manufactured housing sector with the aim of building out a high-quality institutional-grade portfolio of assets,” says Robson.

“We can unlock the opportunity for them to achieve scale and attract institutional capital. Over time, we think institutions will come to appreciate the return profile from that long-term income stream, particularly in the hands of high-quality management.”

Talking numbers

According to Robson, principal investing brings in a sizeable portion of MREI’s earnings – impressive for a relatively new part of the business.

“Collectively, the managers we have made investments in have an AUM of more than $20 billion. These businesses are quite development heavy. If you look at their business plans and with the capital they’ve got, they are targeting to be $50 billion in the next five years. MREI draws on the Macquarie Group balance sheet. Our access to the group balance sheet enables us to commit large individual sums, although we generally like to have a horizon over time where that single deal exposure comes down,” says Bakker.

Robson explains that MREI aims to own around 50 percent of these platforms, although emphasizes there is no golden rule on this, nor is there a specific timeframe to exit an investment.

“Ultimately, there is a point in time where that may end up being the outcome. But we don’t invest on that basis as we take a long-term view. Our focus is on assisting growing high-quality specialist businesses with sustainable operations and income. There may be a point that it may make sense to change the capital structure at which point Macquarie may realize value for its investments.”

Looking to the future

Growth economies, supported by structural tailwinds, are attractive markets for the firm’s principal investing strategy going forward, says Robson, and on that basis MREI is likely to further build exposure to markets such as China and India across sectors including logistics and multifamily. The firm is currently investing in logistics warehouses in India and China through its partnership with LOGOS, and is not shy of looking at other opportunities in the market. Together with Greystar, it is looking at multifamily across Asia-Pacific with Shanghai a particular hot spot.

Japan, where there is an established rental housing market, is on the radar too. “There we are looking to have more of a core-plus strategy where it is more about leveraging management expertise to create greater value across the rental housing sector,” says Robson.

“While most of the groups we have invested in are early stage, we’re also investing in more mature platforms like Investa, a specialist Australian office manager, that we think is well-positioned to outperform and grow over the long-term as the only major Australian office sector specialist,” says Robson.

MREI’s investing momentum is gathering speed.