In 2015, Harrison Street made its first foray into Europe by launching a €235m (£212m) student housing fund backed by institutional investors.
Since then, it has broadened its investment mandate into build-to-rent (BTR), partnering with Apache Capital and Moda Living, and raised €700m for its second European fund last May.
This second fund is investing in student housing and other residential assets such as micro-living, with a focus on acquisitions and developments in core markets across Europe and the UK.
Daniel Gorzawski, managing director and head of Europe, outlines Harrison Street’s approach to alternative residential assets.
Why did you branch out from student housing?
In the US, Harrison Street invests in demographically driven real estate, in particular student housing, senior living, healthcare, storage and social infrastructure.
In the UK and Ireland, we recognised the opportunity in the BTR sector, which is similarly driven by demographic trends that we have been tracking for a while and that have created a significant structural supply/demand imbalance.
Market characteristics are similar to early-stage purpose-built student accommodation markets, with fragmented ownership, yield premiums, limited supply and only a few institutional-level developers and operators.
From a design and operational perspective, student housing, micro-living, co-living and BTR share similar characteristics that can be adapted and we feel very comfortable investing in these sectors.
How strong has investor appetite been?
We are grateful for the support we have received from our sophisticated and global institutional clientele for our European funds. The bulk of our capital has been from investors in North America, Europe and Asia. We expect to launch our third European fund in Q4 2019, which will have a senior housing and healthcare strategy.
Has that got anything to do with yield compression?
First, our investors understand that these sectors are defensive in nature. Risk, yields and returns relative to traditional real estate asset classes do play a role. Real estate in core institutional European markets can only be acquired at record-low yields.
Investors look at student housing yields that are often 100 to 200 basis points above main real estate sectors and recognise the opportunity in what we consider mispriced risk: very attractive yield premiums for property sectors that have proven to be highly resilient throughout cycles.
These property types can be more operationally intensive, but that’s part of the opportunity if you have a manager with the right expertise.
How do you benchmark performance across Europe?
That is still a challenge for market participants, given the early stages of these sectors in some European countries. And that is especially a challenge for new market entrants – how do you underwrite opportunities with little in the way of benchmarks available?
Having been an investor in this space for nearly 15 years, Harrison Street has access to large amounts of data and we have developed very specific metrics that we utilise when assessing an investment.
Given the demographic nature of our target sectors, the firm invests a lot of time and resources in researching potential target markets. That does let us delve deep into any market to decide which ones we want to invest in.
What are Harrison Street’s plans for the future?
I can only speak for the European business: we raised our first European fund in 2015 and have invested in more than 15,000 student housing beds and BTR units across five European countries.
We are looking to broaden our sector focus to include senior housing and healthcare, increase our geographic footprint and continue to offer our investors differentiated investment options in the core and opportunistic risk spectrum.
The European business is the growth focus for the company right now and we continue to seek to generate value for our partners and investors.
If you hail from the residential sector or have an interest in alternative residential assets, you can’t afford to miss the RESI Convention. Join key decision-makers as we look ahead to what the future holds for our ‘Brave New Mixed-up World’.