If European private equity real estate is a small world, then the world of development-focused funds is even smaller. But thanks to macroeconomic trends, one firm thinks that it will take that level of active management to bring them the returns they're after.
“We just don't feel growth is likely to continue at the same rate,” explains Steven Webster, one of the directors of London-based Develica. “It's a result of low interest rates, yield compression and weight of money.”
The partners intend the fund's effect on its investments to be “transformational”, going beyond active management and into fullscale development. In that way, they hope to achieve returns of higher than 20 percent. Although they admit this business model is not unique – “There are other people who do what we do” – they are unusually hands on about it: earlier that morning, the partners had spent a few hours poring over blueprints and arguing about where to put the drainage system in a retail park.
They are unusually hands on about it: earlier that morning, the partners had spent a few hours poring over blueprints and arguing about where to put the drainage system in a retail park.
The firm is currently raising DevelicaI, LLP, a six-year, UK-focused fund. The firm hopes to hold a £25 million ($45 million; €37 million) final close by the end of September and with leverage, they expect to have £160 million in purchasing power. The firm decided to stick to a small fund, partly because of their lack of a track record as a team, but also because they wished to focus on a small number of high net worth individuals. “They're more entrepreneurial and relationship-based, and so can introduce us to deals,” says Grant Tromans, another of the firm's directors.
Develica's search for superior returns has led them to be extremely fussy in which deals they take on: having examined the better part of 100 opportunities, they have so far taken on only two. In the pipeline at present is a development project in the south Wales town of Blackwood, where the firm has paid £3.85 million for a 15-acre greenfield site. It intends to develop 85,000 square feet of bulky goods retail space, almost half of which has already been leased, as well as housing on a small adjacent plot.
The firm is awaiting planning permission before construction can begin. Once it is confirmed, they hope to turn the project around within 30 months – and to get a tasty IRR of over 20 percent.