God save the Ministry of Defense

In 1996, the UK Ministry of Defense ran an auction to sell approximately 57,000 homes located throughout England and Wales, a process that drew interest from 19 real estate and private equity investors, including ING, BritishLand and a group led by developer and Conservative Party fundraiser John Beckwith. Under the proposed terms of the sale, the government would rent back the houses from the winning bidder, while also releasing a certain number of units each year for sale, re-lease or redevelopment. After a lengthy and hotly contested auction process, it was Nomura's principal finance group, the private equity arm of the Japanese bank, at that time run by Terra Firma founder Guy Hands, which emerged as the winning bidder with a price of £1.7 billion. When the deal was announced, it was the largest single transfer of residential property in UK history.

Unlike the other bidders, whose plans called for knocking the houses down and developing nicer ones in their stead, Hand's philosophy was much simpler: put as little investment into the houses as possible.

“Our belief, which is not shared by the world, is that most development of property adds very little value,” Hands told Private Equity Real Estate earlier this year. “Your real increase in value comes from what is going on in the market.”

To that end, Nomura engaged in an ambitious, yet modest, renovation program, spending approximately £16,000 per house on small improvements, but leaving most of the interior work to the buyers. To encourage an efficient sales process, all houses in each development were sold on the same day and the new company, Annington Homes, also provided buyers with full surveys, a mortgage and a price point that was 5 percent to 10 percent below the market.

Though the deal generated headlines for a number of reasons, including its high-profile, the fact that some buyers would wait in line for weeks and the heated reaction of some government officials over the sale of military housing to a Japanese firm, it was ultimately the profits generated by Hands and his team that made even bigger news. Following the sale of more than 12,500 homes and two asset securitizations, Nomura's initial equity investment of £226 million has turned into a profit of approximately £1.6 billion.

Not only that, the deal foreshadowed Terra Firma's push into the German residential market via its acquisition of Deutsche Annington in 2000, as well as the €7 billion purchase of the Viterra portfolio in 2005, one of the largest private equity real estate deal of all time.