EUROPE NEWS: Oligarch city

A high-profile court case last month between Boris Berezovsky and Roman Abramovich highlighted the bad blood that can exist between Russian oligarchs. It also served as a reminder that billionaire Russian exiles have a penchant for living in London – a point that has not been lost on private equity real estate firms, which in recent times have shown interest in developing high-end residential property with notable frequency.

Within the past 12 months, Europe’s Orion Capital Managers, Washington DC-based The Carlyle Group and, most recently, Brockton Capital have announced grand projects. Brockton’s plan, revealed last month, is to convert a 1930s red-brick mansion on Curzon Street near Green Park into an 18-unit ultra-prime apartment block, with an expected development value of £400 million (€458 million; $629 million). The firm has spent four years buying 40 flats to get into a position to redevelop, according to the Financial Times.

Even mainstream private equity firms have been involved in the sector. London-based Beaubridge, for example, already has exited its investment in a luxury apartment block. In October 2010, it provided financing to Liberty Property to embark upon a £40 million redevelopment of a 1960s serviced apartment building into 32 luxury apartments. The investment in 2 Hyde Park Square was made on behalf of a club of investors in Beaubridge’s MC Special Opportunities Fund. The first offering of apartments was sold to overseas buyers via Savills.

“Private equity people have realised that getting high-teen returns in a low-leverage environment is very tough, so they have turned their attention to the high-end residential world,” said Robert Rackind, principal and co-founder of London’s Wainbridge, which originally was set up as a high-end residential property fund and whose investors include two ultra high-net-worth Russians, Kirill Pisarev and Mikhail Serdtsev.

“The true private equity is focusing on the key locations of Mayfair, Knightsbridge, Belgravia, Kensington and Chelsea,” Rackind said. “These sub-markets have different end buyers. For example, Russian high-net-worth individuals are really interested in Mayfair, Knightsbridge and Belgravia, while Chelsea and Kensington are more international.”
Rackind noted that the more political strife and economic turbulence there is outside the UK, the more money that arrives in London. “We believe high-end residential property is going to completely disconnect from normal residential property because the units do not churn,” he said. “They are held and are not even occupied for many days of the year.” He added that there have been a few sales of properties in the £6,000 per square foot bracket, but the blended average is closer to £4,000 to £4,500.   

Why London? Political certainty, its judicial system, its schools and Knightsbridge shopping are all counted as attractions, along with the diversifying nature of holding some property in the Sterling currency.

For private equity firms, it seems there are three reasons.  Van Stults, a founding partner at Orion Capital Managers, said supply constraints, increasing demand both from an occupational standpoint as well as an acquisition investment standpoint and the tremendous shortage of construction financing for any kind of residential property are behind the interest. Aref Lahham, also at Orion, added: “As a private equity fund manager, we move into sectors when the time is right. For central London luxury residential property aimed at international as well as domestic purchasers and investors, we believe the time is now. We are looking for more residential opportunities of this nature.”

Private equity firms have tended to focus on the multi-unit, high-end schemes, but less so on single-family homes. One reason for that, said Wainbridge’s Rackind, is that such assets are much harder to justify and underwrite for fiduciary managers of capital. “It is much more touchy-feely,” he explained. “Why is a house worth £60 million and not £80 million? I think getting into the high-end home world is not for private equity because it has problems underwriting the risk.” 

Still, there certainly is demand for such expensive homes. Experts say there are more than 100 registered buyers of homes in central London that have more than £100 million to spend.

“If one thinks about emerging markets and where wealth is being created, people take such risks in their home countries that they want to protect their capital when they have made it,” Rackind said. “For private equity, as long as one can truly understand the value of a property, one can make good money. But if you get it wrong, you can certainly lose money too.”