BLUEPRINT: Resolution’s red dawn

Resolution Property, the London-based real estate investment manager, has been an ever-present in European private equity real estate’s mid-market for more than 15 years. But while its presence in the region has been continuous, there is change afoot in the shape of new ownership at the company level.

In July, a majority stake of the business was sold to China’s largest privately-held consortium Fosun Group ushering in a new Eastern-flavored era for a firm that to date has been quintessentially British in culture.

It is this change that prompted PERE to drop by Resolution’s upmarket Mayfair offices to talk with founder and chief executive Robert Laurence one sunny afternoon last month. First on our list of questions was why his firm sold the majority stake to the Shanghai-based group.

“I had been thinking for a while, although hadn’t got around to really focusing my thoughts, on getting a powerful partner to work with,” explains Laurence. “We wanted someone who could bring a number of things to the table. Not only capital, which is important, but an interesting profile and stimulating thoughts about the market. I think China is going to be, albeit with a few bumps in the road, the most interesting source of capital and ideas globally going forward.”

In its first ever asset management platform buy outside Asia, Fosun Property, the group’s real estate business, became the majority owner in Resolution Property Investment Management (RPIM), a joint venture company created between Fosun and Resolution. The remaining stake has been retained by Resolution Property’s partners. The deal was termed a strategic investment by Fosun and Alex Gong, executive president, overseas business and equity investment, at Fosun Property Holdings, told PERE that Resolution would act as Fosun’s exclusive real estate investment manager to invest in value-add real estate opportunities across Europe.

The pair were introduced by a third party and it took about six months of in-depth talks and negotiations before a deal was struck. Laurence says he didn’t know a lot about how large Chinese corporate organizations conducted themselves but was pleased with the teams that Fosun deployed to do the deal.

Of course Resolution are not the first European private equity group to receive the financial backing of Far Eastern capital. Rockefeller Group International, a US subsidiary of Japan’s second-largest real-estate developer Mitsubishi Estate, acquired a 75 percent stake in Europa Capital back in October 2010. Since the backing from Rockefeller Europa has gone on to raise €600 million for its fourth opportunistic fund, which it closed in July. That fundraising took two years.

Resolution will soon be out testing the pulling power of its backing by Fosun by launching its fifth fund later this year. “The scale will probably change. It’s going to be quite a big fund and it’s unlikely we’ll have any assets of less than £50 million (€75.5 million; $87.7 million) and they are most likely to be a lot bigger than that. The biggest assets we have bought in Resolution so far are still large, we have just sold one for £280 million, so it is not unusual for us to own something that is £200 million-plus, but most of what we will be doing will be at the larger end of our scale,” says Laurence.

Fosun is expected to provide cornerstone funding for all subsequent real estate funds launched by Resolution, but the London-based firm will be looking to bring in other investors too. “The capital they are providing is substantial enough that it could be a fund in itself, but we both want to start attracting third-party investors to that as well. Fosun have got some interesting contacts, especially in the Far East, which will be completely new for us, but I do think we will retain a lot of our existing investors from Europe and the US. It’ll be an interesting mix of some of the existing and the new ones.”

And Laurence is confident the Fosun brand will encourage investors to come into Fund V. “If there are any sceptics who say well this is all new, and of course it is, if we demonstrate it is working well and we are acquiring good assets, then I think that will encourage anyone sitting on the fence to come in.”

One notable area where Laurence believes Resolution can take advantage of Fosun’s reach and brand name is in soliciting capital from Chinese retail investors. He says: “the volume of investment coming out of China and the emerging powerful middle class that wants to make investments and needs to have a means of securely investing capital abroad is a great opportunity. I think that to tie-up with one of the largest and most respected groups in China, who is a household name for those people is a wonderful conduit for us to be able to deploy Chinese capital in Europe.”

17 not out
Raising cash from Chinese investors will be a far cry from Resolution’s roots. The firm, established by Laurence and an investment team from UK property company Argent Group in 1998, was originally backed by US private equity buyout giant Warburg Pincus. The private equity investor committed the vast majority of Resolution’s £100 million first equity haul in February 1998. Global private equity real estate giant The Blackstone Group and JER Partners put £70 million into limited partnerships covering the firm’s first three major assets too.

The firm’s first investments were across the retail, industrial and office sectors with an emphasis on the London media industry, with landmark acquisitions such as the purchase of Greater London House, an office building, in 1998 and the Forge Shopping Centre in Glasgow.

It wasn’t too long before Resolution embarked on a cross-border investment strategy throughout Europe. To that end, in February 2004, Resolution closed its second fund, with commitments in excess of £330 million from an enlarged shareholder base including US universities and foundations, US and European private equity investors and US and European pension plans.

Resolution’s Swiss residential portfolio is an example of this extended reach. The firm had been working on putting together an investment thesis for European residential, particularly in Switzerland, where it was intent on taking advantage of the country’s lack of rent control apartments. Laurence was able to approach a “good friend” who was in that business and Resolution partnered up with him for investments.

The result was a portfolio of around 2,600 rent-controlled apartments in the Geneva area, which Laurence says produced a strong income stream for the firm. “If you have a rent-controlled asset in a country where rents are going up very fast no one wants to leave because they have a better deal to stay put so you have a better quality of income stream. Plus, no one wants to build them as the minute you put a normal apartment building into rent-control the capital value is worth less because the rents are lower and you can’t get out of that.” Resolution has since exited the assets but has built a new portfolio of a similar nature in Copenhagen.

Monitoring Resolution’s investment theses is central to what Laurence calls “keeping ahead of the curve” and so at least once a year he and the senior investment team will review each of their investment strategies. And Laurence is not scared of modifying strategy dramatically. A case in point is its approach to retail. “What has been interesting is the face of retail has changed so much. Big box retail has come and then slowed down a fair amount so retail warehouse parks, which had historically been very good to us, recently have not been performing as well. But we could anticipate that and began selling before the period of performance could impact their value.”

Building firepower
Key to any private equity real estate firm’s success is the ability to raise cash from investors, and here Resolution has been affected by market sentiment. After being backed initially by buyout behemoth Warburg Pincus, the firm then closed its second fund in 2004 on £330 million, but it more than doubled the size for its follow-up effort, Fund III, at the end of 2007, closing on €808 million. PERE previously reported that the fund was largely backed by US endowments and limited partners such as Hewlett Packard and Stanford Management, although Resolution declined to comment on limited partners.
Predictably, with an €800 million-plus fund that bestrode the global financial crisis, Resolution had some challenges with the early part of Fund III’s vintage.

“We haven’t been perfect. We have had some situations pre-Lehmans which didn’t look so happy post-Lehmans, we’ve had our share of knocks, but you can’t have been in this industry as long as we have without taking your share,” says Laurence.

“We made some investments just before the crisis which weren’t great, but weren’t terrible either, and we made the bulk of the investments after the crisis which did very well.”

Standout deals for Resolution’s Fund III include the acquisition of a 50 percent stake in the Waterfront shopping center in Bremen, Germany, as part of a €130 million joint venture with Ireland’s LNC Property Group. The firm was able to exit the asset in August, selling the shopping center to Danish pension fund ATP for €212 million.

Under Resolution’s watch, Waterfront underwent an extensive asset management program and the asset is now fully let following 430,566-square-feet of leasing or lease renewals. Another success of Fund III was the 240,000-square-foot Alphabeta office development in London’s Shoreditch. The property, formerly Triton Court, was sold to Singapore-listed property company Sinarmas Land for £280 million in August, reflecting an initial yield of 4 percent.

When Resolution hit the fundraising trail in 2013 with an initial target of around £650 million for Fund IV, the firm did not have everything its own way. Resolution called time on fundraising in October 2014 having raised around £300 million.

Explaining why Resolution raised half the initial target, Laurence says: “We were transitioning from all one type of investor to a wider group: pension funds, insurance companies, sovereign wealth funds. And so that took a longer time than previous funds.”

“And there were a number of endowments, our traditional investors, who were, post-crisis, not wanting to do that much in Europe anymore. Those were really the main reasons.”

One pan-European fund manager, which was marketing a fund at the time agreed that the US endowment market had not recovered as quickly as its pensions and that was making it much more difficult to get these investors into a European fund.

He adds that only the biggest US investors were really looking at European value-add and opportunistic funds, but were committing significant chunks of cash, and that Resolution’s target of £650 million would arguably have been too low for many of these investors to put to work their desired amount of capital.

A pension consultant says timing played a big part in Resolution not hitting its target too. “There were a lot of other European fund managers in the market at the same time, and the market hadn’t improved enough yet for all of these managers to get their hands on US cash.”

The equity haul for Fund IV provided Resolution with firepower to assemble £800 million of assets and notable investments included: Department W, a media center and residential re-development near the future Whitechapel Crossrail station in London; the Great Northern Warehouse retail, leisure and entertainment center in Manchester; and Poznan City Centre, the dominant retail center in one of Poland’s biggest cities.

Resolution has just three or four deals left in Fund IV, which the firm is in the process of signing so the fund is expected to be fully invested in the next couple of months. After this investing is wrapped up, Resolution will embark on raising Fund V, and although the aforementioned change of scale to the firm’s next offering, Resolution will be sticking to its knitting when it comes to buying properties.

“When we start investing Fund V with Fosun, and we are considering opportunities both in London and abroad, we will need to be highly, highly selective. We need to depend on our own resources and add a lot of value, rather than look for market shifts in what is a very competitive environment.”

“What I don’t want to do is rush, because we all know that a lot of European markets are looking quite warm at the moment. There are instances where yields are at record lows but supply is starting to creep up and that is not a good combination. We will undoubtedly do some large and interesting transactions over the course of the next year but we don’t have to do anything.”

Laurence says Resolution will also not alter its investment strategy for Fund V and will in fact take Resolution Property’s UK model of office development for the creative and digital sector to new European cites.

“We definitely want to focus on the same areas for Fund V. We will continue to look at markets which either are institutional or will be institutional so we can make institutional grade buildings in those areas.”

Despite a major change in the ownership of this European real estate investment management stalwart, there will still be plenty of continuity.