Round Hill Capital is looking at troubled real estate opportunities to help fuel the expansion of its US business, PERE has learned.
The London-based residential investment firm launched its US business two years ago via a partnership with Atlanta-based multifamily firm Cortland. Round Hill currently manages approximately $500 million of assets in the US, including $150 million through its US Residential Income and Growth Fund, which targets garden-style multifamily properties in the Sunbelt region. The firm’s most recent US RIG acquisition was the purchase last week of a 205-unit apartment community in Cary, North Carolina for about $50 million.
To date, the firm has raised about $100 million from European institutions for US RIG and is in ongoing discussions with a handful of other investors on additional commitments. Round Hill’s remaining AUM in the US comes from a joint venture with a development partner to build subsidized workforce housing.
Going forward, the firm is also looking at pursuing both organic and inorganic growth opportunities in the US. “At the top of the market, there’s often a lot of fragmentation, with teams spinning out of bigger organizations to create their own investment management companies,” said senior managing director and head of Americas Rob Reiskin. “In a down market, you often start to see much consolidation. There are some good groups that are out there. But many are sub-scale, and they’re now looking to join a safe pair of hands.”
Round Hill is currently in talks with a number of groups, ranging from investment management firms with third-party capital, to small specialist teams at larger organizations. The parties include those focused on multifamily as well as those active in other housing strategies, such as student housing, where the firm has invested in Europe but not yet pursued in the US.
“We’re growing concerned by some segments of the student housing sector in the US,” Reiskin said. “There’s been a lot of building and significant capital that’s come into the sector, which has not always been disciplined and also newer to that asset class. I think there might be some interesting opportunities to invest in the US student housing sector as a result of some pain that some other players might experience.”
Another area that may present some inorganic growth opportunities in the US is in credit. “Occasionally, there’s a shortage of debt capital,” Reiskin remarked. “In part, that leads us to believe that this might be a business we could get involved with.”
Round Hill could potentially extend its existing European debt venture with specialist residential lender Hilltop Credit Partners into the US or otherwise acquire or merge with a small team or organization with credit expertise in the country.
In addition to its income and growth strategy at US RIG, Round Hill is also readying a value-add strategy targeting potential pockets of distress that could arise in workforce housing if federal and state stimulus payments come to an end for many unemployed or underemployed residents.
With renters in workforce housing, “you have a lot of people in the gig economy, a lot of people living paycheck to paycheck, or not earning a paycheck now, so they’re really relying upon that stimulus package and the forbearance that the government is requiring landlords to adhere to,” Reiskin noted.
Indeed, the vacancy rate in US multifamily rose by 30 basis points quarter-over-quarter to 4.6 percent during Q2 2020, while average monthly rent fell by 1.4 percent to $1,720, according to the Q2 2020 US multifamily report from commercial real estate services CBRE. “Given the magnitude of the job losses, the rise in vacancy and drop in rents was relatively modest, as federal and state stimulus programs, including enhanced unemployment benefits, helped financially-stressed apartment residents make their rent payments,” the report said.
With the removal of the stimulus payments, many tenants would struggle to make rent payments, which in turn would put financial pressure on owners, which in turn may be required to sell assets at attractive pricing within a relatively short period of time, Reiskin said. “You might see that temporary impairment ends up forcing some investors to sell at a very inopportune time, which again could present some interesting buying opportunities for us in areas where there is still an acute shortage of workforce housing, despite strong demand.”
A value-add strategy, however, would be geared toward US or Asian investors more comfortable with slightly higher-risk, higher-return investments, in contrast to the more conservative capital that’s backing the income and growth strategy at US RIG, which attracts European institutions looking for long-term cash yields, Reiskin said.
At year-end 2019, the firm managed more than $6 billion of assets across residential units, student housing beds and logistics space in Europe and the US.