With more than $50bn (£37bn) in assets under management, America’s Heitman has leaned into the alternatives sector decisively.
Among the team members leading this charge in the UK are Tony Smedley, managing director of Heitman’s European private equity business, and Caleb Mercer, its head of acquisition asset management and portfolio manager.
On a humid London day, with Heitman’s Hanover Street office suffering a power failure, the pair laid out the investment manager’s strategy for growth in operational real estate sectors such as student housing, senior living and self-storage – and explained why the UK remains one of its most fertile hunting grounds.
The company has $7.4bn invested in self-storage globally, which amounts to approximately 15% of total AUM, and $2.3bn, or just under 5%, in student housing.
“We’ve historically, globally speaking, had more of a thematic approach to investment,” Smedley said. “We’ve taken a lot of learnings and applied them here in various formats, and certainly the living space is one component of that.”
Smedley was previously the head of continental Europe at Schroders. Compared with the earlier years of his career, he said, much more capital is being allocated away from traditional office and retail investments and into more operational areas due to the higher growth opportunities they provide.
Mercer, whose 20-plus year career has focused on American real estate investment managers, was drawn to Heitman precisely for its focus. He said: “One of the reasons I came to Heitman was so I could do the alternative sectors.” He joined from Starwood Capital Group, where he was head of acquisitions.
Smedley summed up the Heitman ethos: “It’s how we’re supposed to make our value at the end of the day – by taking things and repositioning them to something that’s actually useful to the end tenants. And that’s part of the function we serve in the grand scheme of things.”
Learn then invest
Although their lens is global, Heitman sees particular promise in the UK across multiple subsectors. “It screens well across a number of the asset classes in the alternative sector that we look at,” said Smedley. “Our highest priorities in the short term will be more self-storage, more senior housing. There’s a lot of demand, a lot of need for very good quality product.”
Smedley said Heitman is not chasing trends blindly. “We do a huge amount of underwriting across all the markets,” he said. “We’ve typically looked at different ways to allocate, either through existing platforms, businesses, entities, assets or conversions with respect to self-storage. That’s another way you could look at entering the market, buying existing and then improving, rather than building new.
“We’re open-minded to any and all of these entry points, as you have to be, but we tend to look a little more cautiously at ground-up, because it carries great risks in so many different ways – and opportunities, certainly.”
That buying and improving push is particularly marked in care homes, for example. “A lot of product that exists in the market, because of its age, doesn’t have an en suite bathroom, for example,” Mercer added. “There’s a real need for more of the good-quality product that we’ve been delivering.”
Heitman’s approach is typically light on development, but not averse to transformation. “Generally, we buy standing assets that we can reposition… Even a data centre, we’ve been converting [to self-storage], which is relatively rare in this day and age,” Mercer said.
Operational DNA
The Heitman team believes its operational edge sets the company apart. “We do a lot of physical transitioning, but we also do operation transitioning,” Mercer said. “We’ve been buying assets where we’ve just felt that there’s the opportunity to pay a bit more attention to the operations and bring some of the knowledge we’ve built from the US over those decades of experience – and even within Europe over the past 16 years of funding sectors.
“We like to apply some of that knowledge we’ve built up to just improve the operations, whether that’s how the space has been priced, sold, how you’re looking at inquiries and converting them into leasing.”
This ethos has driven its platform-building strategy. Mercer added: “The other thing we like to do is in these asset classes is be a bit more granular – buy things one by one and build a nice portfolio or platform. We do a lot of platforms investing with the head office as well and putting that package together and sending it to that institutional capital that doesn’t seem to want offices so much anymore, but increasingly wants these sorts of sectors – you can give them something of quality and scale and they favour that.”
When it comes to senior housing, Mercer said the company knows its niche: “In the UK, we’ve been doing more of the assisted living end of the spectrum, or care homes. We remain fairly focused on rented strategies.”
And they’re not afraid of the grunt work. “That’s a lot of what we do in care homes. At the moment, the way the markets are working, you can do portfolio acquisitions. In care homes, it’s relatively attractively priced,” Mercer said. “Hopefully, we can shortcut the whole granular process and do more portfolio shaping and weeding out the bad stuff and focusing on the good stuff.”
“We don’t really take planning risk,” he added. “If we buy anything that necessitates a planning component, then it’s a subject-to-planning investment.”
Mature but still selective
Heitman’s student strategy is defined by caution and quality. “We go for the better quality ones which are growing,” Mercer said. “One of the lessons we’ve learnt is demand is great, but… you can, in isolated pockets, get oversupply.”
Smedley added: “The UK is by far and away the most mature market in student accommodation… [but] we are cognisant of the liquidity, because that can drive pricing.”
Recent moves, like acquiring Norway’s largest private student housing platform, underscore a broader ambition: “We’re looking to transfer learnings from the US… like dynamic pricing systems and revenue management into our self-storage businesses, but also into student accommodation,” Mercer said.
The regulatory environment is never far from mind. “It is one of the challenges,” Smedley said, referencing Scotland’s sudden inclusion of student housing in rent control. “Students used to be seen as exempt but even students now seem to be protected from the institutional owners who are trying to provide them with accommodation.”
Heitman is also active in build-to-rent, though remains cautious about single-family rentals. “We’ve looked at single family homes,” says Mercer, “but it was normally large-scale sites in weaker locations where you had a lot of supply coming in.”
Smedley is philosophical about it: “If multi-family is a growth area, then single-family also should be. But clearly, the Covid environment was an accelerator – everyone was looking at ways to access it.”
Heitman is consolidating self-storage around two hubs: London and Birmingham. “We’ve built a cluster. Birmingham’s the largest cluster, and then we’ve got another in London,” said Mercer. “We’ve been filling in between those two markets and slightly around them as well. At some point, we will branch further afield.”
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