Joint Ventures

By Keat Foong, Executive Editor

Apartment companies in the U.S. may take their development and management capabilities for granted. But, U.S. expertise and knowledge in designing, developing and managing American-style apartments is a valued and sought-after capability in other countries.

Taking advantage of what they can bring to the table in offshore markets, and on the lookout for opportunities, some of the most-established big-name U.S. apartment developers are going overseas to engage in sometimes gargantuan apartment developments.

In a recent example, Related Companies formed a partnership with Cardiff, United Kingdom-based Sydney & London to place a bid for the controversial 35-acre Euston Station project. Property Week reported that this is Related’s first U.K. project.

In another deal, it was reported early this year that Silverstein Properties won a record $2.21 billion bid in partnership with Qianhai International Energy Financial Center to acquire a site in the new economic zone of Qianhai Bay, in Shenzhen, China.

And the top apartment owner in the U.S., Greystar Real Estate Partners LLC, is acquiring and seeking to develop apartment real estate in the U.K. and Mexico.

Some of the opportunities in global markets can be huge and on a scale that is unheard of in the U.S. The projects do not consist of “one apartment tower, but a city,” Jeffrey W. Baker, executive managing director, Savills, tells MHN. “They are building 10 towers at the same time. Most projects happening [in China] are mini-cities…These are staggeringly large markets. To not participate in them will be a mistake.”

But just as foreign investors looking to develop apartments in the U.S. seek well-established local U.S. partners, only the institutional-caliber U.S. apartment companies can land joint venture deals overseas currently. Developers engaged in joint ventures with foreign players on U.S. soil will be required to have a “very well-demonstrated expertise,” says Brian Ward, president, Capital Markets—Americas, Colliers International. If the American developer is engaging in its first or second project, the potential foreign partner will be “less than reluctant” to engage in a joint venture with it. Apartment companies that will be accepted as joint venture partners of foreign players on U.S. soil will have to be the “Hanovers and Holland Partners of the multifamily world,” says Ward. Likewise, it is not a stretch to imagine that the same requirement will apply to outbound U.S. developers playing in other countries.

Where the developer is experienced, they could be much appreciated overseas as, surprisingly, a well-established and mature apartment industry does not exist in many countries as it does in the U.S. It is this fact that works to the advantage of U.S. companies seeking development avenues in other countries. Multifamily as a commercial product type is still “nascent” in Asia and many countries in Europe, says Ward. In fact, the U.S. is where an institutional investment market in multifamily housing is “robust,” he says.

Indeed, many countries still do not have a significant stock or supply of for-rent apartments. For example, in Hong Kong and Shanghai, most of the multifamily product produced consists of for-sale condominiums, rather than for-rent apartments, says Ward. In any case, where there are rental apartments, they may not be feasible as institutional-grade investment properties—in Hong Kong, the cap rate for rental buildings can be a mere 2 percent.

The U.K. rental apartment stock is similarly not as developed as an institutional investment product type as in the U.S. Multifamily rentals in the U.K. are said to involve private owners buying blocks of units to rent out. The homeownership rate is not high in Germany and Italy, says Savills’ Baker, but much of the rental product in Germany is subject to rigorous rent regulations. Investment-grade apartments or even apartments as a product type “are not a fully developed concept in most countries,” agrees Baker. “The U.S. is furthest along in [the development of the apartment model].”

American-style apartments are “definitely a model that players in other countries want to import,” says Baker. The opportunities for joint ventures lie in development, rather than investment, as American players do not need local expertise in managing apartment properties. U.S. companies that acquire apartment properties offshore could form their own companies to lease and manage the property. “They would hire local groups to manage the properties, but not under a joint venture format,” says Baker. “Most countries do not have the established management companies that we have in the U.S. There is no equivalent of a Greystar or Riverstone in Ireland. That has to be created.”

While the U.S. companies may not require much local expertise in multifamily housing management, they will when it comes to property development. Local partners provide expertise in the acquisition of prime development sites, and in navigating local laws and regulations. “It is not an easy task to move overseas and take over a large development project, comments Baker. “It is difficult for an offshore group to penetrate the market immediately and out-maneuver local players to get at the major development sites.”

And what do they offer their partners? The expertise U.S. apartment developers can bring to the table that local partners in foreign countries desire ranges from knowledge about amenity packages to apartment management best practices to new apartment technologies, says Baker. Related can import to London “tremendous knowledge and sophistication about the way the U.S. market works, which is far advanced than those of offshore rental operators. That is of tremendous value to the local partner.”

Besides superior knowledge about the proven apartment product, American companies also contribute “a dependable knowledge base in property development,” which is viewed by their foreign partners as being valuable, says Baker. And American companies can also bring capital. If they are major developers, “they will have a huge following from institutional capital sources which may be of use to the local partner.” Large pension funds or institutional investors from the Middle East may consider their comfort level with the U.S. companies when calculating whether to invest in the project.

Greystar, which holds the number one spot in the NMHC 50 ranking of the largest U.S. apartment managers, is another multifamily developer that has ventured offshore to both acquire and develop apartments. The company has acquired a portfolio totaling more than 8,000 units of U.K. student housing assets, with partners including Goldman Sachs. And it also manages a portfolio of high-rise luxury apartments in Mexico City and Monterrey in Mexico. Bob Faith, Greystar chairman and CEO, says the company is cultivating “a significant pipeline” of new developments in both the U.K. and Mexico. In the U.K., it is “looking at development opportunities in London and other regional U.K. cities.”

Faith foresees a market for “purpose-built” multifamily rental housing in these countries. “What is intriguing to us is the emergence of the middle class [in many countries],” he says. “There is tremendous urbanization which is encouraged by the governments. Rental [apartments] make sense for the middle class to move to [in] the Mexico Cities of the world. They need decent housing to rent. Institutional owned rental buildings are not necessarily something that you see a lot of in Mexico and the United Kingdom. We are exporting on a large scale management and development knowledge they do not otherwise have.”

In typical joint ventures, the American developer could contribute equity and share development fees and any promotes paid by the capital partners with the local partner, says Baker. Faith suggests that the responsibilities of the various partners should be clearly spelled out in these offshore joint ventures. “It is really important to manage expectations about who is doing what and about the characteristics of the job so that everyone understands what the goals are.”

Although Greystar may engage development partners in ground-up construction projects, none of the student housing properties it has acquired in the U.K. involve joint ventures with local partners, affirms Faith. “Typically, we are always the operator of acquired properties. We lease and manage the properties, but we need the local expertise of the local team [when it comes to development].”

As is the case when they operate domestically, developers need to be “local” if they want to be successful in overseas joint ventures, says Faith. “Having a joint-venture partner is a way to be local.” Nevertheless, Faith suggests that American companies can develop their own local development capabilities over time although they may partner with local partners at the beginning of their global forays.

Baker believes that U.S. developers will continue to go to overseas markets to seek out real estate opportunities. “We will absolutely see more ventures. There will be increased focus by U.S. institutions to participate in desirable offshore markets such as London,” says Baker. We are now, he believes, witnessing only the “early stages” of the trend.