, the $56bn (鈧�51.4bn) fund manager, prioritises risk management through conservative leverage, interest rate hedging and a focus on alternative asset classes, according to the firm鈥檚 European transactions head.
Speaking to 91传媒在线 at MIPIM, Josh Miller explained the company鈥檚 strategy, emphasising the high barriers to entry in these asset classes and their long-term growth potential, contributing to the strategy鈥檚 resilience even in challenging markets.
鈥淲e consciously steer clear of traditional sectors like office, retail and industrial. Our strategy prioritises alternative asset classes such as student housing, build-to-rent, life sciences, data centres and senior housing,鈥� he said. 鈥淭hese sectors have historically been viewed as niche within the real estate landscape. Our preference for these sectors stems from their inherent structural advantages.鈥�
Miller said that, unlike traditional asset classes whose performance more closely mirrors the macroeconomy, these alternatives 鈥渂enefit from embedded supply-demand imbalances鈥�.
This dynamic tends to foster high occupancy rates, rent growth, and lower overall volatility, he said. 鈥淥ur central investment thesis revolves around targeting consistent returns with a reduced risk profile compared to traditional real estate sectors.鈥�
Harrison Street which initially focused solely on the US market for a decade, launched its European operations in 2015. It has since opened four offices in Europe and invested over 鈧�5.5bn across 90 investments in various European countries, including the UK, Ireland, France, Germany, Spain and, most recently, Italy. The firm has headquarters in Chicago and London, and offices throughout North America, Europe and Asia.
In December last year, Harrison Street entered the Italian market through a joint venture with a local partner Artisa Group. The partnership acquired Viale Monza, a 260-unit residential asset in Milan, with a plan to scale the venture over time.
Italy is a 鈥済reat example of a country with attractive demographic trends in our sectors of focus and strong supply-demand dynamics鈥�, Miller said. 鈥淭hese are all elements that exemplify our investment strategy.鈥�
The European strategy maintains a consistent approach to risk management and collaboration with local partners originally established in the US 鈥� but there are differences and market-specific nuances to European geographies, Miller said. For instance, student accommodation in Europe is primarily located in city centres, contrasting with the US phenomenon of college towns.
鈥淥ur risk management approach is granular. We take a conservative stance on leverage, prioritising lower debt levels within our projects, whether it鈥檚 for core assets we鈥檙e considering or opportunistic investments,鈥� Miller said.
鈥淲e primarily utilise senior loan financing, avoiding the potentially problematic aspects of mezzanine debt and other high-leverage strategies. While these strategies can be attractive in bull markets due to their return-enhancing potential, they can become incredibly challenging during economic downturns.
鈥淭herefore, we鈥檝e historically shied away from them. Additionally, we actively hedge our interest-rate exposure. This means that even when our loans have floating interest rates, we implement hedges at the time of investment. This ensures we have a clear understanding of the worst-case scenario from an interest-cost perspective.鈥�
Even with a well-defined risk management strategy and a focus on high-barrier-to-entry asset classes, the company still encounters challenges. A challenge is that the markets are fragmented in some places. Finding operating partners that have a track record in our sectors of focus can be very tough, Miller said.
鈥淪econdly, I鈥檇 say finding access to land sites can also be challenging, because in some cases certain asset classes are not considered the best use for certain land sites, so being able to find something that鈥檚 suitable for a project can take work.
鈥淩ecently, some of the volatility we鈥檝e seen from government regulation of the residential sectors has added complexity and there have also been considerations around rent controls and ESG-related regulatory requirements.鈥�
Miller sees a lot of these things are positives overall since they 鈥渋nhibit long-term supply across the asset classes in which we operate鈥�. But adds that it is also just an unknown in the market.
鈥淎nd for us as an investor, it can be tough to underwrite unknowns. So, we鈥檙e focused on understanding the direction of regulatory changes in specific countries and have that guide how and where we invest. Ultimately, there鈥檚 significant and structurally embedded supply-demand imbalances. So an investor like Harrison Street is well positioned when we are able to overcome some of the challenges and deliver projects in sectors and geographies that have high barriers to entry.
鈥淪o the assets themselves are generally going to perform very well once you can get a project delivered. And we鈥檝e seen that throughout our existing portfolio and, again, despite a lot of the headwinds that are happening at the macroeconomic level.鈥�
Miller said the last year and a half has been both challenging and interesting, and emphasised the importance of separating the macro and geopolitical headwinds from the underlying real estate market. 鈥淚nterest rates and construction costs have spiked, making some projects less viable in the short term. Geopolitical issues like Ukraine and Gaza add to the uncertainty,鈥� he said.
鈥淗owever, looking strictly at the real estate itself within our alternative asset classes, performance has remained consistent. This reinforces our thesis that these sectors exhibit resilience and lower long-term volatility, as evidenced by our portfolio鈥檚 continued stability, low vacancy rates and exceptional rent growth. This underscores our belief that, over the medium to long term, these alternative sectors are projected to offer attractive risk-adjusted returns with less exposure to market fluctuations.鈥�
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