Blake Olafson has spent the past 28 years in the real estate industry in Asia and is the founder and managing partner of Asia Capital Real Estate. Founded in 2011, ACRE is a global real estate private equity firm managing capital for institutional and family office investors through a series of private equity and debt funds with AUM exceeding $2.1 billion. Blake speaks to us about ACRE, middle class housing and the impact of COVID-19.
Thank you for joining us at The Yield, Blake. Please introduce yourself to our readers
Hi, my name is Blake Olafson and I am the Managing Partner at Asia Capital Real Estate.
Could you give us a brief overview of Asia Capital Real Estate (ACRE)?
We started in 2012 as a private equity real estate firm with the initial goal to invest in middle class multi-family rental apartments in the USA, primarily across the Southeast (Texas, Carolinas, Georgia, Florida, Kentucky, and Ohio).
We have since evolved into a fully integrated property and asset management company that is focused on middle and working class residential multifamily value add property. The ACRE team consists of around 20 executives and 200 “boots on the ground” to help manage our portfolio of approximately $2 billion of assets under management. ACRE has also expanded to include a credit business, lending to owners / developers of multifamily assets.
Why did you initial invest into middle class multi-family?
ACRE saw this as the greatest risk reward space within multi-family at the time. We were one of the first to put an institutional framework of capital to work in the middle-class rental apartment sector. New built multi-family has traditionally been invested in by REITS and pension funds, and only really at the upper end of the market. The lower end was fragmented by non-institutional money and by “mom and pop” operations. We saw a great opportunity to consolidate the sector, as middle class housing may not be viewed by some as prestigious as the high end demographic, we view it as more stable as the rental is seen as a necessity as opposed to a luxury.
We have created a stable product that is now very attractive to larger investors. The larger institutional investors were not initially interested in these products as they were not new and typically of a much smaller deal size. There was a lot of work to be done due to the smaller ticket size of the purchases to consolidate them into an institutional offering on exit. We have successfully done this and have exited on several properties.
Are we seeing this strategy being echoed in Asia?
Sure, two larger players from Singapore have embraced the rental housing sector recently, particularly with a US focus. CapitaLand has invested into middle class rental housing with a very large transaction last year. GIC has invested into the lower end of the spectrum through mobile home parks. Both taking Asian money and moving it into the USA. We also view the mobile home sector as being very attractive once consolidation is done. The yield is higher and risk perception that historically existed has largely been mitigated through education and an understanding of space.
We saw an opportunity 2-3 years ago to bring rental housing into Asia. We are seeing this trend echoed in Hong Kong and Singapore through the growth of the co-living space, however this may struggle due to the current concerns surrounding social distancing. ACRE has also invested in housing for the employees of the hospitality and medical sectors.
Affordability has also climbed in Asia. The younger generation doesn’t inspire to own their own home as much or as early on as their parents’ generation did. Nor can many afford to do so. They are mobile and want to move without hesitation. This has contributed to the growth of the rental class.
We also think this will continue to expand across Southeast Asia, in what traditionally has been a private, non-communal condominium market supplying the rental stock to the end users. Millennials are increasingly looking for a sense of community. This is something we will create across our portfolio; it is somewhat pioneering and an area that we are focusing on.
You mention the resilient nature of middle-class housing. How is the outbreak of COVID-19 impacting you?
It is too early to tell. The Coronavirus stimulus package that the US government released led to us having one the of the largest leasing days ever and has increased financial stability for the next four months for renters. However much of the US middle class live quite close to pay cheque to pay cheque so we need to stay proactive. We are helping tenants where we can as we are owner operators, hands-on and not just running the portfolio from an office in New York, but at the property level every day.
What challenges does COVID-19 present for ACRE?
The challenge operationally is that corporate and leasing offices are closed. We quickly adapted to a virtual meeting system for staff, tenants, marketing and even apartment walk throughs for prospective tenants. From a headquarters level, COVID has driven people to be more closely connected and integrated. There is a greater frequency and connectivity at our town hall meetings.
The big thing in all rental markets is rental collection and the biggest challenge we currently have is collecting rental cheques. We are fortunate in that middle-class households are one of the most stable demographics and we are owner operators and not absentee landlords.
The lower interest rate environment has helped us from an operations perspective and allows us to service our communities better. We are also fortunate that we do not have hospitality exposure in our platform, however we do have some student housing in our portfolio. Students have moved home during the crises, and when will the universities open? This is a bit of a concern for us.
How is ACRE adapting to the challenge, and how should investors play the market right now?
We noticed the dislocation of the credit market so we moved some of our attention from equity to debt. In the US, and this is applicable to Asia, opportunities have opened up as spreads have widened. People have great quality assets who have never borrowed before and just need some capital solution for the next year. These are shorter term but an opportunity to create equity like returns but within a secured debt instrument.
We have begun to offer private credit for real estate investors and other owners. We have been active in this space for a few years but is has certainly picked up now.
We also don’t have the legacy issues of some of the other lenders in the market who may have used credit lines to enhance returns and those are being called in. And as we haven’t borrowed short term lines to lend long term, we are uniquely positioned.