What is your investment philosophy at Gatehouse?
We call ourselves a merchant bank, meaning that we are partners with our clients. Our investment philosophy is focused on the needs of clients in this region. Historically, they have invested with big, well-known investment banks, but these firms have been going through strategic changes. Additionally, the regulatory environment has evolved, which has impacted the industry. We realized many Gulf-based firms were employing an ineffective model, namely that having someone in an office who has never known a market, structuring a product, and having relationship managers selling that product without understanding it was not working. I wanted people on the ground defining what we and our clients want and need. With our teams, we specifically design our products to fit the investment goals and objectives of our clients, focusing on global diversification and wealth preservation in real estate. With investment teams and capabilities in the US and UK, Gatehouse is the bridge that is opening up these markets to our clients. For nearly a decade, we have defined a new way of thinking for clients and the market.
What are some of the recent successes you have had at Gatehouse?
We constantly innovate and we take a pioneering approach to finding value in real estate markets. Coming out of the financial crisis, we were deploying capital across a range of single-tenant, income-producing assets when many were too afraid to invest. We employed this strategy in the US and the UK, where we saw increased economic growth and corporate balance sheets improving. This had a positive effect on both the office and industrial real estate markets, among others. Today, our thesis has proved correct, having successfully exited a number of these investments. In student housing, which today is a popular asset class with institutions, we were among the first to enter the sector in the UK and the US. We then looked at single-family residential assets in the US. Many of these assets were held by banks due to the mortgage crisis. Due to the valuations we were seeing, combined with our view toward economic, job, and rent growth, we became heavily involved in the sector during the 2013-14 period. Today, we own approximately 1,800 homes across multiple growth markets; these assets are providing strong current income for our investors. Building upon this, we looked for similar opportunities in the UK. While the private rented market differs in the UK relative to the US, we saw that there was a significant supply-demand imbalance in the UK market. From here, we focused our attention on the private rented sector (PRS), which is quickly becoming an emerging asset class in its own right due to its underlying fundamentals. There is a shortage of private, affordable housing in the UK and, as a result, there is significant government support for the PRS sector. Our first move into PRS was a £110 million investment to develop and let over 900 homes in northern England. Following the success of this investment, we launched a new initiative to develop thousands of homes across the UK on a much larger scale. We are proud that this initiative has the backing of the sovereign wealth fund of Kuwait. This is a great example of Gatehouse taking a leadership position in the markets in which we operate. However, being aware of what clients want and need is really the secret to our success.
What trends drive your focus on real estate investments?
Over the last 10 years, we have seen a focus on wealth preservation with a desire to be invested in major international cities, such as London, New York, Washington, or Los Angeles. Investors view these as safe havens for investment; we believe that real estate is an asset class that can sustain value in the face of the deepest of crises and credit crunches. Prudent strategies, focused on value creation and replacement cost, are things that we believe drive good real estate investment. Real estate is also something that clients can understand as you can generally define your risk and reward based on history and clear data. One of the reasons we invest in the UK and US is their level of transparency. This does not mean the value will always go up, but at least we can define risks and develop strategies to mitigate the value of going down.
Kuwait, through its sovereign wealth fund, investment companies, and the investments of private individuals, is known as the leader in the region in terms of investment outflows. What do you think is needed in order to bring some of this investment into Kuwait?
It comes down to the rule of law. We choose the US and the UK for our investment activities because we can define and understand what our legal rights are in those jurisdictions. Global investors need clear local laws and transparency. An investor does not want to be in a market where they may run into problems if they want to liquidate assets or move money. That being said, Kuwait is a sophisticated market in terms of liquidity with the potential to be a leading frontier market with global exposure. However, Kuwaitis tend to feel that they should be the ones investing in their country. This is different from the attitude in other GCC states where they are heavily promoting foreign capital investment. If there is a project in Kuwait that global companies want to fund or be part of, Kuwaiti companies tend to want to do it themselves. This is a cultural mentality, and I do not blame local companies for seizing these opportunities when they have the liquidity. In recent years, Kuwait has been trying to encourage more foreign investment by introducing new foreign capital regulations and tax incentives. Kuwait needs to be more welcoming and clearer from a legal perspective and also refine the bureaucratic process required to get things done. In terms of sectors, oil has been the focus for a lot of global investment in the region, but there are other attractive opportunities for investors to consider. It is interesting to note that about 70% of the population in Kuwait is under the age of 35. Kuwaitis also have significant spending power. As a result, Kuwait is a great market for the retail and food sectors, as well as other sectors for investment that could focus on the potential of the consumer demographic.
What are your expectations for 2016?
The geopolitical issues the world is facing are concerning for any investor. Markets never react well to uncertainty, and volatility over the course of the year is expected. The recent interest rate hike we saw in the US was a good message for investors, as we have not seen a rate rise since 2006. We think that the low interest rate environment has led to some income-generating assets being overvalued; this includes some real estate. For this reason, we have exited a number of investments over the past two years. Our bank is now focusing more on lending. This demonstrates that we are still comfortable with real estate, but we are cautious. Looking at regional markets, their performance is affected by the low oil prices and we have seen this already with the stock exchanges. It could be a bumpy ride ahead. The anxiety within the regional markets is good for us, as investors will want to diversify and move money to safe havens, and we can benefit from this. My concern for 2016 is increased levels of volatility and a general correction of asset prices. However, bear in mind that companies and banks are healthier than they were a decade ago and the regulations are getting stronger. Nevertheless, in this environment, there will be markets that suffer and those that do not. Our view is that safe havens will retain or even gain value as volatility causes a flight to safety by investors. We hope for more stability on a global level.