Mar-gulf acquires projects and develops warehouses and self-storage facilities in the US
Mar-gulf Management Company Inc., the real estate subsidiary in the US for Kuwait Financial Centre “Markaz”, recently invested in three new real estate transactions in the US on behalf of its investors.
Sami Shabshab, President of Mar-gulf Management Inc., said that three new transactions in the United States have been concluded: a 351-unit value-add apartment project in Austin, Texas; a 28985. 75 square metre warehouse project in Phoenix, Arizona; and a 11148.4 square metre self-storage facility in West Palm Beach, Florida.
Shabshab added, “We are now in the eighth consecutive year of growth in the US commercial real estate market. Economic recovery and strong employment have driven demand for real estate space, leading to rent growth across most sectors and geographies. In addition, prices of real estate have increased due to historic low interest rates and strong demand by investors who are seeking yield. During that period, we at Mar-gulf have focused on developing a number of office buildings, warehouses, urban apartment complexes, and self-storage properties; whereby, we were able to deliver to our investors very favourable returns with reasonably low risk.”
He added that the question today is: can we replicate the returns that were delivered to our investors during the past eight years? The answer is: probably not.
Mar-gulf highlighted that supply in many asset classes is catching up with demand, and hence, rents are unlikely to continue to grow at past rates; and cap rates are likely to increase because interest rates are on the rise. Consequently, the company is becoming more cautious and accepting that new investments will produce lower returns than the ones previously executed. However, the real estate market can continue to deliver better risk/return performance than many other asset classes with the company’s focus on identifying the new emerging opportunities as older ones fade.
Mar-gulf elaborated that higher returns cannot be delivered by investing passively in real estate. The company fundamentally believes that delivering extra return can be achieved either by adding value to a project or by tapping into an emerging trend ahead of the pack. Mar-gulf’s strategy going forward continues to be based on these two fundamentals and translates into three opportunities.
The first one consists of investing in value-add apartment projects. Favourable demographics, consisting of young people, who demand flexibility or cannot afford to buy a house, will continue to drive the demand for rental apartments. Even though apartment supply is high in certain cities, it is mainly in the high-priced/luxury segment, leaving the demand for more affordable units unsatisfied. Therefore, the company is targeting well-located Class B projects within work force communities. The objective is to create value by renovating the projects and improving the quality, so it can optimise rent and occupancy. These investments can deliver attractive cash yields during the ownership, as well as capital gain at exit. An example of this is the 351-unit class B apartment project that was recently acquired in Austin. The renovation programme is currently in progress, and Mar-gulf is able to increase the rent for the improved units.
The second targeted opportunity is the development of warehouses. The strategy is to benefit from the shift occurring in the retail industry from conventional retail, which depends on retail stores, to e-commerce that requires logistics/warehouse properties. The US market is leading the emerging trend. This is creating growing and sustainable long-term demand for warehousing in proximity to urban centres. Mar-gulf started two months ago the development of a 27871 square metre facility in Phoenix, and is currently looking to develop other projects in areas that are most likely to benefit from this trend.
The third opportunity is self-storage. This is supported by the growing need for storage space by households who are now more likely to live in smaller units in urban areas. The self-storage sector is generally resilient to economic cycles, and hence, more appealing to institutional investors. The company is developing properties in urban, visible and easily accessible locations and where supply of self-storage space is limited. Last quarter, Mar-gulf started the development of a 6503 square metre self-storage facility in Los Angeles and a 11148.4 square metre self-storage facility in West Palm Beach.
Shabshab added that over the last three years, Mar-gulf had invested in 14 real estate transactions with a value of $295 million across various cities, with a focus on Dallas and San Antonio, Texas; Las Vegas, Nevada; Los Angeles, California; and Phoenix, Arizona. The company’s developments have targeted a variety of sectors. Seven projects have been already exited, generating attractive double-digit returns for Mar-gulf’s investors.
“My biggest fear or nightmare is to have a special purpose building in a non-institutional market become empty. Even if the tenant is a blue chip paying rent, the building can become unsellable. Before we invest in a property, we ask ourselves: What happens if the tenant vacates? Who else will lease it and at what cost? Who will buy it? Is this property subject to obsolescence because of its functionality or because of the industry it serves? If we cannot think of several satisfactory answers, then such property is not for us. As such, we avoid single tenant buildings, special purpose buildings that are hard to lease to other tenants, or hard to sell, and marginal locations even if the quality of the tenant is high. Even the most credit worthy tenant today can go out of business tomorrow,” said Shabshab.
As for potential risks, Mar-gulf believes that investors in well-located properties lose money because they are forced to sell, not because they want to sell. Such situations arise when there is a mismatch of assets and liabilities, for example, triggered by a loan maturity during a down market. During 2009 through 2011, a large number of property investors become distressed exactly for this reason, and Mar-gulf was able to acquire good quality assets at large discounts from such motivated sellers. This is why, when structuring investments, Mar-gulf tries to obtain long-term debt with appropriate interest rate protection and some prepayment flexibility; holding power is critical.