Sitting beneath artwork in his elegant office, Michael Bickford is talking about caves.
The founder of Round Hill Capital, one of the world’s most successful residential-focused investors, attributes his firm’s achievements to a back-to-basics approach. ‘I call it cave theory,’ he says.
‘When humans came to the earth we needed water, food and shelter. And we believe that the necessities for people haven’t really changed, and the cave hasn’t really changed.
‘There was always a place where humans ate, slept and relaxed – I’m sure they even had an outdoor area, a front door and security. And that cave afforded you protection from the world. If you look at real estate today, shopping malls aren’t necessary for survival. Office buildings are a great way for people to converse and accommodate daytime requirements; but you don’t need them to survive.
‘Residential is the largest asset class in the world – bigger than agriculture, commercial and infrastructure. It’s also typically had a very fragmented ownership, so ultimately when you start to aggregate that real estate, you create something very valuable.’
Connecticut-born Bickford, who is a former high goal polo player, has some 28 years of experience in private equity real estate. From 1995 to 2002, he acquired property for Morgan Stanley Real Estate Funds, before setting up Round Hill Capital in 2002.
While the firm started out with a European focus, debuting with investments in Swiss industrial, UK senior living and German offices, it has since grown to vaunt a global portfolio with 15 offices worldwide, of which 12 are in Europe, with other desks in Singapore, Boston, and Bickford’s current home turf of Palm Beach. Yet while the firm has expanded, its convictions have become even more focused. Today, and for the foreseeable future, Bickford is betting on beds.
‘For the first five years of Round Hill’s existence we thought more like an opportunity fund,’ he says, ‘working a Morgan Stanley-style allocator model. But over the last 15, we’ve matured to really focus on accommodation. We believe that this is the biggest and safest way of investing in real estate.
‘We’ve been through three market cycles and we’re now entering a fourth, and this asset class has been the most resilient. Yet today, we have an asset class which is still supply-constrained – all segments lack product – from student housing to key worker and affordable homes. And with the massive trend for aging demographics, housing needs for seniors are just going to keep rising.’
Bringing the institutions on board
While the fundamentals of the living sector and its appeal to institutional players today are taken for granted, it’s worth remembering that core fund managers weren’t always so relaxed about beds. Nearly 20 years ago, while private equity funds parcelled up German residential portfolios, pension funds and risk-averse players were much more comfortable trading offices and shopping centres. Despite all this, Round Hill Capital persisted with its theme.
‘From about 2006, we started to establish ourselves as one of the first pan-European investors and vertically integrated managers in residential real estate. And we had to stay convicted that this was the right business plan,’ Bickford says. ‘It took perhaps another 10 years for the industry to realise what we were doing and to believe in it. I would say that right up until 2016, most of the investment community was unsure about residential and student housing. We grew anyway. We had to keep going and be ready for when the industry woke up.
'When they did, in 2016, we were the only pan-European residential specialist with a track record as an independent sector specialist. That was very attractive to global pension funds tryng to put money into the safest asset class in the world. So, when the wider industry wanted to turn to residential, we were the only choice with sufficient experience and a pan-European track record that the funds could trust.’
Today, Round Hill Capital excels in teaming up with scores of institutional funds to make their residential aspirations happen. In the last five years alone, joint ventures with the likes of QuadReal, Ivanhoe Cambridge, Canada Pension Plan Investment Board, Mubadala, Stepstone, TPG and more have seen the group expand into a dominant position in several European markets.
While it has accumulated a platform of significant size in northern Europe, particularly in the Netherlands, Ireland, UK and the Nordics, increasing forays into Spain and Portugal have broadened its geographical spread and emboldened institutions to follow.
‘Like any other private equity player, we raise our money from institutional investors. But we’ve found ongoing partnerships to be a better fit than raising comingled capital, as the likes of Blackstone do. That’s also because we are vertically integrated – we’re the fund manager, the investment manager, the development manager, asset manager, marketing and property manager – and that is what makes us the expert in our world. We are also the group that’s financing and developing the technology that goes into buildings and the operating companies, through our Round Hill Ventures model.’
He adds: ‘We have never lost money for investors over three cycles. And we’ve managed around $13 bn on their behalf. We have a realised blended equity IRR of 24% – and for relatively safe investments these risk adjusted returns make us one of the most successful real estate investors around. But how we achieve the returns is what makes us unique – around 50% of our returns come from the hands-on work of our vertically integrated teams.’
Despite having a single-strand focus, Round Hill’s ‘living’ conviction takes them across a broad range of asset segments. The firm is active in multi-family rental, purpose-built student accommodation which it develops across Europe, senior living, co-living, and modular housing.
Its approach incorporates multiple strategies, such as acquiring existing assets, developing new build assets, forward-purchasing assets and repositioning assets. It has even expanded into logistics and industrial in recent years, which Bickford justifies for its connections with ‘the home’.
‘We identified a consumer-led phenomenon which added shopping to the home. You no longer have to get in the car and drive to a shopping centre… you can shop from your front room. So, we identified this new vertical that could fit with our original theme and we saw arbitrage opportunities,’ he says. In 2016, the firm made its first acquisition into the logistics and industrial sector with a portfolio consisting of 18 assets across Norway, Sweden and Denmark. Other logistics deals in Italy and Spain followed.
However, the firm has since exited most of these properties, making effective returns. Says Bickford: ‘Pricing for these assets has become very aggressive and we have taken the view that there are specialists in logistics that would like to hold these assets long term. We have helped and facilitated this market but we don’t see investment opportunities at the moment and prefer to concentrate on residential.’
And to be fair, there is plenty that needs to be done in the residential sector. Supply constraints aside, one of the largest challenges Bickford sees is secondary stock. ‘We have so much work to do in our industry today to satisfy our consumer who now has higher expectations of a better-quality cave,’ he quips. ’We’ve been moving between trying to buy old stock and modernise it, and buying land to develop into new, modern housing. We have advanced fibre connections coming into our homes today and consumers want to use that tech – and more – for a higher and better quality of life. The whole process requires a tremendous amount of technological investment and leadership.
'We are trying to drive a whole culture of innovation and disruption as we can’t deliver great returns unless our people at Round Hill have the technical tools and they are also innovative people themselves, that’s why we like to build teams with diverse talent not just from real estate but other sectors including consumer goods, technology and venture capital.’
One surprising font of inspiration has been student housing, Bickford says, which contains the perfect, tech-hungry tenant who is ready for innovation. ‘A lot of our evolutions have come out of our student housing business,’ he notes. ‘Young people have embraced technology and want a better place to live. They told us they wanted more common areas, to converse and study. They said that we don’t need as much space, but we need smarter space. So, we responded to that. We’re also now converting new worker housing to that same model, and providing co-living for young professionals. It all helps us to think about how we are going to live in the future.’
Round Hill Ventures
Bickford’s fascination with tech culminated in the creation of a venture opportunities platform in 2016, when it closed on four investments in the property technology sector. In 2020, Round Hill Ventures (RHV) debuted a €200 mln fund dedicated to the proptech industry in Europe, with a focus on late seed to Series B high-growth opportunities. To date, RHV has backed start-up successes including SenSat, Spacemaker AI, Allmyhomes, Plentific and Casafari.
Yet the firm’s injections into tech actually started a decade before, Bickford says. ‘We started investing heavily in tech in 2007 when we realised that the residential management systems in the UK and Europe were very old and inefficient. We set out on a journey to build tech systems through third parties, and started to see real improvements from about 2012. In phase two of that, we started looking at new proptech firms that were building lighter and more efficient systems that could help us, such as lease booking systems.
'At that time, these companies were being capitalised by VCs outside of real estate. So, we started investing our own money and licensing the software, to not only promote its growth, but also to improve the industry.
‘Who could be better to back residential tech than a firm which is using it every day? We now have a vision of using that tech across the UK and Europe to help us on our journey of modernising apartments, and creating a better user experience for our tenants. Our venture fund also acts as a filter for new tech that we can test and buy.’
He adds: ‘On top of that, we really believe that proptech will be bigger than fintech. The real estate industry is massive and there’s so much more to be done to modernise the industry, yet tech has hardly scratched the surface to date. It’s going to be a huge transformation and for us, being a part of that, is a win-win-win for investors, managers and tenants.
'Most tenants don’t feel connected to their landlord. Our mission is to be socially connected and bring about satisfaction through improved communication and operations which can all be enhanced by tech. It also enables our ESG approach thanks to tech’s capacity to monitor building performance and creates better governance as it facilities greater transparency – key to unlocking better returns, greater ESG performance, and tenant satisfaction.’
Unsurprisingly, the environment has become a big part of Round Hill’s mission and the firm is focused on building to become net carbon neutral over time, as well as experimenting with modular building while continuing to convert older stock. In terms of the social aspect of ESG, the firm is constructing both affordable housing and rental housing for key workers.
When asked about the notorious problems of achieving returns when investing in and refurbishing rent-controlled property, Bickford says: ‘We are flanked by partners who want to invest in real estate in the long term so we are able to make the margins work. It’s very important to put money into affordable housing and you can focus on quality with a long-term vision for that.’
Examining the current macro environment, Bickford concedes that ‘inflationary high costs are a concern for everyone’ in the development trade. But he notes: ‘We have been dealing with inflation and supply-chain issues for two years now, and we have factored this into future development costs.
‘Despite the challenging macro-economic picture, the fundamentals of living, the fundamentals of supply and demand have not changed. If you are a specialist manager with a local presence on the ground, while having a global macro investment structure, and are low leveraged and invested for the long term as we are, you can be confident about the future. I think the cracks are going to come for those who have made financial mistakes, who are highly leveraged, and who haven’t understood the market challenges to come.’