Atlanta-based Cortland Partners has had success this cycle using its model to examine which markets to enter and where to scale back. It currently operates more than 40,000 units in 18 markets across the U.S., but the firm no longer focuses on just one country, or even one continent.
In September, Cortland closed on a deal to acquire Orion, a property development and investment company based in the United Kingdom. Cortland will assume Orion’s existing development pipeline, which includes an upcoming, 485-unit multifamily project in Northwest London that’s set to break ground in early 2018.
The U.K., says Paul Wrights, Cortland’s executive vice president of finance and development, was the optimal spot for his firm to expand overseas. The team at Cortland first had the idea around the time of the Brexit announcement, when U.K. voters decided to leave the European Union, but it wasn’t until the fourth quarter of 2016 that the company really considered the idea of international expansion.
Cortland asked a global research team to take the algorithm the company uses to identify U.S. markets and apply it to markets in Europe, Asia, and Australia, with more than 1 million people and similar supply-and-demand fundamentals that Cortland looks for in the U.S.
From there, the U.K.—and, specifically, London—was identified as one of the best areas on which to focus. Wrights and other Cortland executives spent several weeks’ worth of time in the U.K. in early 2017 meeting with local developers, operators, and capital partners and hosting focus groups.
From there, Cortland devised a business plan.
London Landscape
As Wrights puts it, London is similar to many U.S. markets in that affordability is a problem. There’s a lack of supply on the for-rent side as more people are electing to rent apartments. According to Cortland’s own research, one-third of U.K. renters are renting without saving for a down payment. “There’s a clear segment of the market that is renting by choice, and we think that segment is growing,” Wrights says.
Currently, roughly 5 million households rent in the U.K., Wrights says, and that number is forecast to grow by just shy of 25% (about 1.2 million) by 2021.
When Cortland was doing its due diligence, it found that 98% of the London rental market is owned by individual owners that control one to five units. That stat presents a major opportunity for a company like Cortland.
“There’s really a dearth of institutional ownership and professional property management,” Wrights says. “So the renting experience varies widely from renter to renter, and, on average, it’s not a very positive experience.
“There’s really this general view that renters are being allowed to rent, versus the way we view it, as the customers are allowing us to provide homes for them,” he adds. “We think that’s a big mind-set shift that's happening there with this professional property management approach. [We’re] trying to focus on that customer experience arbitrage.”
According to Wrights, there are about 20,000 professionally managed apartments in the U.K., including what’s under construction. In comparison, the Dallas–Fort Worth market alone has more than 500,000 such units.
But Wrights says the rental culture is shifting in the U.K., and especially in London, because of the local student housing market, which has become more institutionalized over the past decade. There's a whole generation of student renters who have experienced a high-quality living environment and now want something similar. “They’re coming out of their years in university and are now looking for a comparable product in the market on the conventional side, and it’s just not out there,” Wrights says.
Looking Ahead
After Cortland acquired Orion, its founder, Richard Olsen, became Cortland’s head of U.K. operations. There are about 10 people who work in Cortland’s U.K. division, including those who split their time with the U.S. operation. Wrights says it was crucial to find employees who know the ins and outs of the U.K. market and know how to acquire land and shepherd it through the planning process, which can be very time-intensive and political, Wrights says.
Cortland’s goal for the U.K. is to develop about 10,000 units in the next four to five years and build up its operation to more than 50 employees. The company currently has about 2,000 units in the development pipeline.
For now, the U.K. is Cortland’s sole international focus, but that could change once it achieves sufficient success there.
Wrights doesn’t think it will be long before other U.S. companies, as well, enter the United Kingdom.
“There’s a ton of institutional capital that’s trying to get exposure to the residential property market in the U.K., but there’s only 20,000 units, if you include what’s under construction, that’s available to buy,” he says. “As more groups come into the U.K., that institutional capital is going to be looking for ways to invest, looking for partners to pair up with, and, frankly, there just aren’t a lot of rental housing operators in the U.K. So I think bringing the U.S. model adjusted for the U.K. makes sense.”
