Willhelm Stahlke IV, our Vice-President of Investments at CASAFARI Portfolio Solutions, was interviewed by Proptech Buzz, a podcast that talks to Proptech leaders about what it takes to build successful companies, presented by Ravi Kumar.
They discussed single-family residence investments, how the pandemic affected the rental market, changes in how investors see investments in Europe and the scenario for Proptech companies. Let’s see what Willhelm had to say!
What does CASAFARI do?
CASAFARI was born as a data company, we wanted to bring transparency to the real estate market. Our founders, Nils, Mila and Mitya, actually founded the company in Spain because they were trying to invest money on their own into the real estate sector after having some few successful exits from other startups.
They realised that it was very difficult to obtain information about the real estate market. You can go on different portals, marketplaces rather, and find assets that are for sale, but it was difficult to perhaps benchmark what those assets should be priced at, do comparables analyses, to look at the trajectory of how prices have changed in that particular city or even more at granular level.
So, CASAFARI was born to bring transparency to the real estate market. We’ve grown a lot over the past few years and today we essentially have two verticals of solutions that we offer to our customers: we have our SaaS (software as a service) solution, which is a B2B software that we offer to any sort of company that’s in the real estate sector and that needs information on real estate, and we have Portfolio Solutions, which is the vertical specifically devoted towards assisting institutional investors and helping them build granular real estate assets across Europe.
So, two different verticals, serving two different types of clients, but all based off of a spectacular level and depth of data that we have.
There are different verticals on Portfolio Solutions: acquisition, property management, asset management. Can you share about them as well?
When an institution or a professional investor comes to us at Portfolio Solutions, there’s the entire development underwriting, the development of the investment strategy and the thesis.
What we do is we listen to what the investment metrics are for that particular investor and then we build a bespoke investment strategy around that. They say: I would like this kind of risk profile, this kind of asset, I prefer exposure to this kind of geographies, this is my IRR target over X period of time. When we have all the information of what the investor needs in order to comply with their internal metrics, we are able to design the strategy for them.
Once we capture the mandate, then that’s where the three phases of capital deployment begin. We have our Acquisition team, which we call our real estate transaction specialists, who are people that have a deep amount of local market knowledge in the cities where they operate. They are the people that go out and look for the property, always using the CASAFARI solution for searching for properties, running comparables analyses, everything that crosses the acquisition timeline – from identification to closing of the asset, with negotiation and all that in between.
It’s very important to realise that our interests in CASAFARI Portfolio Solutions are perfectly aligned from the beginning of Acquisition to the disposal moment. Taking a step back and looking at the investment underwriting stage, we project discounts that we can acquire for each asset. We also project rent levels. So, this is all done and makes the business plan come alive in the Acquisition stage.
Post-closing, it’s all about Property Management. Renting out the asset, making sure that the prices are optimised for what the market can hold and to quickly have the asset leased by a strong tenant.
Finally, at the end, at the third silo is Asset Management – everything related to asset management, particularly related to the disposal of that asset overtime. It’s about making sure that it’s properly marketed and sold to the next buyer. So, we cover that entire lifecycle of what is an investment into the PRS (private rented sector).
On the Acquisition side, what would be the use cases?
If you look at how institutional investors operate, they will usually have multiple funds that have different return criteria. Not also necessarily return criteria, but also having the necessity to exposure to certain types of asset classes. So, institutional investors will usually come to us and say “this is the kind of risk level that I want, this is the kind of yield that I need, what are my options?”. They will come to us with those metrics in mind and what we’ll do is look for opportunities that fit with that.
Because we’re able to see what occurs at not only a city level, but also going down into the areas of it, looking at what it will cost you to acquire and what you can rent it out for – and, of course, what would cost you to upgrade that asset to a certain level that one would want to achieve vis-à-vis the rent levels that you want – you then come down with all the different returns.
That’s what we’ll do in the strategy phase. But when it comes down to Acquisition, once we build the buy-box (average asset price, locations, yield profile, etc.), through our technology, instead of having to go look at tens of thousands of units for sale, we are able to, with all the different filters, immediately receive a list of all the different properties that comply with everything that’s in the buy-box.
We’ll choose the best of those to start making the calls, the visits, ensuring it’s for sale, seeing what the situation is for the seller, eventual negotiation if the asset is greenlighted, all of that. So, it’s about rapidly being able to identify opportunities and doing that at scale.
These investors already have their own business models. Do they share it with you or do you also build business models to come up with a nice expectancy of how the investments will be over time?
We generally will begin conversations with “this is what we think you can get based on your investment metrics”. But it’s always what I would call a co-underwriting process where we’ll develop the investment thesis together.
Our team in Portfolio Solutions, we come from investment finance backgrounds, real estate backgrounds. We definitely speak the same language as these institutional investors. So, it’s definitely a very collaborative exercise and it’s something that it’s necessary to have buy-in from the institutional investor, but also affirmation from us, being the local real estate experts, of ensuring that what they’re expecting is achievable in the market. Because it’s one thing to build out a business plan, it’s a complete other thing to actually turn that into reality.
Is SFR (single-family residences) a more likely choice for institutional investors over multi-family homes? Is there a preference of one over the other?
There’s a bias towards multi-family housing for many reasons. One, it’s something that is easier to manage and the management process is very important. If you have a portfolio of 300 units, and it can be in one building or it can be scattered, from an economy of scale perspective, from a managing perspective, it’s easier in a single building to multi-family housing and much harder on this single unit side.
But I think one thing that’s unique about Europe, and particularly our city centres as we do not have this plethora of space that you might have in cities in the US, if you want exposure to call it more centrally located assets, SFR is really the only way to go.
If I’m thinking about Madrid, I cannot build a building in the heart of Madrid, in the middle of the centre, of a ground up construction. You can, but it’s generally just too costly. It’s too difficult. Thus, that’s why if you look at Spain, a lot of the BTR (built to rent) projects are sort of in the peripheries of the cities, not in the core centre.
What I’m saying is because it’s difficult to build a purpose-built rental building in the city centre in Europe, your only alternative if you want prime or centrally located exposure is through acquisitions of single units and joining them together into a portfolio, rather than being able to acquire a single building full of rental stock.
That scattered portfolio is what is the heart of SFR. And we’re here to show investors that it can be done efficiently in terms of the buildup, in terms of the management and you’ll get exposure to a different location than you would in BTR.
Since you had exposures in the US as well, could you explain the growth in the US and its expected impact in the European residential markets?
If you look at rental housing stock, particularly in the US, it was traditionally multi-family housing. The amount of land was favourable. It was larger, so it was favourable towards investors wanting to build up, purpose made BTR buildings.
But, then, what we’ve sort of seen over the past 10 years has been growth in the SFR space and it’s something I think Europe in a certain way, particularly Spain, we certainly lag a bit how it’s done in the US. So, BTR in Spain has been something that’s relatively new and SFR is even relatively newer. I think the expected impact is the percentage of rental housing stock that’s in multi-family versus single-family largest skew towards multi-family housing.
I think over time, in Europe, the discrepancy won’t be as large as we sort of enable investors to be able to build up single unit residential portfolios. I think there’s a lot more interest in that just because of the interest in having an exposure to more central locations, that is only possible through SFR.
I think the changing dynamics from in southern Europe, particularly of homeowners wanting to now become renters, they’ll sell that stock and that creates an opportunity to buy for investors of basically a transition from owner-occupied stock to professionally managed rental stock.
Let’s also explain the growth in Europe with the higher regulatory frameworks in place here, especially on carbon reduction goals.
I think that’s an interesting point about the carbon reduction goals and the different regulatory framework that we have in Europe. I think the European Union has definitely been at the forefront in the past few years about reaching carbon neutral goals. And if you look at the application to the housing markets, what that means is that the ability to repurpose already existing housing stock instead of having to build up new stock will definitely help move towards those goals.
There’s a lot of work, and when I say work in terms of usage of resources that are involved in BTR and building a building from the ground up, whilst in SFR, if you’re essentially repurposing housing, making upgrades to it, not only just changing out kitchens in our bathrooms, but making this housing stock more environmentally friendly. Like changing out the windows to the ones that are double painted so there’s not so much leakage of heat or air conditioning, putting in more energy efficient boilers. It’s all about upgrading existing stock.
It’s something that can be done in a more cost-effective way and, in less intensive form, from a climate perspective. And I think that will be sort of crucial to creating a viable housing sector in the long term.
The interest in the rental space for investors, why has it become so popular recently? What are the macroeconomics trends that have resulted in this direction?
If you look at Southern Europe culturally, we have a preference towards owning your home. If you look at the Spanish market, for example, of the entire housing stock, roughly three quarters of it is owner-occupied. 25% of it is rental stock.
And there have been, over the past few years, changing dynamics, with more young people moving to city centres, or just mobility in general, with you own your home, you’re a little bit more planted in a way to where that location is. So, as the population has become a little bit more mobile, and as wage growth hasn’t necessarily kept up with the growth in the price of housing stock, because of a preference and because of a price out, it’s made it difficult for the younger generation to acquire their first property sooner than perhaps then their parents’ generation.
What that means is that the pandemic didn’t only accelerate this, but rather highlighted this sort of shift. investors realise that there’s demand for more rental housing stock, and the pandemic showed that it was an extremely resilient sector. You saw that there wasn’t a massive wave of defaults on housing mortgages or there wasn’t a massive move out of tenants or from their homes during the loss of jobs. And part of because during the pandemic there was certainly a lot of government support towards those that became unemployed. But, nonetheless, the housing sector’s resilience was certainly reinforced as a result of the pandemic.
And what that has resulted in is investors wanting exposure to the rental housing market, because of that supply-demand imbalance. And, for us in CASAFARI, I think that gives us unique position, since we have data-driven insights into the market and are able to help investors pinpoint those locations that they can not only extract value in terms of make returns, but also improve the housing stock and reduce the supply-demand imbalance that presently exists.
If this is the next big opportunity, where are you looking? What kinda opportunities do you see for PropTech players in this space today?
I think that PropTech is a huge sector or it’s continuously growing and will be even bigger. And I think that’s because the real estate industry as it stands today is relatively antiquated. It’s not as digitalised, it’s not as forward-moving or as rapidly forward-moving as perhaps other sectors. So, oftentimes, I think the adage is if it’s not broken, there’s no need to fix it.
I think that’s how a lot of operators in real estate work. But I think that if I would have to bucket PropTech opportunities, at least from the specific area that I work in, with information and investments, I would say there are companies that can provide retail investor solutions and there are companies that can provide institutional investor solutions.
That’s very much a niche in terms of what the whole PropTech ecosystem really is, but I talk about data solutions because, if you look in Southern Europe compared to Northern Europe, or certainly compared to the United States, there’s just a lack of transparency in the real estate market. It’s difficult to know where prices have moved, to know not only what’s going on at asset level, but to know what’s going on at city level. So, any company that is able to bring clarity to these fragmented, opaque markets can provide a lot of value.
Then, if moving into the investment sector, it’s almost about the democratisation of real estate investment, looking at serving retail investors. I think of companies like Prop Brick, that what they do is demystify the real estate investment process and they aid individual real estate retail investors into making that leap to buying their first investment property or buying a fraction of their first investment property. And allowing them a new avenue for investment.
And what we’re doing in CASAFARI Portfolio Solutions, serving institutional investors. Institutional investors have been active in real estate not only in Northern markets, they’ve been very active in the Spanish market, but not in this SFR space. It’s sort of bringing another avenue of investment into its specific sub-asset class that previously was just too difficult, too time-intensive for institutional investors to get into and speeding up the entire process, bringing a level of clarity and analysis that previously was just too difficult to ascertain.
Are there any competitors of CASAFARI in Europe today in this institutional space?
At least in Southern Europe, not really. We have a 360 degree platform. There are companies that, for example, provide great property management solutions, but CASAFARI is a partner with really strong data-driven insights and the operational capabilities to effectuate and to bring to life the plan. So, I think our bespoke solution, the A to Z solution that we offer, is really unrivalled.
And that’s key because it’d be great if I tell an investor I can invest X million number of euros for you, this is the kind of return that I would project. But, then, post acquisitions, I wash my hands of it and I leave them to it. They’re not property managers, maybe they have asset managers on their team, but that connection, the alignment of interest from acquisition to disposal, is just imperative to make sure that the business plan metrics are met and to allow these institutional investors to do what they do best, which is make investments. And they’re not there to manage these properties, particularly disaggregated properties.
What is the timeframe for an average sized institution investor, from acquisition to disposal?
Generally, we work with five year business plans. It takes a little bit of time to build up the portfolio, then stabilise it and optimise it. And, ultimately, you want to sell it at its peak optimization level to obtain the greatest profit margin possible.
Let’s talk about the CASAFARI’s strengths. End-to-end process is one and you also mentioned its exhaustive real estate database, that allows this new business unit to move forward. Can you shed some light there as well?
We were born as a data solutions provider, someone that’s bringing transparency into the market. And we saw the level of investor interest in the housing market and particularly of aggregating portfolios for our investors that want exposure to this particular type of sector. It was just about pairing the strength and the quality of the data we had with the desire of these investors to have that level of exposure. It was almost like a marriage of the two things.
I think for us at CASAFARI, at least in Portfolio Solutions, that’s sort of how we operate. And there’s a lot of teams behind us, behind the SaaS solutions and Portfolio Solutions: our data team, the people that are able to build out all these algorithms and to capture the data, de-duplicate it, bring it into a single location and run analyses over that.
If it wasn’t for our data team and the level of investment internally that we’ve put into data collection, data cleaning, we wouldn’t have in Portfolio Solutions or in our SaaS such a great tool to be able to offer to our end users. So, for us, there’s such an interconnectedness of value and a reliance on each other for success.
Want to hear the complete interview and even more questions answered by Willhelm? The podcast can be found on Proptech Buzz’s Youtube channel. Thanks for having us, Ravi!