6th February 2016
Ethika Investments is a renowned real estate investment firm that provides investors access
to a unique platform by tactically investing in opportunistic real estate assets primarily
in the United States. We spoke to Andres Szita, Chairman at Ethika Investments,
to find out more about his firm and to talk us through their highly innovative fund strategy.
At Ethika, their advisers employ an entrepreneurial investment strategy designed to consistently achieve attractive risk-adjusted returns by creating capital appreciation opportunities through repositioning, restructuring, redevelopment and intensive post-acquisition asset management of underperforming assets. As a result of their expertise, Ethika’s team has over $5 billion in diverse real estate transaction and development services experience, encompassing investment management, asset management, operational repositioning and design/development management.
As a company immersed in the real estate industry, Szita has noticed a number of trends in their industry, unsurprisingly stemming from the 2008 Global Financial Crisis. “Since the financial crisis, financing has remained conservative,” says Szita. “This is positive, as it has helped keep supplies generally in check. New construction loans, for example, were a lot easier to come by in the last cycle, which of course resulted in a market oversupply.”
“Alongside this, leverage has also remained conservative, since many deals ended up underwater during the financial crisis. This has refocused the attention of fund managers primarily to high quality assets in high quality markets – concentrating equity in the country’s Gateway and top 20-40 markets.”
With conservative financial activity now a prevailing theme across the financial landscape, many banks have remained reluctant to lend in the sector over the past number of years. However, according to Szita, this development has really paved the way for private lending. “With heavier banking regulations, from Dodd-Frank domestically to the Basel III regulatory agreement globally, requiring banks to hold more of their secured product on their balance sheet, the door has been opened for private lenders,” explains Szita. “As such, private equity real estate fund and debt fund capital has been able to step in and take the place of banks, with the opportunity to earn some attractive yields.
“The evolved lending landscape has created a great wealth of capital amongst investors and fierce competition among borrowers,” adds Szita. “Any investor that is leaning away from more core assets is finding themselves dealing with the non-banking lenders more frequently. The positive aspect is, of course, that for investors focused on value-add in non-core assets, these groups have the opportunity to be nimbler and are not as boxed in as the bank lenders have traditionally been.”
With the financial markets always being susceptible to uncertainty, Ethika’s investment process is grounded upon diversification and consequently leaves them less vulnerable to volatility. “We make sure to look at opportunities in such a way that they’re not purely cycle driven,” says Szita. “Instead, we like to invest when we see a rapidly improving market on a macro level, while identifying what we deem pockets of opportunity, be that market specific or pertaining to particular asset classes.”
“Generally speaking, Ethika prefers to buy into assets that aren’t perfectly stabilised, allowing us to acquire properties at a very attractive price. We’re generally more of the mind-set of taking a higher stabilised yield in the future, rather than pay full price today. If we can buy a perfectly stabilised asset, you don’t have a clear path to grow the value. With no room to improve the asset, you’re at the mercy of the market. Whereas with a value-add investment strategy, there is a clear path to improve the property to make it competitive, using the fact that the asset is not performing at its fullest potential to then build the value.”
2016 has been an exciting year for Ethika, primarily due to the launch of their new real estate fund at the closing end of 2015. The fund focuses on opportunistic investments in the top 30 U.S. markets that will create value through significant renovations and operational improvements. Named the Ethika Investment Diversified Opportunity Fund II, the platform is targeted to attract $250 million in equity capital from both new and existing investors, resulting in nearly $1 billion of new acquisitions over the next several years.
In sticking to their tried and tested strategy, the Ethika Diversified Opportunity Fund II will adhere to Ethika Investments’ vertically integrated investing approach that includes sourcing real estate assets with positive fundamentals in compelling locations at prices below historical values and replacement costs. The launch came on the heels of full deployment of Ethika Diversified Opportunity Fund I, which last year delivered an internal rate of return of 22.3% and a 2.1x net equity multiple to investors after investing in 17 properties across 13 different markets.
Alongside their investment strategy, Ethika have a number of other features which allow them to distinguish themselves from their competitors. As Szita outlines: “As a vertically-integrated investment firm, we not only serve as a fund and capital manager, we can service every investment that we do,” explains Szita. “In taking on a value-add investment, we can very quickly put a strategy in place that encompasses everything from sourcing the asset, underwriting the asset, escrow, design, construction, repositioning, accounting, investor relations and property management, consolidating the entire process to a single operation, again minimising risk and the room for error.
“Moreover, the midsize niche that we’re in is also a true differentiator,” adds Szita. “A typical deployment for Ethika usually sits between the $15 to $50 million mark. We’re nimble and can take on these sorts of assets and stabilise them, increasing value on our net multiple goal of 2.0x over the fund’s investment.”
As a result of their success, Ethika has grown to provide a highly diverse client base, and building and maintaining relationships with their clients is at the heart of everything Ethika does. “Our fund partners vary throughout each real estate cycle, but are generally a 65/35 split between foreign and domestic capital sources. We service a wide variety of investors, from large institutional pensions to private sovereign wealth funds.”
Despite the shifting road ahead, Ethika remain confident that their company will continue to strive and find the pockets of opportunity that may come along the way. “Of course, we will be primarily focusing on our new fund throughout the course of 2016,” says Szita. “While growth pace has slowed significantly, we still strongly believe that of all the major economies in the world, the U.S. still has the best underlying monetary policy and pricing fundamentals for growth and strong investment returns moving forward.”
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