Bernard Wasserman is the president of Participant Capital, a real estate investment management firm known for bringing Class A real estate investment opportunities to wealth managers. Through Participant’s investment vehicles, the firm invests alongside institutional capital in mixed-use, multifamily and hospitality development projects in the Sun Belt states and Puerto Rico. Participant’s integrated development company, Royal Palm Companies, has developed, over the past 40+ years, more than 50 large projects that feature luxury co-branded partnerships, high-end residential and retail amenities.
Russ Prince: Why, in turbulent markets, can it be smart to hold hard assets, such as real estate?
Bernard Wasserman: There are two things that move all asset classes: external factors and demand. Market shocks can quickly impact liquid assets, but hard assets are better positioned to weather short-term volatility since they don’t fluctuate like liquid assets. Private equity real estate companies flush with dry powder after years of record capital-raising are in no rush to sell housing in a down market; they’ll simply hold on to those units, collect monthly rents and wait for the market to rebound.
During the pandemic, one of the best asset classes was multi-family housing because it provided a reliable stream of income and is supported by strong demand, limited supply growth and record low-interest rates. Savvy real estate investors with a five-to-10-year investment horizon don’t overreact to market disruptions, not even during a pandemic.
The second factor is demand. People will always have a need for housing. They may not need as many offices in today’s work-from-home reality, but they need places to live.
We invest in properties that capitalize on larger demographic trends such as the explosion in migration to tax-friendly Sunbelt states and territories such as Florida, Texas and Puerto Rico, whether from retiring baby boomers or young work-from-home professionals in search of good weather and a more affordable lifestyle outside of the Northeast. We focus on specific markets within these larger regions, including metro areas such as Orlando, Tampa and West Palm Beach that are seeing growth but haven’t yet topped out. And then we incorporate the live-work-and-play amenities that we are known for and that Northeasterners have come to expect: quality shopping, restaurants, supermarkets, high-end hotels, health-and-wellness facilities, synagogues, etc. We provide everything they’re used to have in one location.
Prince: In today’s expensive real estate market, why is investing in ground-up development potentially more lucrative than investing in value-added or distressed properties?
Wasserman: Investing in value-added real estate involves buying properties with existing income and making improvements to generate attractive returns. While this may seem like a good entry point to investing in real estate, today’s value-add investors face both a frothy real estate market and escalating interest rates. There is incredible competition for value-added properties, which makes the risk that you’ll overpay greater today than it has been for some time. Would you put your money into low-current coupon, long-term bonds today and hope that rates go lower?
The reason ground-up development is such a good investment in the high-growth markets we target is that not everyone can do it. Individual investors don’t often have access to developers with a long track record of building high-quality properties on budget and on time. So, often, when value-added properties become too expensive, value-add investors will move down the risk curve in search of better returns in distressed situations. This leads to buying up properties that are on the brink of foreclosure or already owned by a bank, often located in less-desirable neighborhoods.
But here’s one thing to consider: The timeframe for investing in distressed properties is roughly the same as investing in new, ground-up development—three to four years. So, at the end of those three to four years, you could either have a brand-new property with all the amenities in a great area or a fixer-upper. Which would you rather own?
Prince: What are the benefits of investing in an integrated company?
Wasserman: If you’re going to be invested in private equity real estate development, you should select a manager that has a close relationship with a proven developer, private equity real estate generalist managers tend to lack major development experience, and metaphorically speaking “they can look under the hood but can’t really see the engine.” When it comes to development, there are so many variables and a lot that can go wrong. Many firms can come in on time and under budget. The question is: Did they cut corners to get there?
Our integrated development company, Royal Palm Companies goes to great lengths to maintain high-quality standards and de-risk investments. We do that by conducting extensive due diligence and research, which means we encounter fewer hiccups throughout the process. With a residential or multifamily component to most projects, we capitalize on our historically highly successful pre-selling efforts, taking in large deposits from buyers early in the process, effectively turning them into stakeholders. Royal Palm Companies’ long-standing relationships with key market players also allow us to navigate the permitting and zoning landscape faster than most.
At Participant Capital, several of our key employees have a dual role at Royal Palm Companies. We leverage their experience and objectivity at every opportunity. Over its 40+-year history, RPC has developed more than 6,000 residential units across 50+ properties exceeding $3.5 billion in value and created proprietary luxury brands such as PARAMOUNT, Legacy Hotel & Residences and Grand Reserve Puerto Rico. Given its track record, RPC isn’t reliant on Participant Capital to fund projects. What Participant provides is an opportunity for wealth managers, family offices, and their clients to get in on the ground floor and participate in ground-up development alongside major institutions.
Russ Alan Prince is the executive director of Private Wealth magazine and one of the leading authorities in the private wealth industry. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals. Connect with him on LinkedIn.com.