Home is where the hearth is: the expansion of Federated Hermes’ Hestia platform

Early last year, before the UK’s first lockdown began, Will Gibby cycled from London to Brighton, in a long and winding trip via Gatwick North Terminal. “I could have actually got on a plane,” he says. But Federated Hermes’ BTR fund director was committed to the route, making his way to another target city. Much like Gibby’s cycle ride, the Brighton transaction took some time – but a year on, Federated Hermes’ Hestia platform completed the acquisition, adding Preston Park to its growing portfolio. “Deals take a while to do,” Gibby says. “This has been a continuation over a long period of time. You’ve got to lead with substance. If you want to be good at something, let’s be good at this. We have focused on it for such a long time.” For Gibby, the journey is as important as the destination. At Hermes that started in 2014. Following the dismantling of the Vista Fund in 2017, you could be forgiven for thinking the fund manager was backing off from UK BTR. But Gibby insists he has been peddling away. Now Hestia is in acquisition mode, striking a flurry of deals in recent months, and setting out plans to deploy £1bn in two to three years. Shifting gears Gibby has been with Hermes since 2006, focusing on residential investment on behalf of BT Pension Scheme in the US, Australia and the UK. Hermes first entered the UK BTR market with BTPS’s £95m investment in the Vista Fund managed by Countrywide. It launched with a seed portfolio, seeking new capital for expansion, but after securing two developments opted to restructure. Hermes brought the management in-house and set about building out those schemes as part of a vertically integrated development business. It opened the 324-flat Cargo in Liverpool and 164-flat Pomona Wharf in Manchester four years ago, with new assets added to the portfolio only at the end of 2020. “There has not really been a pause,” Gibby says. “Because the market is new in the UK, it’s a very immature market. Gaining data from operational assets is absolutely key. It’s a fundamental part of what we do.” Hermes has been getting that operational platform off the ground, examining its two initial schemes with property managers at Savills and speaking to customers, gathering information to direct its mid-market strategy of up to 15% discount to premium pricing. That broad demographic is a niche market, says Gibby, because so few companies are active in it. “It feels like the market is bifurcated between those in the affordable space and the [premium product]. We are really sat outside of that. Where we see greatest demand is in the mid-market,” he says. “Pomona and Cargo are kind of the bookends of the mid-market.” Pomona Wharf is at a larger discount to Manchester’s premium product, with Cargo nearing the top end for Liverpool. A more affordable product is important for Hermes’ wider social purpose, but also for delivering sustainable income. “What we are trying to do is create a product that is accessible,” Gibby says. “The greater the accessibility of that product, the greater likelihood that you will get sustainable income.” He and his team prioritise this over rental growth or yield. “It’s about that renewal rate and keeping people in your buildings,” he adds. Hestia was launched at the end of December as a platform to bring that community together – from the Greek god of commerce came the goddess of the hearth. “Hestia is really about that sense of home and the stability that home brings,” says Gibby. And as the portfolio grows, each asset will have that brand continuity and expand the database. Chain reaction Establishment of the platform and database has sparked new growth this year. Armed with 1,182 data points, Hestia is racing through a list of 30 target cities. In less than three months it has added projects in Lewisham in London, Leeds and Brighton to the portfolio. “At the moment, we’ve got things in Cardiff, Bristol, London, Glasgow, Edinburgh, Birmingham – there are a number of markets and that’s just the deal flow from the past couple of weeks,” says Gibby. Target schemes comprise more than 150 homes, dipping a little lower in London, and typically 200-300 flats in the regions. They should be 10-15 minutes outside the central business district, where local shops and services are easily accessible and land values are lower to help hit that price point. In these locations, Hestia can also incorporate outdoor space and natural amenity, such as water or parkland. “We were thinking this before the past year, because it is something we have done in the US,” says Gibby. “Sustainability and our pathway will be an active part of our investment strategy. Our underwriting will include these in order that the product has its depreciation reduced.” Cargo recently received a world-first BREEAM In-Use residential certification, and all developments will meet the most stringent type 4 fire risk assessment criteria. Gibby says that should be a basic minimum requirement for anyone in BTR. From there, Hestia will seek to exceed expectations with tailored schemes and amenities. In Brighton, it will offer ground-floor workspace for residents who commute to the capital, with flats suitable for homeworking and Zoom calls. But it won’t provide services such as barbers or coffee shops that the city centre already has in abundance. Accelerating investment While perusing new sites and designs, Gibby has also been courting prospective investors to fund expansion beyond its agreement with BTPS. Hermes has a global mandate with the £55bn pension fund and discretion to spend that where it sees best. “Within that, we allocate to geographies globally, but also sub-sectors,” says Gibby. Right now, 20% of the real estate investment allocation is directed to BTR, with 10-15% specifically in the UK. Gibby is reluctant to share BTPS’s UK BTR target, but with three new schemes recently committed, some 700 flats in development and a target to add £500m via new funders to hit that £1bn total, it would be fair to assume it’s hefty. Growth of that target will hinge on how this new strategy plays out. Things have changed a lot since 2014. With Hestia’s BTR strategy now proven, Gibby and the team have more certainty and direction for the road ahead. To send feedback, e-mail emma.rosser@eg.co.uk or tweet @EmmaARosser or EGPropertyNews