Blurred boundaries in real estate investment: The “institutionalisation” of the “alternatives” sectors


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The last 18 months have seen a significant influx of institutional investment into the residential sector (historically badged a so called “alternative” sector for institutional investors). So what is behind that interest and what might we see going forward?

The changing landscape

Rewind 10 years and the institutional investment market was happily focused on offices, retail and industrial – with a little leisure thrown in for the adventurous. Commercial buildings with residential elements were often off-putting to traditional investors, and needed to be carefully ringfenced so as not to “contaminate” the core asset.

Fast forward to 2019, and the property press is full of headlines hailing joint ventures in Build to Rent, largescale capital being ploughed into affordable and shared ownership schemes, and an increasing appetite for healthcare and senior living investment. The student accommodation sector has reached the point of active trading of established schemes. Beds are no longer something to be feared – they are being embraced by the investment industry, with even the most traditional of players in the market considering a move into these so called “alternatives” sectors.

This sea-change, which started out as a slow swell, has been looming larger over the last couple of years. This is perhaps unsurprising when we zoom out and look at the investment market today as a whole. Investors are wary of retailer failure and the perceived uncertain future of older retail schemes. There is a limited flow of good office and industrial stock in the market due to wider economic factors (don’t mention the “B-word”). At the same time, investment managers’ pockets are full of cash which needs to be allocated - and they are accountable for producing returns.

Are the “alternatives” sectors becoming mainstream?

Realistically, it is still early days. Taking Build to Rent as an example, the US have a mature and highlydeveloped “multi-family” investment market. The UK’s fledgling steps to emulate this success are building up a young investment market but with strong fundamentals. It is expected that one in four of us will be renters in 2021 according to a recent report from Knight Frank – Multihousing 2017 PRS Research. The Housing White Paper actively encouraged Build to Rent, with a focus on planning policy and affordable private rent.

With the Government currently distracted by other matters, private investors are nevertheless entering this market in a big way. According to Savills’ research in June 2019, investment in Build to Rent totalled £2.6bn 2018 of which £880m (roughly a third) was made up of institutions.

We have seen significant investments in affordable housing (witness Blackstone’s investment in Sage Housing, a For Profit RP, and Legal & General’s own For Profit RP), as well as Legal & General’s ground-breaking deal with Croydon Council.

Similarly, in the senior living world, the fundamentals seem to speak for themselves. Knight Frank’s Retirement Living Insight in 2018 reports that the number of over-65s in the UK is forecast to increase by 20% to £12m by 2027, and predicted that 3m retirement living properties would need to be built to accommodate those that would be likely to consider downsizing.

It’s always useful to ask the question “if it’s such a good idea, why isn’t everyone doing it?

Many institutions need others to pave the way into new sectors and create track record before they can justify piling vast capital into less mature real estate sectors.

There are however a large number of heavyweights who have embraced these “alternatives” sectors with gusto, holding the doors open for more conservative investors to follow. There is also a perceived “skills gap” amongst many investors who do not yet have the scale of personnel or experience to tackle a major beds portfolio or fund.

This is leading to exciting times in the world of joint ventures and partnering, with investors becoming more dynamic and collaborative in their approach to investment and asset management, and in doing so creating opportunities for the traditional housing association sector and for local authorities.

What about reputational risk?

Leaving aside financial and market factors, one of the main things to remember is that dealing with beds for individuals carries a higher reputational risk than dealing with workplaces for corporates.

The care sector is an obvious example, where vulnerable people could be involved. Care is heavily regulated and issues can be headline-grabbing, so it’s important to keep a close eye on day to day operations. A care home which falls under an embargo affects not only reputation but also income stream and exit strategy, so early and active monitoring is key.

The reputational factor does of course work both ways. We now live in a world where major institutions must demonstrate that they are leaders not just in business, but also in behaviour and conscience. Delivering accessible and affordable high quality homes, to a population which sorely needs them, has great potential ESG benefits.

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