THEWORLD@OxfordSaïd Issue 2
In a low-return world, investors are looking anywhere for yield. Real estate investors are no exception. The Oxford Real Estate Conference 2016 revealed a rapidly changing sector in which lines are increasingly blurred, yet opportunities abound. Andrew Baum lists the top five innovations to watch.
PRS: the next big thing
Privately rented houses and flats are hardly new – but purpose-built blocks of professionally-managed facilities are, and they’re here to stay in increasing scale, with the backing of large, institutional investors. Variously called the Private Rented Sector (PRS) or Build to Rent (BTR), this emerging asset type is based on large, purpose-built developments for hundreds of households, usually including on-site services (such as exercise facilities and lounges) and staff.
In a market such as the UK, where 97% of privately rented residential stock is in the hands of small landlords with between one and three properties, BTR has the potential to revolutionise attitudes to renting as well as investment in Real Estate. Speakers acknowledged that investors and public sector bodies in the UK were still moving quite slowly as it has ‘taken a while to get their heads round it’, but pointed out that the market is already well developed in the US. Although there are some cultural differences, if it works there then investors will be convinced that it will work here.
Operational real estate companies
As BTR gains more of a foothold in the market, operational management companies that run and manage the properties will become increasingly important. One speaker, representing a BTR company, explained that their objective was to ‘create social cohesion amongst the tenants’, which meant believing that ‘living starts at the door of the building’. Not for these buildings are the concrete stairwells and soulless corridors of yesteryear: developers are creating attractive lobbies with 24-hour concierge services, and providing inclusive services from broadband to catering for events.
While traditional real estate investors like to immunise themselves against operational management by agreeing long term lease contracts with devolved responsibility, BTR is only one of several ‘new’ property types that require hands-on management expertise. Hotels, self-storage, student accommodation, care homes and others offer enhanced yield in return for more engagement with the end user. These new types of operational companies are looking for the skills they need in hotel and hospitality companies rather than in traditional property management companies.
From real estate to real assets
With the opening of high profile ‘inclusive’ developments such as that at King’s Cross in London, people are realising that to focus on pure real estate investments such as retail and industrial properties is to miss an opportunity. Farmland, hospitals, schools, social infrastructure and other formerly public buildings are all part of the real estate and built environment and form complementary assets. As one speaker pointed out, ‘A building that is not connected to a road, or that has no water supply or electricity, is valueless … cities are simply bundles of interconnected real estate and infrastructure assets.’
Speakers argued that worrying about the differences between real estate and infrastructure, for example, was unnecessary. Investors care about the style of investment, not about what it is called. If an investor is offered an opportunity that is long-term, with high income and low volatility, and matches inflation, they are not going to quibble about whether it is based on real estate or real assets.
Online estate agents offer to sell your house for £780 while online mortgage brokers such as Trussle promise to find you a suitable mortgage without charging you a penny. Technology disrupters and disintermediaries seem set to transform the painful and expensive business of buying and selling property. Brickvest and Lendinvest will facilitate investment in real estate capital markets through equity and debt.
Participants at the Real Estate Conference had mixed views on this. Online mortgage brokers and other providers in this field are worth considering for investment as the Fintech sector is well established and consumers are comfortable with buying financial products online. The big institutions know that their days in this market are numbered so are keen to collaborate with Fintech companies and start-ups.
Online estate agents may struggle more, however. Participants thought that consumers would lack confidence in their own abilities to get the best price for their biggest asset and that they needed the reassurance of dealing face-to-face with a professional. Companies with a hybrid approach, such as Purple Bricks, may be more successful than those based purely on online transactions.
It is in the bringing together of the users of space and owners of space that more rapid progress may be observed. WeWork, with a market capitalisation of over $10bn, offers flexible workspace and is a classic disruptor of the long lease tradition.
Oxford Saïd’s Dean, Peter Tufano, wrote about the Matrix of Imperfections – which are at a maximum in emerging markets. But imperfections lead to opportunities. In Africa, for example, 44 million houses are needed and 140 million households can afford a $5,000 house – the target market for companies such as UK-based REALL. In Latin America, Brazil appears to be in trouble; but Mexico and Colombia look good and Cuba and Argentina may become increasingly interesting for the brave. China continues to need new real estate assets; and while the currency remains a concern, political change may mean that India may be different this time, and irresistible to global investors seeking higher returns.
Introducing the Oxford Real Estate Programme: Building successful real estate enterprises in turbulent times
Programme and market insights from faculty, alumni and industry partners
Oxford Real Estate Society: Creating a strong network of real estate professionals and students from the University of Oxford.