Institutional investment within the housing market is booming. But what type of influence will long-term investors have over the prices and will they be faced with challenges in 2022 and beyond?
Institutional landlords have been purchasing residential properties at levels never seen before.
In Europe alone, purchases reached GBP53bn (EUR64bn) in 2020, with around EUR150bn of housing stock estimated to reach the large investor’s hands, which includes insurance companies, infrastructure funds, and pension funds.
These are the long-play investors that have increasingly shifted away from buying commercial properties such as care homes, hospitality, retail, and office space.
This is an approach that has not only buffered decreased demands for commercial spaces that the Covid-19 pandemic has caused, but has also taken advantage of predictability within the rental avenues present in the residential market.
Institutional landlords provide multiple benefits to residential property markets. They are interested in providing societal benefits that match up with their ESG values. The long-term capital approach of these investors can easily adjust to mobility and housing trends. They are also required to adhere to a few new government-led policies.
The reputation of institutional landlords and rising prices of houses have caused property valuations in the UK to soar when the Covid-19 pandemic was at its height, and demands for green space and larger houses surpassed housing stock. A temporary stamp-duty break for properties that were valued under GBP500,000 also spurred prices and deal closings.
This now means that property development finance and owning a property in the UK is not affordable any longer for many individuals in their 20s and 30s. Growing families and young professionals now have to rent properties for longer, with a lot of people having to wait for generational wealth in order to fund deposits on homes.
In certain locations in Europe, there haven’t been any meaningful institutional investments in the residential sectors. This capital influx should have resulted in the advantage of regulated and well-run landlords taking long-term views of their investments. Another advantage is investors that are now targeting different market segments which leads to a supply increase that is no longer focused on specific locations or stock types.
How Can Institutional Landlords Lower Risks In Residential Real Estate?
Diversification in all asset classes lowers risks relating to overexposure when it comes to any “one type” of location or housing stock.
Some of the institutional landlords tend to go for specific mixed ownership or outsourced rental models when it has shown to be successful in other markets. However, they must be prepared to adapt to the local dynamics in order to minimise risks. Other investors might acquire housebuilders so that they have inside influence over the trends relating to the housing stock.
Certain large-scale institutional landlords have started to focus on affordable housing like rent-to-buy, shared equity, and build-to-rent, which provides added portfolio diversity.
Others are interested in “sell a lifestyle”, which is one of the popular trends in North America that provides amenities like sporting and golf facilities, laundry services, on-site restaurants, and communal-cinema rooms.
However, “amenity-rich” offerings might present risks when prospective tenants feel like they will be paying for things they do not use or when they might find better options elsewhere.
To lower risks, investors should be prepared to adapt to the times, as well as carry on asking questions:
Are the prices for rentals in check?
Will the requirements of pensioners, families, or young professionals today, still be the same after 10 years?
Can access to amenities be optional and then charged accordingly?
Is it a greener approach to construct “zero-carbon” newbuilds from scratch, or for urban mining and pre-existing stock (reclaimed building materials)?
How can our ESG policies and green mortgages work if we do not have a full understanding of the actual footprint relating to housing stock that is both new and old?
How To Manage Housing Portfolios In This Complex World?
Institutional landlords are trying their best when it comes to adapting to historical as well as changing lifestyle and housing trends.
For instance, in continental Europe, the institutional landlords are the staple supplier when it comes to properties within rental markets and this is set to continue. In the US, this was once predominant in the cities, but this is changing due to a greater acceptance surrounding remote working.
In the UK, residential ownership once dominated the real-estate markets. But this is also changing since affordability for the younger generations and increasing desires for population mobility have also increased the demands for renting.
Institutional landlords have started to invest more in the property market in the UK for several reasons:
Property valuations continue to rise as more of the urban dwellers have started moving to less expensive and larger properties in the city outskirts and the countryside.
Interest rates have remained relatively low, yet they are still rising.
Purpose-built properties are no longer required to take cookie-cutter approaches, but can still cater to several different lifestyle trends and residential needs.
European and US investors that made investments in the UK after the pandemic have generally reported great returns on these investments up to now.
Consistent changes to many regulations have made cross-border real estate a bit more complex. Investors have to gain an understanding of foreign regulations, tax laws, language, and even a few cultural cues in order to secure effective deals.
The Corona Virus pandemic has added additional layers of complexity, which slowed down real-estate activity around the globe and restricted foreign travel.
This is the reason why it has become very common for many investors who own sizable assets that are spread across several jurisdictions to rather choose outsourcing these activities to single points of contact or international administrators.