Intertrust N: How to Reap the Benefits of the Residential Real Estate Market

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Institutional investment in housing is booming. What influence will these long-term investors have on prices and what challenges will they face in 2022 and beyond?

Institutional owners are buying residential real estate at unprecedented levels.

Purchases in Europe alone reaches €64bn (£53bn) in 2020with an estimated €150 billion of housing in the hands of major investors including pension funds, infrastructure funds and insurance companies.

These long-term investors are increasingly moving away from commercial properties such as offices, retail, hospitality and care homes.

This approach not only mitigates the reduced demand for commercial space caused by the Covid-19 pandemic, but takes advantage of the predictability of rental income in the residential real estate market.

Institutional landlords offer several advantages to the residential real estate market. They want to bring societal benefits in line with their ESG values. Their approach to long-term capital can adapt to housing and mobility trends. They must also respect latest government policies.

Rising real estate prices and reputation of institutional landlords

UK residential property valuations soared at the height of the Covid-19 pandemic as demand for larger homes and green space outpaced housing stock. A temporary suspension of stamp duty for properties worth less than £500,000 also boosted deal-making and prices.

This means that property ownership in the UK is no longer affordable for a growing number of people in their 20s and 30s. Young professionals and growing families need to rent longer, with many relying on generational wealth to fund home deposits.

In some places in Europe, there have been no significant institutional investments in the residential sector. This influx of capital should have the benefit of well-managed and regulated owners who take a long-term view of investing. Another advantage being that investors target different segments of the market, resulting in increased supply that is not focused on certain locations or types of stocks.

How can institutional owners reduce risk in residential real estate?

Diversification across any asset class reduces the risk of overexposure to one type of property stock or location.

Some institutional lessors will turn to a specific outsourced rental or co-ownership model if it has proven itself in another market, but must adapt to local dynamics to minimize risk. Other investors may acquire a home builder to have an internal influence on housing stock trends.

Some large-scale institutional landlords are looking for affordable housing such as build-to-rent, rent-to-own, and shared equity, which will provide greater portfolio diversity.

Others want to “sell a lifestyle” – a trend popular in North America that offers amenities such as golf and sports facilities, communal movie theaters, on-site restaurants and laundry services.

However, “amenity-rich” offers can pose a risk if potential renters feel they would pay for something they don’t use or could find a better option elsewhere.

To reduce risk, investors need to adapt over time and keep asking questions:

  • Are rental prices controlled?

  • Will the needs of young workers, families and retirees today be the same in 10 years?

  • Can access to amenities be optional and charged accordingly?

  • Is it greener to build from pre-existing stockpile and urban mining (salvaged building materials) or to build new “zero carbon” construction from scratch?

  • How can green mortgages and our ESG policies work if we don’t understand the true environmental footprint of our housing stock, old and new?

How to manage real estate portfolios in a complex world

Institutional landlords do their best to accommodate historical and changing housing and lifestyle trends.

For example, in continental Europe, institutional landlords have been a staple provider of properties in the rental market and will continue to do so. In the United States, this was predominant in cities. Now that is changing thanks to greater acceptance of remote work.

In the UK, home ownership dominated the real estate sector. But that, too, is changing, as affordability for younger generations and people’s increased desire for mobility mean demand for rentals is growing.

Institutional owners are investing more in the UK residential property market for a variety of reasons:

  • Property valuations are rising as more city dwellers move to larger, cheaper properties in the countryside and on the outskirts of cities.

  • Interest rates remain relatively low, but rising.

  • Purpose-built properties no longer have to take a cookie-cutter approach, but can cater to a variety of resident needs and lifestyle trends.

  • American and European investors who have invested in UK since the pandemic have reported good returns on their investments so far.

The constant evolution of regulations complicates cross-border real estate. Investors must master foreign tax laws, regulations, language, and even cultural cues to complete an effective transaction.

The Covid-19 pandemic has added an extra layer of complexity – slowing real estate activity across the board and restricting overseas travel.

This is why it is common for investors with significant assets in multiple jurisdictions to outsource these activities to an international administrator and a single point of contact.

The Intertrust Group real estate team will be present at Mipim this month to discuss these trends.

Why the Intertrust Group?

  • Vertical integration: we can help establish and administer real estate structures for all types of institutional investors.

  • Technical expertise: we can support you with technical and practical expertise in real estate financing and acquisition structures.

  • Global Presence: We can support your cross-jurisdictional needs.

  • Benchmarking ESG data: Intertrust Group can help you navigate the complexity, become “ESG ready” through its Fast Track System.

  • Intertrust Group is a publicly traded company with 70 years of experience providing world-class trust and corporate services to clients around the world.

Penny D. Jackson