Institutionalisation of emerging real estate sectors

Emerging real estate sector, the often dubbed ‘alternative sectors’, have experienced rapid growth in recent years, driven by a range of structural forces driving demand in markets where supply is constrained.

Over the course of this week, we will take a look at what it means for emerging property sectors to become mature or institutionalised, with a focus on three standout nascent sectors in particular: Build to Rent (BTR), healthcare and retirement living.

Each of these sectors are at a different stage of maturity and benefit from different structural drivers. So, what makes an asset class institutionalised? Here are an outline worth considering: 

  • Attract institutional capital (equity investors, debt providers & financial intermediaries);
  • Professional management of assets, including:
    1. Research-driven investment strategies;
    2. Asset management and portfolio management;
    3. Portfolio monitoring;
  • Data, including frequent independent valuations, transparent performance measurement, and a liquid transactional market;
  • Investment reporting (including leasing, transactions, financing, market value accounting, etc); and
  • Digitalisation.

In this first article we start to consider to what extent each of these alternative sectors have reached maturity and how much further each need to go before they can be considered truly ‘institutional class’ sectors.

Build to Rent

Institutional investment in the UK residential property market was a slow burn for decades and then, since 2012 has gathered incredible momentum. It has been driven by declining home ownership, as changing lifestyle choices and tightened mortgage regulation have supported rental demand and, in turn, residential capital growth.

Strong price has further been supported by the demand and supply imbalance, historically cheap mortgages and in population growth forecasts, entrenching the structural tailwinds supporting the sector.

Seven years ago, the market was held back by the lack of “oven-ready” portfolios of scale, the challenges of developing without recognition or support from housing and planning policy, the granularity of the asset management and the need for new finance models.

But then M&G’s acquisition of the Berkeley residential portfolio in 2013 was evidence that UK institutional investors were in the game. “It was a way to get into the sector, even though the portfolio was not purpose-built,” explains Lawrence Bowles, associate director, residential research at Savills. The institutional investors realised that they had to build product themselves, which subsequently drove the trend in forward funding in the sector.

Tomorrow, in the second instalment in this new series, we continue to explore the BTR sector.

james.wallace@realassetmedia.com