Institutionalisation of RE: BTR

Fellow insurers Legal & General, Aviva, AXA IM – Real Assets soon followed M&G’s lead, as did listed investors including Grainger, PRS REIT. In mid-2015, private equity capital joined the fray with Lone Star’s £700m acquisition of Quintain, one of the UK sector’s early pioneers along with Sigma and Long Harbour.

Dan Batterton, Fund Manager BTR, LGIM Real Assets, explains:

“Relatively speaking, this market is in its infancy.  For many institutions, in order to assess the risk and reward of their investment, they require access to high-quality data.  For BTR, it’s the operational data which is the most valuable, so as more assets come into operation and the data becomes available we will see more deals emerge.  But the reality is that we are five years away – maybe longer – from being able to provide data that can demonstrate a correct and fair assessment of value. 

“For the large annuity and liability matching investors, like Legal & General, the credit rating will depend on the strength of income cash flow, so if the cash flow can be correctly rated then the size of the potential investor market will see significant growth.  We need to show that this asset class can offer low risk and steady growth returns over the long-term. 

“Along with access to high-quality data, in order for BTR to reach maturity and become a viable asset class there needs to be liquidity in the market. At the moment, there are buyers but limited sellers – we need a sufficient pool of assets to see regular deals.

“But ultimately, in this sector, operators will only really succeed if we can deliver on the quality customer service that the BTR model is built on. The customer experience is key.” 

The liquidity issue remains a significant draw back and best exemplified by Lone Star’s aborted sale of Quintain, in a thin bidding process led by Delancey last September. Lone Star wanted £2.2bn for Quintain, which owns one of London’s largest urban regeneration sites at Wembley Park, but did not get close enough to close the deal.

Overall, the BTR sector remains immature but it is developing fast. Operational BTR stock increased by 26% in 2018, according to Savills, while the amount under construction has increased by 33%.

This rapid growth highlights the momentum of the sector which continues to attract significant investment, from both overseas and domestic institutional investors. Much more to be done, but as new players continue to enter the market, liquidity should increase, helping BTR transition to the next stage of maturity.

In tomorrow’s third instalment, we turn to another sector: healthcare.

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