Investor Forum: Household names
The reasons for investing in housing are as numerous as the investors moving into the sector. Rachel Fixsen speaks to six investors and advisers
• High valuations deter Finnish pensions insurer from new deals right now
• Increased residential investment substantially over past five years
Timo Stenius, director of unlisted investments of Finnish pensions insurance company Elo, says the institutional investor appreciates the stability of residential property, but high valuations are keeping it on the sidelines of the market for the time being.
Elo has €3bn invested in real estate, with €2.2bn of that within Finland.
“We are quite a big investor in residential investment in Finland and now around 35% of our domestic property investment is in homes,” Stenius says.
“In the last five years we have increased our residential investment substantially, because we like the asset class’s safe risk profile compared with office and logistics, and the secure cash flow it provides. And on top of that, we aim to diversify our portfolio.
“We want to have both kinds of assets – those that are perhaps more closely bound to the economic situation, and also residential, which is less dependent on the cycle.”
Finnish offices have performed poorly over the past 10 years in Finland, with the decline in values lowering the total return, says Stenius. But residential values have been very stable over the past 20 years, particularly in the Helsinki metropolitan area, he adds.
Since the European Central Bank started easing monetary policy, he says, “yields have been decreasing, which has caused very good value growth – even a bubble in prices”. He says: “So we are more cautious at the moment in our buying, although we are doing some new building in residential.”
Residential property is very management intensive, he notes. “We see it as a volume business — you have to have a portfolio of thousands of apartments to make it efficient.”
All of Elo’s residential investment are in the form of directly held assets, although it has exposure to care homes through a shareholding in a specialised investment company. But it is considering adding foreign residential exposure.
“We have been looking at ways of doing the same kind of business in other European countries such as Denmark, the Netherlands, the UK and Sweden,” Stenius says. “And there are some opportunities that we are studying more closely.”
Legal & General Capital
• Differing risk-return profiles matched against different capital sources
• Activities include large stake in CALA Homes
Housing is one of the key sectors where Legal & General Capital (LGC) has identified a financing gap and potentially attractive returns for long-term investors, says James Lidgate, head of housing at LGC. The other two sectors are SME finance, and infrastructure – specifically, urban regeneration and clean energy.
“With access to a strong balance sheet and patient capital, as well as long-term partnerships across the UK, L&G’s housing platform can generate strong and growing profits while helping to provide the UK’s population with high-quality, affordable living at all stages in their life cycle,” Lidgate says.
LGC is helping build new homes in the UK. It has a large stake in housebuilder CALA Homes, an investment in a 1,000-home development project in Crowthorne, in the south of England, and a pipeline of projects through its own house-building arm, Legal & General Homes. It also has a 550,000sqft factory in the north of England, which will be used to construct up to 3,500 modular homes per year.
“L&G more broadly also invests in social housing, care homes and student accommodation,” Lidgate says. “Each of L&G’s housing investments offer differing risk-return profiles and therefore can be matched against a number of different sources of capital that we manage.”
The main reasons for the company’s investment in build-to-rent include a strong demand-supply imbalance; highly stable income returns, because of the low level of vacancy in the UK, coupled with residential property demand, which combine to deliver a highly stable rental income.
Other reasons are rental growth ahead of inflation, the opportunity to introduce higher standards of design through purpose-built accommodation, and the opportunity to enable above-average net operating income through active management.
“Between 2006 and 2015, residential rents significantly outperformed broader commercial real estate,” Lidgate says. “This relatively stable and growing income profile, which differentiates so strongly to other parts of the real estate investment universe, is one of the major attractions of the residential asset class,” he says.
ZBI Zentral Boden Immobilien
• German residential is ‘good, sustainable’ investment, particularly beyond big cities
• Residential less volatile due to large number of tenants and regional spread
Looking beyond Germany’s largest cities can be wise for investors targeting long-term residential assets, suggests Bernd Ital, the chief executive of German residential property specialist ZBI Zentral Boden Immobilien.
“The German residential market is a sustainable and good investment, especially outside the areas of high demand and expensive metropolises,” he says.
These positive prospects are down to the fact that population growth, income and household development, combined with rising construction costs and the ongoing low-interest-rate environment provide for fundamental demand, he says.
“However, the prerequisites are professional management and research, at all stages from purchasing to value-enhancing asset management, property management and even a possible sale,” Ital says.
“Apart from the very expensive speculative and money-flow metropolises, such as Munich, residential real estate is also a less volatile investment than some other types of real estate, because of the large number of tenants in individual properties and the regional spread in portfolios – if the fundamental framework conditions of economic, population and household development are positive.”
The family-owned ZBI Group says that having more than 10 branches throughout Germany means it is able to make good investments beyond the biggest cities.
ZBI Zentral Boden Immobilien, which is part of the group, recently joined forces with Union Investment to facilitate Union’s first residential property investment. The two firms agreed to form a partnership through which Union Investment plans to add residential real estate to its existing range of open-ended real estate funds. As part of the deal, the business operations of the ZBI Group will be bundled into the newly-formed partnership holding company ZBI Partnerschafts-Holding, and Union Asset Management Holding will acquire 49.9% of the new holding company’s shares.
• Canadian investor expands residential tenfold over past six years
• Residential in ‘gateway markets’ contributed to global returns in 2016
In the past six years, Ivanhoé Cambridge has increased its residential real estate tenfold from CAD1bn to CAD10bn (€6.6bn). “This represents about 18% of our overall global portfolio,” says Sylvain Fortier, president, residential, hotels and real estate investment funds at the subsidiary of the Caisse de dépôt et placement du Québec.
“We feel this asset class, in the few gateway markets such as New York, London, and San Francisco, offers the best risk-adjusted returns and it contributed significantly to our global returns in 2016.”
Ivanhoé Cambridge increased its allocation because of the resilience of the asset class. “In bad, uncertain times, most of our residential assets will remain fully occupied, as people will tend to rent instead of buying a home or an apartment,” he says.
The main risk remains new supply. “Demand is there but we have less control over new supply,” Fortier says. But by focusing on large gateway cities, the investor has minimised that risk. “Land is scarce, and high density is not permitted everywhere.”
Ivanhoé Cambridge’s residential investments are mostly held directly with partners, although it also invests in the asset class alongside a few key fund managers. They include Greystar, Veritas Investments, Blackstone, Stonehenge and Residential Land. Fortier says they have been critical in growing Ivanhoé Cambridge’s residential investments.
Most of the investments are located in New York, San Francisco and in London, and it has around 1,300 units in Montreal and Quebec City.
“We very much continue to like London – a market that is still in need of residential,” Fortier says.
“We try to avoid secondary markets where institutions and lenders have traditionally been more prudent, making the exit more difficult.”
Fortier is very optimistic about the future of the sector. “Millennials are renters by choice, home ownership is a heavy trend going down, and we feel this asset class is much more accepted and interesting for large institutions now that you can find scale, and we will continue investing in it,” he says.
• Foresees no let-up in institutional appetite for UK residential investments
• Brexit talks could disrupt the ‘perfect storm’ now in place
Richard Birks, real estate partner and head of housing at international legal business DWF, expects the undersupply of residential property in the country to continue buoying institutional investors’ interest in the sector.
“The stars are well aligned for the domestic residential market in the long term, particularly in newer, more specialised areas, and we anticipate no let-up in the institutional appetite for investing,” he says.
But he cautions: “The one caveat to make is the ongoing concern that Brexit negotiations could be poised to disrupt the perfect storm currently in place.”
In the past few years, there has been an increasing focus among real estate investors in the UK on the residential market, he says, and this has been driven by demographic trends and well-documented years of undersupply of housing stock across the range.
“As a nation, we are simply not building enough residential accommodation at any level and the resulting imbalance of demand against supply has benefited actual and potential yields,” Birks says. “Residential property is, therefore, becoming a more fashionable asset class for institutional investment, particularly worthy of note being the well-established student accommodation market and the developing build-to-rent sector.”
Build-to-rent is an asset class redefining the traditional focus on home ownership in times of a more transient tech-fuelled workforce who want modern affordable housing, flexibility and a sense of community with great transport links, Birks says.
“The returns, supported by government policy to recruit ever more students, have been stellar in recent years, providing a sustainable income stream and longer-term property hold, with policy considerations again playing a role,” he says, adding that the government has declared in its recent white paper that build-to-rent will be a key part of its future housing strategy.
But to be successful as income-generating assets, both student accommodation and build-to-rent demand a product that will grab the market, Birks says. “In the vast majority of cases, there are no guarantees or underwrites of income so demand studies need to be robust and compelling.”
• Residential property in the UK is a maturing market for institutionals
• Extended residential from home market to Germany, US, Japan, UK
Residential real estate in the UK is not yet an institutionalised investment market, but it is maturing, according to Mathieu Elshout, senior director, private real estate Europe at Dutch asset manager PGGM.
“We have about 20% of our €13bn private real estate portfolio invested in residential, and have been involved in this sector for a very long time,” Elshout says.
To begin with, PGGM’s residential investment was purely domestic, but it extended this exposure to Germany, the US and more recently to Japan and the UK. “We started investing in UK homes early last year, through a partnership with Legal & General Capital and LGIM Real Assets developing build-to-rent properties,” he says.
PGGM’s partnership with LGIM Real Assets and Legal & General Capital is involved in residential development projects in London, Manchester, Leeds and Bristol and Bath.
“Residential has a positive impact on the risk-return profile of the whole portfolio, because it behaves differently from other sectors in terms of returns and volatility,” Elshout says. “It is not as cyclical as other sectors as it has a large and diversified tenant base and is very much a basic need; everyone needs a home whether they are thriving economically or not.
“This means residential provides investors with a stable income stream with more limited investment risk,” he says, but adds that this does depend on the sub-sector.
“We typically avoid the higher rents, because these properties are more cyclical in terms of their tenant base, as they attract expats, for example. Instead, we target the middle segments in particular, where people are able to make a rental property their permanent home. I believe the new generation sees renting in a positive way, because it provides flexibility.”
In the UK, people renting in this segment are currently still very reliant on the buy-to-let market, he says. “In good-quality residential, well managed and with the right amenities, tenants will also be willing to stay longer, which will be better for the investor, because it is of no benefit to have a lot of churn in the portfolio.”