Rented residential appealing to investors across the globeAugust 2019
Well over a third of all the cash raised globally last year, for sector-specific private equity real estate funds, targeted funds aiming to invest in multifamily rented residential. This latest survey by PERE shows the funds amassing a war chest of over $10 Billion. With typical debt leveraging, this would give those funds buying-power in the order of $20billion.
Pension funds and insurance company investors across the globe are appreciating the favourable investment characteristics of rented residential. Their quest is to find investment assets that match their liabilities. Typically, these liabilities are linked to inflation in the long term and often to wage inflation. Our home is such an important part of our well-being that most of us spend more than a third of our income on it. The rent we pay or the purchase price we are willing to accept reflects the current state of the economy and has traditionally grown in line with that economy.
With this positive macroeconomic background, get the investment characteristics right and you are onto a winner. Flexible shorthold tenancy contracts work for both parties. A broad income base from multiple occupiers reduces void risk and, if operated as a business and managed like hospitality, we can achieve rapid re-letting and maintain high occupancy rates. Working hard to establish a community within each scheme will increase the length of stay of your residents. And ultimately, remember one of our catchphrases at Geraghty Taylor, “Happy customers pay you money!”
So now you can see what these global investors are thinking. This is an asset that delivers a solid long-term income from a wide potential customer base. But be sure this requirement was built into the scheme from the start. Be mindful of the play-off between upfront cap-ex and ongoing ops-costs. Appreciate the cost of management and future cap-ex and understand the life cycle of the building. Take a look at our BTR Timeline.
All the funds raising money will hope to benefit from rental growth in the long-run. The brave ones will take on development risk to enhance their returns to investors by making a development profit. In the UK it is interesting that we are at the very beginning of our journey into multifamily investment, but despite this being an “emerging” market, we already have pricing which is very reflective of a mature institutional market. There seems to be little if any, obvious first-mover premium for the early adopters. We seem to have imported the idea but also the pricing.
The old-world order of cash raising has continued with North America taking 42% of all cash raised and Europe just over 20%. In the UK, Hearthstone Investment Management announced at the end of February that it had closed Hearthstone Residential Fund 1 with just over £200 million raised. The Fund has seven local authority pension fund investors and welcomed The Merseyside Pension Fund and The Tyne and Wear Pension Fund in this latest round. They clearly see the investment case, but just as important, the social significance of funding housebuilding in the UK.
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