Operational capital markets is a complicated term for a relatively easy concept – it is those sectors of the commercial property market where real estate is part of a customer facing business and a specialised operator runs the day-to-day business.
Often there is no lease in place and the operator is key to driving value, with performance risk on the end investor. The operational property landscape can include student accommodation, build to rent (BTR) and leisure or hotel assets.
Once classed as ‘alternative’ these sectors are now becoming more mainstream as investors increasingly look to operational assets to balance and diversify their portfolios. Residential-backed income streams are deemed to be ‘non-cyclical’ and therefore are not correlated to wider macroeconomic movements, and typically, funds are underweight in ‘socially good’ sectors such as residential or student accommodation.
Recently there has become a real share of wallet for beds and we are seeing increased interest from new entrants including Korean, Middle Eastern and North American capital. Despite the long term fundamentals being exciting in the residential investment sector, a fragmented rental housing market, a strong housebuilder market and a relatively opaque performance landscape, have meant that institutional scale investors have found it a tough market to enter.
Additionally, the opportunity is a national one and not limited to big shiny towers in London or Manchester, and this relative ‘unsexiness’ of the product and more granular approach has proved also to be barrier to big capital.
Nonetheless, that is now starting to change as investors see the benefits of tapping into an undersupplied residential rental sector, typified by the Goldman Sachs acquisition of 918 single family homes from Gatehouse Bank in January 2021 for £150 million.
Although overseas investors often want shiny assets in locations with names they recognise such as London, Manchester and Edinburgh, student accommodation is a good example of where the significant UK brand value in higher education has helped drive demand from overseas. North American and Asian investors own portfolios of purpose built student accommodation (PBSA) across a wide range of UK university towns and cities. In the last six weeks alone, seven portfolio deals in the PBSA market have been announced with investors ranging from North America, Malaysia, Qatar to Europe.
One of the main challenges the ‘beds’ market faces is that institutional grade product is underbuilt and the assets need to be developed, therefore many transactions are either development, forward funding or forward commitments. As investor allocations to bed-backed sectors have increased, especially in the last 12 months, the supply pipeline has not reacted, leading to a good level of unmet capital demand.
An important component of investing in operational property is a deep understanding of your target customer market. In relation to beds, for the young, location is crucially important as is the sense of community and experience. Here, apartments that provide ample communal space alongside well maintained, low management and affordable living space will be popular. Similarly, with older populations there is a growing demand for highly amenitised senior living. There’s a real focus on creating these developments in town centres, close to restaurants, shops and leisure facilities.
Taking that into consideration, should we be looking at multi-generational living as a way to revitalise and repurpose old retail-dominated centres? It is worth noting that those investors who can get their heads around repurposing and renovating assets will be fairly rewarded - the easiest option isn’t always the best one in terms of returns.
Know your market
One thing is for sure with operational assets, a cookie cutter approach won’t work. There needs to be a real understanding of the location, the customers and the local community to drive value at the asset level and also from a social value perspective. Multi-purpose assets that provide great living spaces as well as outward community facing commercial areas at ground floor level are becoming increasingly popular to drive a sense of place and build communities.
There is no doubt that the future is bright for the beds sector, an increase in student numbers is expected as the impact of COVID proves to be circumstantial and not structural, which is driving robust demand for PBSA. Increasingly unattainable home ownership is also fuelling the need for good quality rental homes. As the sector begins to mature and we start to see confidence return to the UK on a general level, I expect there will be some consolidation in the market, particularly in the second half of the year. It is certainly a case of watch this space.
About the Author
Paddy has over 16 years of real estate experience, advising a range of investors and developers on transactions, joint ventures and operations predominantly across student accommodation, build to rent and co-living in the UK and Europe. To get in touch, contact Paddy.Allen@colliers.com.