Over recent years, politicians and businesses have increasingly sought to outdo each other in appearing digital savvy.
From former chancellor George Osborne declaring his support for the sharing economy to multinationals singing the praises of agile working and big data, tech jargon has been the currency of many a boardroom conversation.
While Britain’s major supermarkets have benefited from seamlessly analysing large sets of data for years - through Tesco’s Clubcard and Sainsbury’s Nectar card - the property industry has yet to fully grasp the full potential of big data.
Ironically, given the largely low-tech fashion in which deals are sealed and networks are watered, UK real estate has been a pioneer in the realm of crunching financial information. The setting up of IPD/MSCI in the 1980s was a significant milestone in developing the sector as an asset class.
Despite being a sizeable and well-recognised benchmark for commercial real estate, IPD/MSCI hasn’t achieved the same success for residential.
This is a shame, because housing accounts for 85% of our £6.3trn real estate market. Of that, only a fifth is private rented housing, but this still represents a growing £1trn market - larger than the entire £870bn commercial property market.
As institutional investors increase their interest specifically in build-to-rent, their ability to benchmark performance is critical. Only 2% of the £1trn market-rented residential market is institutionalised, compared with around 25% in North America. If Britain’s rental sector took on the same shape as the US’s, the build-to-rent sector could be mathematically greater than £250bn.
We therefore face two key challenges to help institutional investors get comfortable with the sector. The first one is to ensure that we have a common language and understanding of how to value those assets. The second one is to ensure that we have a relevant residential benchmark.
The first challenge is interesting, as we definitely cannot continue to assess the value of an income-producing investment using a methodology that assumes the property is empty. The valuation community needs to acknowledge the emergence of this new sector, and the different requirements of investors in this new market.
The methodology definitely needs to take into account amenity areas, shared facilities and professional management, which are best assessed by the rental premium they help to achieve and, ultimately, by analysing the net operating income achieved from an asset.
Competitive market
Having delivered PLATFORM_’s first five fully operational assets in the South East, we are currently expanding more broadly across the country. We are looking forward to having a competitive market to grow into and to benchmark ourselves against our peers to continue to keep ourselves on our toes.
This is the second challenge that investors are facing. We need to find or create a relevant residential benchmark that will be recognised, populated and used by investors. This will then help create a fluid secondary market of build-to-rent assets alongside traditional commercial property.
As the current crop of build-to-rent firms expands, I firmly believe we will see large listed or non-listed residential companies emerge to rival existing UK REITs in their scale. The benefits will be significant: residents will have a range of professional options to live in and be able to invest in property outside buy-to-let and direct home ownership, reducing systemic risks to the economy.
In order for this to happen, we definitely need to come together now to benchmark our performance and evolve valuations to support this growth, or residential will remain in the analogue age.
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