As the global pandemic endures, uncertainty in the market has caused a reassessment of the fundamentals underpinning real estate and capital allocation strategies.
One area moving into the spotlight is investment in single family residential (SFR), one of the world’s largest asset classes. Given market uncertainty, investors are seeking longevity and security as well as returns. Already this year, Goldman Sachs has bought a £150m SFR portfolio in the North West and L&G has set up an offer in the single-family home market — the first concerted moves into this area in the UK.
While capital flows to residential investment have traditionally focused on relatively niche areas such as student accommodation and co-living, SFR, which is a far greater resource in the UK and Europe, is an untapped opportunity.
However, to make this a viable investment category, institutions need to be able to deploy capital at speed by sourcing large portfolios of diverse residential assets. Without a data-led investment strategy, this is a pipe dream. The challenge lies in the supply of assets due to the current inability to source directly from consumer sellers at scale. This is because of the granularity of transactions and the pace at which they happen, as well as the volume of associated processes and documents.
The opportunity to unlock the untouched 98% of the residential market remains
Institutions currently only target about 2% of the available residential market. Using existing investment models to deploy capital at scale, investors have to focus on BTR, multi-family developments or secondary portfolios, incurring high costs, risk and long development cycles until income is stabilised.
The opportunity to unlock the yet untouched 98% of the market remains. But by using cutting-edge technology to address sourcing, structuring and underwriting of deals, institutions can structure diversified and stabilised, income-producing residential portfolios faster, in better locations, with less risk, and deploy capital at a pace and scale not possible in the MFH or BTR sub-sectors.
This model has been successful in the US, where Blackstone acquired, scaled-up and sold on Invitation Homes. IMMO Capital is structuring scalable SFR portfolios, using a combination of machine learning and local real estate expertise. We are working with institutions to assemble income-producing SFR portfolios within six months, a far shorter timeline than traditional methods, which could otherwise take four-to-five years via a BTR route.
As a sector, SFR outperforms in terms of yields, risk, speed of income and potential for scale, and investment options. And the value to investors is multi-faceted, saving years on sourcing at great entry yields and enjoying stabilised income in months not years. SFR investing is also in line with investors’ ESG focus, as it recycles existing homes – and with each new home creating 50 cubic tonnes of carbon, SFR cuts the carbon footprint of a real estate portfolio.
As institutional investors turn to the residential sector, combined with their search for alternative investment strategies, the market needs more engagement with next-generation investment managers and operational partners. With the technology now available, institutions no longer have a reason to ignore the around 98% of the residential market that includes SFR – a market worth trillions of pounds.
Samantha Kempe is chief investment officer at IMMO Capital