WHITEPAPER: A direct investment experience: capturing the best opportunities and altering the investment selection process when investing in Europe. By Vishaal Shah, Chief Investment Officer, Niveda Group. Part of the Investing in Property, Europe, 2017 report.
As investment in real estate no longer a simple process of buying a piece of property or land and developing it, it is no longer sufficient to differentiate property investment as direct or indirect. Rather, for us, it is important that our investment have the right level of controls in place and the appropriate framework, to ensure that any new information, feedback and experiences (from both ourselves and our partners) can be taken into account, when decisions are made by the executing team, at the various stages of investment, development and operations. Traditionally, this level of transparency and involvement could only be achieved through direct investment where the onus is on the investor to make all the decisions. However, post the financial crisis, there has been a surge in joint-venture partnerships and club deals where different parties with different skillsets and resources are pulling together to improve their returns.
This has become a necessity, due to the increased sophistication of property investment. Due to the technological advances of the past two decades, property investment is no longer an investment in bricks and mortar or simply shelter, it has become an investment in lifestyle (almost like a consumer good).
Advances in communication technology has expedited sharing of knowledge, information, ideologies and opinions. Driven by the shock of the 2008 financial crisis, and aided by subtle and clever marketing, the opinions of the younger working population (or the so called “Millennials”) in UK and Europe has shifted from owning “unaffordable” assets to living a lifestyle.
While affordability (or lack of it) has forced many to abandon the plan to own their own home, the technological advances have brought the allure of the new lifestyle and “creative” culture to the masses. The lines between commercial, residential and leisure areas, are very much blurred. In many cities around the world, and certainly across many countries in Europe, people want to stay close to work (or vice-versa), and they expect to have social and leisure amenities close by. In some scenarios (like Paris and London), people are working across two cities in two countries, and therefore tend to have temporary base in each of the cities (and perhaps a permanent home in an entirely different city).
While the demand built up for a more flexible product, the regulatory and financial changes to the banking sector after the 2008 Financial Crisis provided the catalyst for development and sophistication of the property investment sector.
Prior to the Global Financial Crisis of 2008, property was largely referred to as residential or commercial property, with limited financial distinction when pricing the risks within each. The crisis led a rude awakening for the governments, regulators, institutional risk committees, and the investment community as a whole, and forced through a splintering of the previously boring property investment sector.
Today, property is divided into many sub-classes: Residential, Developments to Sale, Developments to Rent, Student Housing, Seniors or Retirement Homes, Care Homes, Offices, Warehousing, Retail, Hotels & Aparthotels.
This is forcing all stakeholders to rethink how cities are built and integrated. Real Estate planning can no longer be done by isolated groups of politicians, city planners and architects. It requires a more collaborative effort between a wider group of stakeholders, which included financiers and banking institutions.
Further, in addition to changing demand, there has been increasing complexities from tighter regulations, lending criteria and tax policies following the crisis. This has led to a change in “the typical property investor” across the different jurisdictions across Europe.
In the UK, property ownership is rapidly moving away from the individual “mom & pop” to the more institutional investors (like insurance company and pension funds who are looking to acquire swathes of properties across multiple towns). In Western Europe, properties that were largely owned by domestic pension funds and institutions are now seeing new owners in the form of Asian & Middle-Eastern institutions, hedge funds, private equity funds, and family offices.
The Explosion of the Property Market
This change in the funding structure, development structure, regulatory structure, and infrastructure, has been a boon for us (as it has levelled the playing field), disrupting the traditional property giants and creating profitable opportunities for smaller nimble players, like us. Investors, like us, who understand the local development and planning laws, are able to create significant value in locations and cities.
One such example of value creation has been through development of “flexible real estate.” These are developments that are used for multiple purposes (such as retail, residential, commercial and hospitality). These developments have been gaining favour in high demand areas, as they encourage flexible use of buildings through innovative construction and designs, as well as providing the owner with resilience during market downturns (by being able to change use easily). This sophistication of the mixed-use development concept (augmented by innovative ways of financing and clever design) is creating huge opportunities for the smaller nimbler investor to take advantage of, and has created a “Venture Capital like” industry in property investment.
This increase in sophistication has created a great opportunity to take advantage of market inefficiency for nimble investors (like us) who are able to consider sites and buildings, based on the potential and flexibility of the use in the various location. Due to globalisation, the emphasis on location has intensified hugely, with major cities like London, New York, Singapore, facing the impossible imbalance of global demand against local supply. Therefore, groups that are able to incorporate global trends in micro-locations have a significant advantage in generating Alpha through securing the best sites.
The astounding rise of the WeWork group (which recently closed a massive $4.4bn growth investment round from Softbank and a Saudi backed technology fund, to fund expansion of their property portfolio), and the astounding 400% annual growth in corporate travel on AirBnB (to account for 15% of total group Revenues as of September 2017 and expected to grow to 30% of total revenues by 2020), are examples of how location and flexibility in the use of space is becoming a major component of the real estate market. With huge premiums paid by flexible tenants such as WeWork, backers of flexible real estate have a huge advantage in securing in key locations, and are able to outbid traditional real estate investors who have struggled to adapt to the change and correctly value the site.
Innovation and creativity (two words not traditionally associated with real estate) are fast becoming the buzz words in property seminars and real estate investment forums. This has led to some commentators to speculate on the development of a potential bubble in certain markets like London, New York and Toronto.
As investors, we continue to remain vigilant and are diversifying across different markets. We follow the same three-pillared approach across all our markets: Localisation, Discipline, and Structure.
Localisation: We have developed significant specialism in investing and developing properties for student accommodation, hospitality and residential use in major cities in the UK. This specialism stems a strong network of local partners, built over the years, across the full spectrum of investment of land acquisition and planning, development, and operations on these segments.
Combining our global knowledge and skill-set, with local specialists in each area of property development and operation, has served us extremely well. Our local partners’ intimate knowledge of the regulatory policy changes, developments in construction techniques and material use, and their strong focus on environmental and communal sustainability, has been the cornerstone of our success as investors.
Discipline: In an increasingly connected world with constant distractions, it has never been so important to be disciplined. With hot sectors like flexi-living and short-term rentals attracting a lot of money, it is very easy to be distracted into chasing these opportunities and abandoning your core selection criteria. By sticking to our core values of selecting investment based on location, types of use and flexibility, we have avoided the volatility and collapse that followed the clamp down of AirBnB rentals in London, or the devastating impact of rent controls in the Toronto rental sector.
Structure: Out of the three pillars, this has been the most important for our portfolio. There are many different structures through which we look to gain exposure into real estate investment, as we believe that making the right choice of structure can be the difference between success or failure. Given the sophistication of property investment, and substantial difference in property regulations and climate across each country (and sometime cities), selecting the most appropriate structure is essential in maximising return on risk. The various options that we have considered and invested through include:
- Investing into a fund or a collective investment scheme run by an experienced real estate investor
- Investing into a real estate company/developer, either privately or through the stock market
- Providing debt or debt-like instruments to real estate developers, investors, and companies
- Using alternative structures like forward commit on purchase, underwriting a sale, and sharing any upside (etc.)
This process is has served us and our families well through the past couple of decades, and (while we continue to make direct investments) the direction and method of investment will continue to change and develop with the market.
This whitepaper is part of the Investing in Property, Europe 2017 report. Download your free copy - simply enter your details online.