Twin Summits Capital

Residential real estate is the biggest asset class in the world, from which US Single Family Homes is the largest contributor, currently accounting for c3 trillion dollars. The US-SFR market became institutionally accessible in 2010, due to advances in technology driving down operating costs. As a result, institutional investment in the US quickly grew from minimal involvement pre-GFC to an estimated 250k+ homes. TSC’s senior management team were amongst the group of intial investors who helped to institutionalise single family homes as an asset class and continue to help lead innovation in this sector today.

Why SFR? With bond yields at historic lows and inflation becoming a significant concern for investors, stabilised portfolios of SFR assets make a compelling investment case given their stable cash flows and inflation hedging ability. The investment thesis for this asset class is further strengthened by it's strong underlying fundamentals, higher rent and occupancy growth rates versus other sectors (e.g. commercial and retail) and arguably an ongoing structural shift towards renting versus owning due to affordability constraints for the younger generation in many markets.

In both the US and the UK, the residential build-to-rent (BTR) sector is growing fast and attracting a lot of institutional interest. In the UK, BTR platforms are regularly being announced by large institutions looking to gain exposure to the UK PRS sector. A problem with investors relying solely on BTR as a method of origination is they limit themselves to targeting only a small portion of a given country's residential market and tenant demographic. But more importantly BTR is significantly less scalable than institutional buy-to-let (i-BTL), which mean investors can put less capital to work per annum.

i-BTL platforms, on the other hand, can unlock the institutional potential of a country's existing stockpile for investors as they acquire from a much larger market, which dwarfs the fraction of sites available to BTR developers to build on. That said, it is important that when an i-buyer platform is being developed and set up in a country it is done correctly with the right technology, data feeds, and management expertise needed to run an i-buyer strategy. This is because i-BTl vs BTR requires a very different approach to asset and property management, given the assets that are being managed are spread out and not concentrated over a few sites. It would be, all but, impossible to run an i-buyer strategy in a traditional way without the aid of technology.

Should investors elect to build exposure to a country's residential sector through the i-BTL channel vs BTR (or to supplement their new build exposure), investors will be able to receive; i) income producing portfolios in a fraction of the time (Months vs Years), ii) tailor made portfolios for different risk reward appetites, iii) a more diversified portfolio (by both housing and tenant type), iv) a portfolio with less concentration risk, and v) a portfolio that has been built to target alpha specifically, and as such has in it only properties which are likely to outperform the market. The aforementioned is not possible with BTR due to the number of potential development sites in a country being much smaller than the number of homes (meaning liquidity is an issue) and the time horizons associated with building properties vs simply buying and renovating (Years vs Months).

As the US-SFR sector has matured, so has the technology funds used to acquire, stabilize and manage large portfolios of SFR assets. Platforms that have been investing in their tech stack can now use algorithms to screen a country's entire property market in real time to best match properties that are currently available for sale with their investors' acquisition sand boxes.

At TSC, we can do the above while also targeting our investors' alpha. We do this by leveraging a mixture of feature analysis, relative value analysis, and machine learning to identify properties that look likely to outperform the market. The investment management team will then use a mixture of clustering and optimisation algorithms to tailor each investor's portfolio. This ensures the assets being acquired are best suited to match any bespoke preferences and or requirements e.g. income/capital tilts, risk/reward tolerance, ESG mandates, refurb alpha etc.

By acquiring and renovating stock from a country's existing stock pile, investors can help to improve both the environmental impact and energy efficiency of older homes, whilst avoiding the high carbon-cost associated with BTR developments (e.g. construction and demolition costs - which can often entail knocking down perfectly good homes to make way for new developments sites).

Additionally, when investors elect to include a co-ownership or right to own scheme for a portion of the properties in their portfolios (whereby tenants jointly own the property with the investor or after several years are allowed to purchase their rental property in full at a fixed price) not only can investors reduce their portfolio risk, but they will be continually injecting modernised, refurbished and environmentally friendly homes back into that country's sector. This also helps aspiring homeowners feel more at home in their rental homes, knowing they can own them one day.

While right to own schemes are possible for BTR properties too, given the homogeneity of most BTR products being developed (often made like this on purpose to reduce costs) BTR properties are often seen as more transitory. Also it has been shown that when tenants have the possibility of buying their rental home, they normally look after them better, in turn reducing opex costs, turnover and voids.