The real estate market is a huge sector that provides numerous opportunities for those wanting to get involved in a fast-paced, highly visible market but what does real estate actually comprise and how does the industry work?
“There are three main groups of real estate,” explains Malcolm Frodsham, founder and director of Real Estate Strategies and host of Bayfield Training’s Introduction to Real Estate webinar, held on 23 January 2019. These include residential (houses and apartment blocks) commercial (office, retail, hotel and leisure) and industrial (manufacturing, logistics and data centres). They make up a built environment valued at around £8.8 trillion in total, with residential accounting for about £6.5 trillion.
How the real estate investment market works
Although much of that is owner-occupied housing stock most of the rest is owned by investors who provide the capital and in return receive rent. Other owners will relinquish their right to ownership, transferring that to an investor through sale and leaseback. Investors can include overseas investors, insurance companies, investment funds, property companies and pension funds.
1) Direct investors
Large investors can go direct but individual properties can be costly with a quality office building costing in the region of £5 million and quality shopping centres available only to the largest of investors. For those with only one or two properties therefore returns are heavily dependent on the performance of those buildings. This means that direct investors have to adopt a portfolio approach if they want to ensure success, spreading investments across the three property sectors and giving a wider mix of tenants, locations and lease expiry dates.
“If you want to get into the real estate market as a whole you really need to build a diversified portfolio so only the very biggest investors are going to do that through the direct route. Many investors have to go through the indirect route,” explains Frodsham.
2) Indirect investors
Within the indirect investment model, there are two principal routes to market. They include REITs which are listed property companies traded on exchanges such as FTSE and including the likes of British Land and Land Securities. The second is the unlisted property funds which are either trust structures or limited partnerships.
Real estate’s role in the economy and wider environment
The institutional commercial real estate industry has a rent roll of about £50 billion with a typical yield of around 5.34%, meaning a total value of UK commercial real estate stock just shy of £1 trillion in the UK. “That’s a large amount of money so it has a great deal of significance in the investment industry because it is a huge asset class. Real estate also has wider importance in the wider economy employing a large number of people,” says Frodsham.
The industry is split across lettings, development and capital market. Within these, roles include brokers, property managers, developers, asset managers, fund managers, lenders and investors.
As well as being rich in value the sector also has another role as a socially responsible investment since all of us shop, work, travel and study and are influenced by our physical environments. Real estate has an important role in improving the quality of an environment too, through urban regeneration. “A lot of that is road, rail and airports but the other aspect is improving the housing stock, putting in place good office buildings and nice places to shop. These all improve and regenerate rundown areas,” explains Frodsham.