In the Spotlight with Anna Clare Harper

We caught with Anna Clare Harper, author of Strategic Property Investing – What works and what doesn’t in a complex UK residential property market.

Related topics:  In The Spotlight
Property Reporter
5th June 2020
Anna Clare Harper 551

PR: We last caught up with you in 2020, what have you been up to?

ACH: As for many people, a lot changed for me personally in that time. Professionally, alongside working with residential investors, I ended up writing three books: Strategic Property Investing, about how private investors can adapt their strategies and navigate the current, complex market; Building a Legacy, a practical guide to building a profitable, sustainable property legacy; and Sustainable Residential Investing, about how private investors can move towards a more sustainable model of residential investment.

Recently, I’ve become a Director at IMMO, a leading European real estate fintech platform creating single-family rental portfolios at speed and scale. We use tech to unlock the 98% of the residential market - the single-family rental market - that has previously been ignored by institutional investors. Then we systematically retrofit properties to deliver quality housing in the places it’s needed. Right now, we are allocating £2.5 billion of capital to income-generating portfolios across Germany, Spain and the UK.

An important part of the vision for me personally is about using market-leading tech to make sustainable residential investments possible at a scale that’s never been done before, benefiting investors, residents and sellers whilst being kind to the planet.

PR: How has property investment changed in the last two years?

ACH: There’s been a huge amount of change and uncertainty, from Brexit and Covid-19 to the tragedies now happening in Ukraine. The agenda for politicians, businesses and investors is more customer-focused than ever. This might be because of a resurgence in the desire to care for one another, or simply because news travels at the click of a button, and nobody wants the reputational risk associated with disgruntled clients.

The economy is increasingly segmented into those who are thriving, those who are not doing well and those who are just getting by. We are in a wildly inflationary environment, the byproduct of disruption in labour markets, supply/distribution systems and increased money supply has added fuel to the fire… and it’s affecting everyone.

- Construction material prices grew by 21% in the last year

- Average house prices are almost £43,000 higher than at the onset of the pandemic - meaning houses earned almost as much as an average person (c. £25k per year) over those two years!

- Asking rents grew by 9.9% over the last year according to Rightmove

- And we all know what’s happening with gas prices

- The shortage of available housing is being compounded by inflationary pressures. It means that prices are likely to remain strong, and continue to rise. And it’s unlikely to change any time soon due to higher costs of materials and labour, a backlog of planning applications and a growing burden of rules and regulations for property developers to contend with.

- The good news is - Real estate tends to perform well in an inflationary environment - and it’s certainly better than putting your money in a savings account, where the best you can expect for a 5-year fix is 2.4% per year - the best offers available mean locking in a 5-year loss!

Socially, it’s difficult to neatly summarise the complex social trends and changes in a post-Covid or mid covid world. Long term urbanisation was followed by an exodus from cities. Rising loneliness and health trends also play a part alongside longer-term, more evident population- and generation-wide shifts. We have an ageing population and people settling down later, if at all. Affordability constraints are mixed with long term rising living standards.

The end result is growing demand for rental housing. People living longer also increases the need for yield-focused investments from pension funds and individuals planning for retirement.

There is a growing generational divide in ideals and resources - Boomers, Millennials and Gen Z seem divided both in their attitudes to the world’s problems and in what resources they have at their disposal, and how they want to or are able to access real estate.

Technological advances, innovation and data are opening up access in the property market, as well as increasing efficiency and quality for cost, often at little or no cost to the user. That positive externality will be really powerful in the coming years - it already is - and it’s important that it is used for good.

We’ve seen many fascinating ideas which turn out to be fueled by metaphorical kool aid - from WeWork’s valuation through to real estate-related NFT projects for which, frankly, it’s very difficult to see how NFTs add any material value to the project. Going forward, Being savvy about what is ‘value add’ tech and what isn’t will be important!

From a legal and regulatory perspective, we’ve seen continued growth in the reach of regulations, thanks to the government’s desire to make the housing sector more professional. The result is a shift in the balance of power from smaller investors and sideline landlords to homeowners at one end, and institutional investors at the other. This aligns with the more consumer-focused political agenda I mentioned earlier. We now have 168 laws and regulations governing property and its management. Notably, many of the newest regulations have focused on the environmental performance of buildings.

Which brings me to environmental changes. Our awareness has grown around the key areas of risk relating to the environment.

The UK’s legally binding commitment to achieve ‘net zero’ by 2050 means that now, sustainability is no longer a ‘nice to have’. ‘Net zero’ is a legally-binding national target that means that the UK’s total greenhouse gas (GHG) emissions should be equal to or less than the emissions the UK removed from the environment. It requires to firstly improve energy efficiency, for example reducing energy usage, then increase renewable usage, then finally to offset any remaining carbon, for example by planting trees to absorb carbon dioxide from the atmosphere. This legal obligation is showing up in the form of new rules, regulations and best practices affecting all sectors that contribute to emissions.

The urgency to address the sustainability agenda has been highlighted by the ‘high impact, low probability’ shock of Covid-19, which has strengthened the case for prioritising people and planet alongside profits, and illustrated the power of collective action to tackle global problems.

The low environmental efficiency of buildings has been highlighted by the tragedy and violence in Ukraine, and the associated impact on energy markets.

So what do we know now, that we were less aware of before? Firstly, there’s physical risk, for example flooding risk. Secondly, there’s transition risk, where buildings become obsolete or fall in value due to environmental changes or regulations around the environment. A great example of this is the impact of Minimum Energy Efficiency Standards on rental houses with EPC ratings below E, which can no longer legally be rented out.

Ultimately, real estate contributes 40% of global carbon emissions - and in the UK, reductions to real estate related emissions have flatlined - so the industry is a really important part of our collective ability to save the planet.

With all of these trends and changes, whilst property assets remain attractive, the old ways are broken. As a result, we need to reconsider and reshape all aspects of investing, from ownership structures to sustainability and impact.

PR: Your new book "Sustainable Residential Investing: How to make profits with positive impacts from UK property" launches today. Can you tell us a bit about it and why you chose this topic in particular?

ACH: For many years, UK residential property has been seen as one of the most attractive investments available. It has offered investors attractive yields, growth and stability in a way that seems relatively easy to understand and implement. As a result, it continues to attract capital from all over the world.

The trouble is, the market has changed. Not only are profit margins being squeezed due to more regulations and more competition from investors and homeowners, but the investors of the future value sustainability more than ever before.

There is unprecedented and growing demand for Environmental Social and Governance (ESG) investing. This sector is now worth $30 trillion in Assets Under Management each year, around a quarter of global professionally managed assets. The traditional goal of profit maximisation is being replaced. Investments must increasingly be profitable as well as sustainable: economically resilient, with positive ESG metrics.

The UK residential property market - worth over £7.5 trillion - is lagging behind. Yet it is of crucial importance to us all, and to achieving global and national environmental sustainability targets. 40% of UK emissions come from households, and 76% of our housing was built before building regulations required insulation.

The positive impacts of sustainable property investing could be huge, for profit-motivated investors, people and the planet. The financial, environmental and social risks and costs of getting it wrong could be catastrophic.

Real estate funds and REITs have, like their counterparts across professional investment sectors, been paying attention to sustainability for some years now. However, these institutions are only responsible for a fraction of the housing market. UK residential property is dominated by individual investors or small private companies: 94% of property investors were individuals in 2018 and in 2016, 93% of residential property investors owned four or fewer properties.

The trouble is, there is very little clear, easily usable guidance for those responsible for a huge proportion of the UK housing market: private investors.

Many residential property investors are unaware of how significant the growing importance of sustainability will be for the values, performance and risk of their investments through the 2020s as well as for the planet, and they are unclear on how to deal with the issues at hand.

My mission with the book is to help change that and to empower residential investors to adjust their approach to align with the times we are in so that ultimately they can create positive impacts and help solve the serious environmental and social problems of the day, whilst making attractive returns.

PR: If it's possible to invest profitably while also practising sustainability in a rapidly urbanising world, why haven't we been doing this sooner?

ACH: Firstly, acceptance that there is more to life, success and business than money might seem obvious now, but in many ways, it’s only recently been incorporated into mainstream ‘capitalist’ thinking.

Secondly, the main commercial advantage of investing in more sustainable ways is that the risk/reward is better. But often, the reality is, that the payback period for sustainable investment is often longer. Sustainable investing requires more patience from investors.

Thirdly, a lot of the impetus for change necessarily comes from government. Without regulations, taxes, grants and public guidance, there is no strong incentive for a profit-motivated investor to act, and risk disadvantaging themself.

Fourthly, our understanding of where emissions are coming from and the technological capabilities to reduce them is still young. A big reason we haven’t done it before is that people simply haven’t known what to do, and in many cases, why they need to do anything at all.

PR: What are the main challenges of investing in more sustainable buildings?

ACH: Probably the biggest challenge in residential property is the age, quality and diversity of existing housing stock. There is plenty of best practice in building new green buildings. But the housing we have needs to be upgraded systematically, which can be complicated. For example, 76% of English housing was built before building regulations required insulation. There are very real financial and practical constraints to upgrading this housing.

PR: What would be your best advice for property investors today who wish to consider sustainability when making investment decisions?

ACH: Review what you really want, and make sure it aligns with the times we are in terms of impacts for you, as well as for people and the planet. This will influence what you buy, and what you do with it when you buy it.

Consider what you really want to achieve from your investments in 1, 3, 5 and 10 years' time. If, for you, it’s all about maximising your profits over the next 12 months, with no care for others or for the world around you, then you’re probably not really that interested in sustainability. Ideally, you should take the long view and adapt your strategy to ensure it will deliver positive ESG impacts. Get expert advice if you are not sure.

Be clear and realistic on your targets. More sustainable investments often have a lower headline yield and longer forecast payback period, as well as lower risk.

Accept and understand the trade-offs between financial and ESG metrics, and within ESG metrics.

PR: What's next for you?

ACH: Professionally, I’m excited about developing IMMO’s capabilities to deliver not just ESG investments, but also Socially Responsible Investments and Impact Investments at scale in European rental markets. By bringing together the tech, data and delivery capabilities in the business, and the right, patient institutional capital, we have an opportunity to transform the market and create a new sustainable residential ownership model in Europe - a much-needed game-changer!

Personally, I’m as passionate as ever about developing and sharing ideas and insights about the industry. Unfortunately, the last two years have made many parts of the real estate and investment industries less diverse and inclusive, rather than more. This is very depressing, so as well as increasing the effort I put into supporting the people around me from diverse backgrounds I plan to continue to make the time to share what I know, as I know this makes a difference to others in the sector who aren’t the traditional white, male, middle-aged stereotype.

PR: How did you get into the property industry?

ACH: I studied at Cambridge, followed by an internship at Knight Frank where I realised that surveying wasn’t for me. I then joined Deloitte as a strategy consultant, working with banks and private equity firms to deliver regulatory responses, customer retention schemes and cost reduction plans, as well as facilitating investments.

I planned to invest in property in my spare time but didn’t have the capital so worked with private investors from my first deal. Some hustling later, this sideline became a boutique investment and development business, which I left the City to run. Along the way, I started hosting a podcast, to explore and share insights on real estate investing. Most recently, I co-founded and developed the strategy for Anglo Residential, a UK property fund, which secured seed capital to build a £150m rental housing portfolio.

PR: The property market is likely to look quite different as it adapts to the 'new normal', what changes do you think we can expect to see?

ACH: Covid-19 has created an immediate and unavoidable opportunity to focus on and review our understanding of risk and purpose. It is forcing a somewhat backward industry to utilise technology for efficiency gains.

On risk, it has never been more important to understand and manage the risks we are exposed to. This applies from the largest banks down to the smallest landlord.

Investors need to understand their risk preferences better to move forward safely in the short, medium and long term. There are huge opportunities and I expect this will be the case for much of the coming year, as a minimum.

For the kind of investor I typically work with, the market highlights three important benefits to ‘taking the long view’ in property investing:

Confidence for the future – This has been vividly illustrated by Brexit, Covid-19, and inevitably, we will see this again. Long term, resilient investments are in high demand and these can help investors feel confident in the future.

Stable value through positive impacts - Whatever happens in the finance sector - whether securing loans is easy and cheap, or quite the opposite - assets with good ‘fundamentals’ that deliver value to the customer (in this case, the tenant) stand the test of time.

Using new technology, for exponential returns - Just because the asset is held for the long term doesn’t mean it needs to be old-fashioned.

PR: What advice would you give investors looking to break into property during the current climate?

ACH: Market and regulatory changes over the last few years have been substantial. The impact of these is being exaggerated by the current environment. The direction of change in the housing market in recent years is in favour of homeownership and more professional delivery of rental housing.

If you want to invest, it needs to be professional, and you need to understand the risks. This increasingly means partnering with the right businesses and teams and ensuring the processes are delivering value in a compliant way.

PR: Tell us about your new book

ACH: I wrote Strategic Property Investing: What works and what doesn’t in a complex UK residential property market, to highlight how the fast-changing climate, market and regulatory changes have affected UK residential property investment, and to explain what investors can do about it.

For more than 20 years, property has been seen as one of the best investments. It has offered investors a brilliant way to grow their wealth safely, profitably and easily. The trouble is, the market has changed. Strategies that worked before are now less profitable, if profitable at all.

In my business, I was seeing how, to succeed in this fast-changing, uncertain context, investors needed to understand what has changed, and what works now. But in an age of ‘information overload’, it can be hard to cut through the noise. The book is designed to be a clear, reliable guide to what’s really happening in the market, and what investors can do about it. So much has changed in recent years, and the market will continue to evolve. The book shares the information needed by investors with limited time who want to grow their wealth safely.

PR: What would you say is the biggest misconception about property investment?

ACH: Most frequently I hear people mistaking homeownership for investment, assuming the property market is one market, assuming that capital growth will continue regardless of fundamentals, affordability and potential regulatory changes, and misunderstanding the difference between forecast and actual profits.

Owning your own home, in fact, is considered by investors to be a liability, since it costs you to own it rather than delivering cash flow. The property market is not uniform: there are so many different geographies, investment types and tenant types. Broad brush statistics and forecasts should be interpreted with caution. More important is: who is going to use the property?

Capital growth is not uniform either: there are so many different determinants of historical, current and future growth. These may not always be what they once were due to factors such as affordability constraints affecting younger generations and poorer people, and regulatory and tax changes which can affect fundamental drivers of supply and demand.

Many investors get distracted by ‘the promise of exceptional cash flow or infinite development profits; new ideas like Build to Rent schemes right through to crowd-funded developments. They forget about the risks. I hate to be the voice of doom but if it sounds too good to be true, it probably is.

PR: We've all had a lot of time on our hands at home recently, how have you been keeping busy?

ACH: I didn’t get a lot of spare time due to the launch of my book - an admittedly ambitious lockdown project. I’m delighted that the hard work seems to be paying off.

It achieved Amazon ‘Best Seller’ status in Real Estate and Investing, but more importantly, I’ve had countless messages from readers and conversations with investors feeding back how useful they have found it.

As for actual spare time - I’m a big fan of health, fitness and wellbeing, so it’s been a great opportunity to focus on this.

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