Q&A – is now the time to be investing in distressed assets?

In this Q&A, Thomas Balashev – who has spoken previously of breaking into the old-money elite of prime London property despite an unconventional background – chats to PIT about distressed property, PropTech, deurbanization and the opportunities of the ongoing retail to residential revolution.

We also chat about the 2% surcharge on overseas buyers, the new investment fund set up by Balashev and his investment partners and why the UK property market has a bright future.  

How has the pandemic accelerated deurbanization and the uptake of PropTech?

Until a few years ago, PropTech was a barely understood, and hugely underappreciated, concept within the property industry. During times of uncertainty and crisis, however, opportunities arise to refocus on new ways of doing things and shifting customer needs.

As such, the pandemic has vastly accelerated the uptake of PropTech, and whereas PropTech may have once been considered a luxury, it has become for many businesses a means to survive. No-one, for example, would have dreamt a few years ago of purchasing a house without physically seeing the property first – something that technology has made possible in recent times, helping agents and brokers get by.

The pandemic has also seen an exodus from major cities to rural areas across the UK. Shifts in behaviours and working styles mean people want more outdoor space, longer rentals to provide security and co-living opportunities to reduce loneliness.

These behavioural changes have forced the industry to adapt, and outdated systems are being turned into efficient digital processes to keep operations moving. OnSiteIQ is a good example of this – they are a US firm specialising in visual construction documentation, leveraging machine intelligence to keep up to date with progress of a development to reduce on-site footfall.

Much of the UK is currently working from home, but for commercial real estate and shared accommodation to function normally again, the introduction of smart offices and a ‘touchless experience’ for employees and tenants will be vital in welcoming back office life.

Once ignored, these smart additions to office spaces and accommodation didn’t provide a compelling yield on an investment but will now be critical moving forward.

You say now is the time to be investing into distressed property assets - what is a distressed property asset and why does it make for a good investment at present?

Distressed assets do not always mean abandoned, derelict assets – often distressed assets need to be repositioned within the market to capitalise on growth potential. These assets, now more than ever, will present a huge opportunity within the marketplace.

We have recently seen e-commerce giants such as Asos buying out brands such as Topshop – but only their operational infrastructure, data, and brand – leaving a store portfolio of 70 assets across the UK.

Across the UK every high street will see a decline in physical stores trading, which offers opportunity to rejuvenate high streets and communities and, in my opinion, we are likely to see a transition from retail to mixed-use assets.

Investors with an appetite for risk, experience with development, readily available cash and who are willing to play the long game to see strong yields will be able to acquire some under market value assets that will offer huge growth over the next 3-5 years.

I also predict we will see huge growth in the co-living sector within the residential market. Following Covid-19, co-living offers both privacy, companionship, and a support network that will present an opportunity for the residential market, too.

What makes you believe the UK real estate market will remain strong and have a bright future, despite all the challenges at play? 

The positive thing about property is that the market offers a range of asset classes which will always be at different stages of the cycle - the key is always being ahead of the curve and being able to identify key areas of opportunity. For example, whilst we have seen the residential market boom due to pent-up demand and reassessment of living needs, the commercial and retail markets have been decimated by Covid-19. But, with uncertainty, comes great opportunity.

As we have seen, the residential sector has performed extremely well during 2020 with a 7% increase in house prices; the commercial and industrial sectors also offer huge growth potential for repositioning.

Real estate investment will continue to rise across both residential and commercial sectors – coming from both existing investors expanding their portfolios, and new entrants from the commercial sector looking to diversify. The government has also placed heavy emphasis on keeping the market open and transacting throughout this time.

Will there be a large-scale transformation of commercial and retail premises into residential units, as we started to see in 2020?

Absolutely – these assets are often in attractive locations with great footfall and exposure to consumers, which poses great repositioning opportunities.

Predictions for the market are uncertain. However, there has been some pivotal moments in recent months, such as the implementation of a vaccine programme in the UK and a confirmed Brexit deal, which has provided stability for investors.

I don’t believe just looking at short-term yields is an effective way of assessing the market or investment opportunities – especially for the residential market.

Yields within the residential sector will usually be affected by immediate changes in consumer behaviour. In London, for example, London’s population is falling - we have seen some 416,000 Londoners flock to rural locations which has seen yields in the capital decrease. However, London will offer excellent longer-term yields as distressed asset classes get repositioned.

Investors will therefore need to continue to navigate to identify assets that are undervalued in key locations to increase yields long-term.

Will the 2% surcharge affect any bounce-back in foreign investment, particularly in Prime Central London?

The 2% stamp duty surcharge on international investment sent shockwaves through the UK, especially in the London market, at a time where we should be encouraging inward investment. 

On the surface, the 2% surcharge could show a reduction in foreign investment into the UK property market, and if we do see reductions in foreign investment, I think it will impact the off-plan and new-build markets specifically.

However, many international buyers will be able to absorb this additional charge when purchasing in other currencies, so there is a chance it will have little impact on the market – especially in the prime central London market. This - combined with the growing interest from Hong Kong buyers specifically following the opening of BNO passport applications - will, I believe, help offset the reduction we see following the impact of the 2% surcharge.

You have an £100m property investment fund - can you tell us a bit more about this?

Monta Capital has been around three years in the making. My business partners and I have built a real estate investment business focused on deploying capital from institutional investors, across a range of asset classes where we feel there is strong growth in the market.

Like many, we had plans to execute a full launch into the market in June 2020 – however, given the environment we found ourselves in, we made a collective decision to continue with a soft launch at that time. However, this time has been critical to ensure we have curated an expert team, professional network and investment strategy in a highly competitive marketplace. 

The reduction of international travel has meant that we aren’t able to freely travel to clients, which naturally has had an impact – specifically to the US. However, we have been able to navigate one of the toughest business climates of our time which we have successfully pulled through.

Given the current stature of the market, our target of £250-£350 million now means that we will be able to deploy capital to areas of the market that are presenting considerable growth opportunities.

How have your businesses and training programmes been affected by Covid and Brexit? And how is the US expansion going?

Monta Capital’s leadership team is spread across three countries, so having a digital focus across all functions of the business was key from inception. We have therefore been able to operate and communicate effectively.

However, the pandemic really made us reassess how we onboard and train staff. We have implemented various tactics such as digital and interactive training which has meant we are able to scale quickly, expand into new markets and recruit talent abroad. In this sense, digital training solutions have been paramount in developing the team and our recruitment reach.

Following a full rebrand, Montague Real Estate (the sister company to Monta Capital) has also been expanding over recent months into key markets including Miami and Dubai. The travel restrictions mean expansion has been impacted, but we are developing contacts with a raft of brokers across the US – and further afield – to grow our international reach and network. We see stability starting to return, and are predicting significant growth over the coming quarters.