Q&A with Castleforge - talking interest rates, BTR trends, data and rental reform

In this Q&A, we speak to Adam MacLeod, partner at Castleforge Partners, for his thoughts on data-driven investment, the latest trends in BTR, what rising interest rates could mean for property investment in the UK and what the company looks for when investing in residential.

How will interest rate rises affect real estate in the UK?

The prospect of rising interest rates has been a key focus of ours in the last few years. But contrary to what some people may think, central banks don’t have the power to dictate long-term interest rates, only short-term rates.  

Longer term, interest rates are set by many other factors. In 2020, our research showed a deceleration in global trade and an ageing global workforce leading to sustained higher long-term interest rates in the medium-term due to a greater demand for investment and a lower amount of global savings.

As a result, we consciously positioned our portfolio to outperform under such conditions - for example, by investing in assets with shorter-dated cashflows that could keep up with the price inflation we predicted, including flexible offices, multifamily residential properties, and hotels.

Back to the current day, we see debt becoming more expensive and opportunity costs rising across the entire investment universe. Savvy investors will increasingly value high near-term cash flows again. With inflation and interest rates now at elevated levels, we expect other investors to increasingly turn towards these types of real estate investments.

You've made a number of investments in residential in the UK - can you tell us more?

We are passionate about delivering a professionally-managed, customer-focused housing solution in regional locations designed for the needs of the local workforce. Through delivering these homes, we are eager to help alleviate the critical housing shortage and condition crisis in the UK by providing a much-needed solution to people competing for housing in an underserved section of the market.

We currently have a portfolio of 2,500 homes that we aim to grow rapidly across attractive regional UK towns and cities. We have accumulated our portfolio over several years, often acquiring from local private investors who are struggling to manage relatively small portfolios, particularly with increasingly demanding management needs, regulatory standards, and sustainability requirements. We believe large, well-capitalised businesses are required to manage rental housing portfolios as the landscape becomes more complex.

You talk about being a data-driven investor - what does this mean in reality?

We pride ourselves on being research-driven, thematic investors. We built an in-house research team that identifies long-term global trends, backed by data, that translates these trends into views about prevailing headwinds and tailwinds across the global investment landscape.

We then use these insights, combined with our local market knowledge from our on-the-ground acquisitions team, to develop investment strategies and source attractive investment opportunities. In some cases, where we see unmet market demand and deep opportunities for deploying investment capital, we choose to develop operating businesses like Ocasa (our residential management business) to execute these research-based strategies.

What trends are you currently seeing in multifamily (Build to Rent) both in the UK and the EU?

Investment activity in the UK multifamily sector has soared to all-time highs, with a record £1.6 billion in investment in Q1 2022. However, these investments are heavily localised in major cities like London and Manchester. Residential investment outside of these cities is scattered and we see a huge opportunity for growth in the multifamily segment in secondary and tertiary cities and market towns. 

Castleforge is looking for an opportunity to address an unmet social need with our workforce housing offering. This design is proving popular with both working individuals and companies keen to secure accommodation for their employees, to support recruitment and retention in today’s constrained labour market. As a result of this massive opportunity, we are primarily focused on expansion within the UK.

What is your opinion on the UK government's recent announcement of rental reform?

The government has a hard task ahead.  We hope they can fulfil their promise to improve the rental sector for private renters while encouraging investment by private landlords. We encourage transparent and fair treatment of our customers, and we believe that every customer should fully understand the reasons behind any possession notice or proceeding.

That is why we have robust consultation processes and regular touch points with customers during any tenancy management process. As such, we remain broadly supportive of government efforts to strengthen the protections afforded to tenants, particularly against discrimination or acts of revenge by unscrupulous landlords. We look forward to reviewing and commenting on the full proposals and helping to contribute to legislation that works for both renters and landlords.  

What do you look for when it comes to an investment in residential in the UK?

We look for locations near employment centres such as hospitals, industrial estates, or retail parks where we can attract a high number of people earning average local wages. These locations are usually within 30 minutes of a major city within a satellite town or smaller secondary city. We target areas with high demand, affordable rents, and good wage growth.

What do you see as the main property investment trends for the remainder of the year?

We see several very interesting trends playing out this year. In the residential market, there remains persistent undersupply for UK housing and extremely limited product offering for renters seeking more affordable housing.

We also see strong growth in the flexible office market, as employers increasingly turn to hybrid working arrangements and occupiers increasingly demand managed and flexible arrangements. This is a large growth sector in the UK and Europe in particular, as offices in these markets are typically not operated with customer needs or flexibility in mind.

The hotel market offers interesting opportunities in the face of the end of Covid restrictions, rising inflation, changing demand for corporate travel, and a renewed interest in domestic leisure travel. We have invested in limited-service hotels in cities where we see a high proportion of leisure travel and continued corporate and group demand.

We are also investigating the life sciences space, in particular the provision of office and laboratory space for life science occupiers. As the UK will (and should) promote itself as a global leader in life sciences, there will be a need for real estate that caters to these occupiers. 

How can we make homes more environmentally friendly now and in the future?

We are constantly looking for ways to provide more environmentally friendly homes and pride ourselves in being on the forefront of change in our industry. We procure green electricity across our portfolio; have begun removing gas from our legacy energy infrastructure; invest in green infrastructure including solar PV cells; improve insulation credentials; and encourage our customers and communities to change energy consumption, waste production and consumer behaviours through engagement initiatives.  

At Castleforge, we believe that reducing the environmental impact of homes requires both the upgrading of our physical buildings as well as changes in the behaviour our customers in their homes.