After a good run post-COVID, market uncertainty has impacted transaction volumes in the living sector. The key challenges over the 9-12 months are well rehearsed. There has been significant supply chain and energy cost inflation; putting pressure on developers and operators. A stiffening in the lending market and a higher cost of debt, with no commensurate drop in land values; making investment returns harder to achieve and stressing the forward funding model. Looking beyond current macro-economic factors, there are other challenges ahead. ESG performance of buildings is in sharp focus, and an embodied carbon emissions bill on the horizon. A potential change of government next year is increasing the risk of rent controls, and the Building Safety Act brings with it significant development costs. 

Where there are challenges though, there are undoubtedly opportunities. During the “Invest tribe” at this year’s ALT/RESI UK event (what a great format for a discussion by the way – think round-table format, without the round-table), I had the chance to discuss how investors, developers and operators might be creative in structuring transactions and finding “that angle” to unlock opportunities. My take-aways: 

• Needing to look harder at deals means you can pick the “best of the bunch” and find counterparties with the deepest development knowledge.
• While opportunistic/short-term capital looking for higher returns is harder to deploy, the sector is maturing fast and attracting the longer-term/institutional capital.
• Forward funding deal structures are changing, with hybrid models blurring the historically clear divide between developer’s "development risk" and funder’s "market risk". Seemingly there are more “true” equity JVs in the market place now also.
• ESG and embodied carbon challenges, as well as Building Safety Act requirements, might in turn create opportunities to repurpose underperforming “First Gen” stock and institutionalise the "brown space".
• There continue to be opportunities to exploit Modern Methods of Construction, particularly off-site modular builds.
• The idea of rent controls or rent limits does not have to scare the sector, given equivalent measures in New York or other European countries work reasonably well and can be priced into the income/return profile…so long as any such legislative changes include proper consultation!
• Regulatory changes could bring opportunities, for example the welcome changes to UK REIT structures, including Private REITs.