Data driven DDs in Build to Rent – why real estate investors “need” them?
In 2016, one of the largest American Private Equity buyout funds was looking to fund a large Multi Family / Build to Rent Scheme in the Hillingdon borough of London. The investment sounded quite attractive on paper as it included a juicy IRR% delivery roadmap led by a renowned London based entrepreneur and a solid team. Being new to the sector, the fund started looking around for data on rentals, some benchmarks or comps data to ensure they can write the $200m+ cheque. They spoke to some of the largest estate agencies who seemed to not be geared to be collecting any kind of data. Next, they spoke to the portals and software companies who provided some data – however these datasets were either too generic or not actionable and needed further data stitching, analysis and then presentation in a way that was useful to the investment committee. They then also spoke to some of the referencing companies, who either couldn’t share any data due to protection laws, or their data was again quite high level.
Incidentally, over a drink one of the directors at the fund spoke to his friend Saurabh, a senior Private Equity executive who had been building a data driven real estate transactions business called “Houzen”, alongside his day job. Through his day job, Saurabh had recently advised a large PE fund on a potential $2b+ investment opportunity into a Western European real estate agency leader, and was fresh off a due diligence into the sector. Saurabh offered to help his friend at the fund, collected some bottom-up data on the local market and presented back to the fund’s director and their Investment Committee – eventually they did not invest.
The issues in BTR die dilligence that need fixing right now
“Due Diligence in real estate has long been a ‘finger in the air’ assumption on another assumption exercise. Due to lack of data aggregation, the residential real estate industry has found comfort with several limitations in the investment cycle” Saxena says. Firstly, the industry actors who are typically custodians of the customer and asset data have not collected the data digitally and at best, have stored it in paper files for decades. Secondly, the industry is so fragmented that even if actors did collect the data, it would need to be stitched together to make investment decisions. Thirdly, all the data that exists today is typically around assets, and very rarely on tenants needs, requirements and willingness to pay. This essentially means that the supply side data is fragmented, incomplete and not voluminous and the demand side i.e. customer side data doesn’t exist. Due to these systemic issues, the entire industry has been making decisions based on assumptions. However, the LP needs are changing now. The UK BTR opportunity is real and well established in the minds and IC’s of LPs, however they demand justification. LPs are custodians of public or tax payers money hence they are transparency oriented to reduce their own decision making risk. Several operators today complain that fundraising with LPs is not easy and they are not loosening their purse strings as much as the BTR hype seems to be. The reason is obvious – would we invest even $100 of our hard earned money on promises and not proof?
And the rest is history
Saurabh went on to quit his day job, and built houzen as the fastest leasing engine for the BTR sector. Today, houzen works with 7 of the top 10 BTR operators and investors and includes Invesco, Kennedy Wilson, Greystar, Grainger, Wellcome Trust, A2Dominion et al as it’s clients, and is based out of Singapore and India, and soon China. Interestingly, Saurabh’s entire pre-MBA experience was in the field of advanced statistics which in today’s speak, is called AI. That experience came in quite handy when the backend AI engine of houzen was built. From day one, all the data which came into their platform was not just collected, but the algorithms started learning and started making sense of the assets and tenant matching equations. In 2019, houzen was requested by a number of private equity funds, state owned companies, large BTR lenders and operators to share their data in order to make go/no-go investment decisions on whether they should buy an asset or not, if a certain borough or location is the right one to invest, develop or operate in based on their strategic KPIs. In addition, they would regularly ask houzen to help underwrite rents and their asset management strategy.
Smart Due Diligence with houzen – now available
Houzen has now launched a new service called “Smart DD”, which helps in connecting the dots between assets and potential tenants, potential revenue and operational cost flows. Further it delivers high quality consulting style reports on leasing velocity, asset management strategy, rent appraisals, buy make or partner decisions, IRR and revenue enhancement strategy and execution, asset turnarounds, and BTR operating model strategies.
The team at houzen is obsessed with the topics Build To Rent sector participants are continuing to solve for, and believes that through an intelligent data and tech infrastructure coupled with a finance and execution mindset will help make the industry more intelligent and investment decisions more predictable.
Find us in London
27 Finsbury Circus
London, EC2M 5NT
020 8064 1431
And in Singapore
79 Anson Road, #23-01