Q&A with Hearthstone Investments’ CEO

BTR News spoke with Cedric Bucher, Hearthstone Investments’ CEO about the past decade, industry changes, business successes, and the next decade.

Cedric Bucher, CEO at Hearthstone Investments | BTR News
Cedric Bucher, CEO at Hearthstone Investments.

As Hearthstone Investments celebrates the ten-year anniversary of its first fund launch, we speak with Cedric Bucher, CEO at Hearthstone Investments about the past decade, examining how the industry has changed, the business’s greatest achievements and what he thinks the next ten years has in store.

Has the typical ‘Hearthstone’ investor changed over the past ten years, and if so, how?  

We work almost exclusively with institutional and intermediary investors. And while the pressures they face have evolved over the years, their aspiration for long-term, consistent income has remained constant.

Suburban private rented housing has, over the past decade, demonstrated its resilience as an income generating asset class. We have a diversified portfolio which minimises risk; income is resilient – we saw, for example, that during the pandemic rental collection rates remained high while commercial property saw high levels of arrears. There is also inflationary protection as rental income tends to rise as inflation rises, which protects the investor.

From an investor relations perspective there has been a constant trend of consolidation of our investor base. Whether that is pooling of Local Government Pension Schemes, or M&A activity within institutional as well as intermediary investors, our current and prospective investor base on average have become bigger.

Have the expectations of your investors changed, and if so, how? 

The macro environment in 2022 is fundamentally different from 2012. Ten years ago, we came out of the global financial crisis, then had an unprecedented equity rally which even Covid didn’t seem to stop – fuelled by both monetary and fiscal stimulus. This is now coming to an end, with equity markets having corrected sharply already in 2022 and the outlook for fixed income being uncertain. There have also been massive shifts within property subsectors such as retail, office and industrial. All the moving parts in other areas of investors’ portfolios can and do impact their expectations in terms of yields, returns and allocations – not always in predictable ways.

The other significant change is the focus on ESG, impact and sustainability. A clearly articulated and implemented strategy towards environmental and social impact was an area of some focus a decade ago – it is now a must-have even for an initial conversation. We invested in systems and processes to better monitor and track a whole range of environmental and social KPIs to demonstrate how we improve energy efficiency, reduce our carbon footprint and enhance the resident experience.

What do you consider to be the biggest opportunities for investors today which didn’t exist ten years ago?

Over the past decade with record low interest rates, buying a house with a mortgage was artificially cheap. This period is now coming to an end and the relative affordability between home ownership and renting is re-balancing towards a longer-term normal. As a result, we see the demand for rental property grow even stronger than it is today, and therefore continued growth of the suburban private sector.

We also see the housebuilding industry innovating. Modern Methods of Construction (MMC) is more than a buzzword, with many providers scaling up rapidly after an initial period of smaller scale launches. We also connect with other innovators in the broader ecosystem, from specialists in energy efficiency to experts in scalable retrofitting.

Finally, investors’ need for diversified longer-term sources of income from private markets is leading to innovation in fund structures for both institutional and private investors in the UK. There is much more work to be done in this field, but the regulator’s intentions are excellent.

So, in summary, we see an asset class with (from an investor perspective) favourable supply/demand characteristics, which can be accessed via innovative fund structures in a scalable way.

What do you know now about the market that you wish you had known ten years ago?

I should first say that I only joined Hearthstone in early 2018 – so will answer this question from a Hearthstone overall perspective – and the benefit of many years of experience from current and former team members. The UK suburban private sector simply didn’t exist for institutional investors a decade ago. At Hearthstone, we had to build our capabilities from scratch – deal origination, appraisals and negotiation, due diligence, institutional property and tenant management at scale, as well as fund structuring.  

As a result, across Hearthstone we developed and improved processes and systems across all these areas, and built a strong and trusted network of agents, developers, property managers, valuers, conveyancing firms, AIFMs. It is a very granular business model which took time to build and takes ongoing effort to maintain and improve.

What do you consider to be the highs and lows of the Build to Rent/PRS market over the last decade?

The most important factor for me has been investment performance. Since the launch of our first fund ten years ago, the asset class has shown tremendous resilience with excellent downside protection in times of market turmoil – such as during the pandemic or more recently in the first half of 2022.

In terms of lows, we continue to be surprised by how little PRS features in UK housing policy. It seems that the significant opportunity the institutional sector can bring to the housing market is not fully understood or supported at national government level – instead, every new housing minister keeps drumming the ‘home ownership’ drum at the expense of all else, while home ownership becomes less and less affordable for many.

What do you foresee as being the biggest industry challenges over the next ten years? 

At macro level, inflation, social cohesion (and the affordability crisis), and the future of the union will be the biggest challenges for the industry – and indeed the country – over the next ten years. As always, there will also be ‘unknown unknowns’. What we hopefully demonstrated having lived through Brexit, a pandemic, and now a war on our doorstep is that we have appropriate risk management processes in place and are nimble enough to manage these challenges.

The one challenge we haven’t resolved yet is how to tackle energy efficiency in older buildings – I call it the ‘embedded carbon’ challenge. How does one, at scale, improve energy efficiency of homes that are 50 or 100 years old in a way that still delivers acceptable returns to investors. I would love for Hearthstone to again be at the forefront of resolving this challenge. It would make a huge impact in our transition towards net zero – in particular as the UK has some of the oldest building stock globally.