As we announce our continued support of Wayhome, the pioneer of Gradual Homeownership in the UK, in their latest £8 million fundraise, we share an overview of the company’s technology-driven approach to tackling a significant, two-sided opportunity in the UK residential property space.
Augmentum & Fin/Proptech
Despite many areas of inefficiency and the truly enormous scale of the asset base ($327 trillion¹) and its supporting markets across financing, asset management and transaction services, the property space has so-far proven challenging for new entrants to disrupt. While many have tried, few ‘proptechs’ have delivered what we would consider to be venture scale outcomes.
Sector specific dynamics such as fragmentation and inertia around offline processes and communications go some way to explaining why, as does the challenge of fundraising through property market cycles if a business model is overly reliant on a certain set of market conditions. Where there have been exceptional successes, the companies have often been US or China based, where players benefit from a large single market to address. Market-by-market nuance in property makes international expansion difficult, with particular implications for European players.
At Augmentum, our response to these dynamics had been to operate with a highly focussed thesis for companies operating at the intersection of fintech and proptech ‘fin/proptech’. We seek to invest only where opportunities are rooted in deep structural trends — such as worsening housing affordability -, have venture scale potential in their home market and a model that is resilient through the cycle. We then look for outstanding teams who bring the domain expertise and tenacity we believe is paramount to success in this area.
Wayhome brings all of the qualities we look for in our thesis, and we are delighted to have been part of the company’s journey through the successful launch of Gradual Homeownership and to now be continuing our support into this next scale-up phase of growth.
The opportunity that Wayhome addresses originates from two key frictions in the UK’s residential property market. The first is that, with the outpacing of growth in house prices relative to wages, thousands of households can comfortably afford to rent properties that they would not be able to buy with a mortgage. The second relates to structural specificities of the UK market that create barriers to institutional investment, leading to significant underrepresentation of institutional investors in UK residential (‘resi’) compared to other European markets and the US; just ~1% of the UK’s Resi stock is held by institutions compared to ~10% in Germany, ~15% in the Netherlands and ~8% in the US².
Wayhome’s product — Gradual Homeownership (GHO) — simultaneously solves these points of friction. This is achieved through an innovative product structure that brings would-be buyers and institutional capital together, and the application of technology to enable property sourcing and assessment at scale.
With more than 145 GHO purchases completed to date, Wayhome have proven product-market-fit but only just scratched the surface of huge unmet demand for property ownership in the UK. With ongoing disruption in the UK mortgage market following the mini-budget and rate rises, and the end of the Government’s help-to-buy scheme, GHO as an alternative homebuying option has never been more relevant. With these dynamics, and £8 million in new funding secured, we believe Wayhome is in a strong position from which to scale.
Gradual Homeownership: How and why it works:
1. Buyers’ Perspective
Under GHO, households use a deposit of 5% or more to buy part of a home and the remaining portion is purchased with institutional capital that is deployed by Wayhome. Buyers then pay a market rent on the portion of the home they do not own, delivering a yield on the institutional investment. Buyers retain optionality for the future; they can choose to maintain their stake at the initial level, increase their ownership in the property to reduce rent paid and/or ultimately buy-out the institutional investors, or sell the property and receive proceeds in proportion to their ownership stake.
The product’s power lies in how it broadens the range of property values that a household can access without loading on risk. While lenders use loan-to-income ratios (LTI) to determine a maximum mortgage size and restrict loan-to-value (LTV) ratios to manage their risk, GHO assesses affordability on the basis of the monthly market rent that will be paid on the institution-owned part of the property. Where rent is comfortably covered, GHO can support the purchase of properties with an equivalent LTI well above what UK lenders offer — up to 10x, and typically in the range of 6–8x. If delivered through debt, leverage at this level would expose buyers to ‘first loss risk’ and the potential to enter negative equity were property prices to contract. The structure of GHO allows leverage to be extended but protects buyers from this downside risk; a buyer with a 5% deposit retains 5% of the equity in their home even if the property value were to reduce.
The rental approach to affordability assessment also means that GHO works well for groups who are underserved by the mainstream mortgage market, such as freelancers, older people, and those with product mismatches due to religious beliefs. With high unmet demand for homeownership across these groups, supporting each of them alone represents a significant opportunity for Wayhome.
2. Institutional Investors’ Perspective
Despite the attractive investment characteristics of UK resi and more than £8 billion in stated annual appetite for investment³, structural factors have prevented institutional investors from building scaled exposure to the asset class. In a multi-year research programme, the Investment Property Forum (IPF) collected data from institutions to better understand these factors in relation to other European markets where institutional investment levels are far higher.
Survey results highlighted the key challenges of 1. building scale across the UK’s disparate housing stock — 84% of UK dwellings are houses vs apartments compared to 31% in Germany and EU average of 58%⁴, and the buying process is complex — and 2. management intensity arising from the relative instability of the UK rental market — where the average tenancy lasts less than 2 years (vs a 5-year average across Europe and 11 years in Germany⁵).
Where investors have identified strategies that overcome these challenges, investment has followed. With large, purpose-built apartment blocks which cater to relatively predictable rental populations such as students and young professionals, UK Build-to-Rent (BTR) has found institutional traction with £4 billion invested in 2022⁶. However, the dynamics of the UK’s new-build market limit the scale potential of BTR, as does diversification, given it’s high concentration in city centers (~50% London5) and amongst narrow tenant groups. In 2020, the majority of institutional respondents to the IPF, stated a desire to engage with broader Resi strategies encompassing single-family-housing and investment outside of cities³.
GHO offers a new strategy to institutions that meets their objectives across scale, manageability, and diversification for the UK market. This is made possible by Wayhome’s proprietary technology platform which automates steps in the property sourcing, assessment and buying stages to make the purchase of institutional-grade properties possible at scale. Post-purchase, the design of GHO — where short-term renters are replaced with long-term buyers — and Wayhome’s digital portal, reduce management intensity significantly.
Wayhome’s platform is currently sourcing and assessing properties across England at an annual deployment run rate of c. £100 million. The map below shows GHO properties and offers accepted, highlighting the diversification already achieved. With this latest fundraise, Wayhome aims to accelerate deployment run rate to £200 million within the next 12 months. As the GHO strategy continues to gain momentum among investors, we believe it has the potential to unlock institutional capital at an even greater level than the multi-billion scale that BTR has achieved.
As an early supporter of Wayhome, Augmentum has long believed in the huge potential of Gradual Homeownership in the UK market and we are hugely encouraged by the positive response to the product from customers and institutional investors so far. With a proven platform and £8 million in new capital, we believe Wayhome remains on track to become a category defining company in alternative homeownership.
We share our congratulations with CEO Nigel Purves and the entire Wayhome team as the company moves forward into its scale-up phase of growth.
Learn more about investing in fintech with Augmentum here.
¹Savills, The Total Value of Global Real Estate Report, 2020
²Calculated for each market using the share of institutional ownership in private rented sector (PRS) multiplied by the share of total resi that is PRS. For example, 3% of the UK private-rental-sector is held by institutional investors and PRS makes up 19% of UK resi (IPF). 3%*19% = <1% of total UK resi held by institutional investors.
³Large Scale UK Residential Investment: Achieving Market Maturity, IPF, 2021
⁵Residential Real Estate in Europe: Facts and Figures, ERPA, 2021
⁶UK BTR market update, Savills, 2023
This financial promotion is issued by Augmentum Fintech Management Limited which is authorised and regulated by the Financial Conduct Authority under Firm Reference Number: 811734. Augmentum Fintech Management Limited is appointed as manager to Augmentum Fintech plc. This financial promotion is for information purposes only and nothing contained in this financial promotion constitutes investment advice. This financial promotion is intended for professional investors and for retail investors who have sufficient knowledge and experience of UK listed investment trust companies. If you as a retail investor are uncertain whether an investment is suitable for you, you should seek advice from a regulated financial adviser. The value of investments, and any income from them, can fall as well as rise and you may not get back the amount invested. Reference to “Augmentum” or “Augmentum Fintech” refers to “Augmentum Fintech Management Limited” unless otherwise stated. Reference to the “Company” refers to Augmentum Fintech plc. Reference to “we”, “our” and “The Augmentum Team” refers to employees, consultants or advisors of/to “Augmentum Fintech Management Limited”.