Private renting is not a new concept in the UK, but it's only in the last few years that large-scale, institutional investors have made their mark on the sector. 2013 was the year things changed, whether you consider the watershed moment to be M&G’s acquisition of a Berkeley residential portfolio or Delancey funding the Athlete’s Village in Stratford. The sector has expanded rapidly in the years since, with over 30,000 homes complete and a further 110,000 in the pipeline that will be built, let, and managed by professional investors as homes for rent.
Looking to the student accommodation sector as our benchmark, there’s at least a decade to go before institutional private rent reaches maturity. This means there is still scope for seismic shifts in the sector. There is also plenty of opportunity for new and innovative entrants to disrupt the market, as customer awareness and understanding of this tenure increases.
If you’re investing in asset classes that perform similarly especially in downward moving markets the answer could be no. On the contrary, investing in asset classes that demonstrate little or no correlation1 to one another may help you enhance diversification and reduce portfolio volatility. While diversification can neither ensure a profit nor eliminate the risk of experiencing investment loss, the ideal scenario is to have a mixture of non-correlated asset classes in an attempt to reduce overall portfolio volatility and generate more consistent returns over the long-term. Many investors who believe their portfolios are diversified may not be as diversified as they think. That’s because traditional portfolios are typically comprised of only stocks, bonds and cash. While stocks and bonds may provide some diversification*, there are other investment opportunities that could provide even more.
Overall the top five countries for investment in residential assets over the next 12 months is the UK (33 per cent), France (28 per cent), Germany (25 per cent), Spain (24 per cent) and Italy (18 per cent). Signalling that the market is attractive for future investment, nearly three-quarters (74 per cent) of respondents plan to invest in European residential assets over the next twelve months. Of these, nearly one third (29 per cent) expect to invest more in 2021 compared to 2020, on average increasing assets by nearly 30 per cent. When investing, the majority (88 per cent) will also choose to enter new countries in partnership with a local developer or manager. Traditional residential assets are the preferred haven choice for most investors, with nearly three-quarters (71 per cent) managing build or own-to-lease properties, while half (51 per cent) maintain student living premises and two-fifths (44 per cent) senior and retirement living spaces.
The top reasons respondents cited as causes to be optimistic were that there is high demand due to a shortfall in supply (43 per cent), real estate income yields are higher than those for fixed income (43 per cent), and asset prices remain attractive (40 per cent). For those respondents that remain negative, concerns over the pandemic and more lockdowns (64 per cent), the recession impacting demand (51 per cent) and the fact that the real estate market lacks daily liquidity in comparison to equity and bond markets (46 per cent) were cited as the three main reasons.
While there may be a higher rental return on commercial properties, the purchase price range can be smaller than residential.
Residential comparable sales are much easier to distinguish and gather potential price rise or fall information than in commercial. Also because of zoning changes, infrastructure and more. Commercial appreciation can be a more consistent journey as many potential value changes can be understood from rental improvements that are often built into the lease. Macro trends e.g. import and export activity, currency movements, ageing population etc.. and more have been partially responsible for the decreasing rental yields for warehouses and medical assets. Yields decreasing on commercial property, mean that people are willing to pay more on the purchase price for less rental income upside.
Volumes should continue to grow solidly over the medium-term. The reasons will have nothing to do with the strength of demographic tailwinds or urbanisation rates. Don’t get me wrong - both remain hugely important and hugely supportive and will continue to be there. The Brexit noise in Government will abate somewhat this year, but it would be naïve to think that negotiations will be anything other than a significant distraction for policy teams. This could be viewed as a bad thing for multifamily housing, but with a Government set on the aspirational homeowner as its key policy priority, the lack of attention will in all likelihood mean that the industry can get on with delivery. Over the past 10 years, the entire UK Build to Rent industry has been non-fictionalised. Developers, supply chains, funders, planners, lawyers, advisors, operators and innovators have coalesced around a largely US-styled asset class and got on to create a pipeline of over 150,000 homes. That is largely despite rather than because of policy. The industry has a long way to go on its journey to maturity. Planners think Build to Rent is 'premium' product. Consumers think it's still about exploitation, rather than choice. Developers still behave as though it’s a land value play rather than a value-generating income play. Operators are still learning about what it means to be truly customer-centric. These are issues that need to be tackled and while I have perhaps been a little unfair to many here, I'm speaking to most in this nascent sector.
The lack of attention provides us with breathing space to learn, to grow, to mature. While Berlin and ultimately the German Government mess about with supply destroying rent controls, in the UK we can drive a consensus around rental supply as a force for good. While market actors in New York and San Francisco, Paris and Madrid all grapple with stock revaluations due to tightened rent regulation, in the UK we can use the cover to get our story straight. Tech innovation that improves quality of life. Check. Advanced manufacturing solutions that de-carbonises new stock, and builds supply chains to reduce the cost of retrofitting old stock. Check. Meaningfully leveraging the new tidal wave of Impact investors that see affordable housing as a big prize on the way towards a dual purpose of driving a commercial return and providing a true social good. UK Build to Rent has some growing up to do. The stakes, in housing terms, couldn't be higher.