AN EMERGING SECTOR
The Residential Investment sector is gaining traction in the UK. Investors looking for long-term returns are seeking out the opportunities afforded in the expanding private rented sector, especially purpose-built age-targeted accommodation.
The Residential Investment sector, incorporating purpose-built Student Accommodation, investment-grade and purpose-built rented accommodation (PRS) and Senior Living has been expanding rapidly in the UK in recent years. The myriad reasons for the growth of investment into incomeproducing residential markets include a search for diversification, finding value in the granularity of occupiers that comes with individual units, demographic and tenure shifts and a housing policy landscape in the UK that is now embracing diversity of tenure.
Within the three sectors that make up Residential Investment, the fundamentals underpinning the markets are also varied, from educational factors in the Student Accommodation market to housing affordability and employee mobility in the PRS and the ageing population and limited care options in the Senior Living sector.
To examine how these sectors will move over the next five years, we have undertaken a survey of 43 leading investors in Residential Investment, the largest survey of its kind and representing a combined £32 billion of investment. The results of the survey are shown throughout the following pages, and are instructive in highlighting how and where the sectors are set to grow in the medium term, as well as outlining some of the expectations around pricing.
The PRS sector is expected to leapfrog Student Accommodation over this time-frame, with the sum of capital invested and committed in the investment-grade PRS rising to more than the total value of the Student Accommodation sector. The combined value of the sectors in 2025, forecast to be £146 billion, means that the sector will start to close in on some of the commercial real estate classes by total asset value, cementing its place as an established asset class for global investors.
THE RESIDENTIAL INVESTMENT SURVEY
An examination of where our 43 survey respondents are currently invested, and where they expect to be invested by 2024, suggests that appetite for Student Accommodation will remain steady in the coming years, while there will be notable growth in PRS and Senior Living.
The survey results also makes clear that some investors who may only be active in one of the three sectors may become active in additional sectors by 2024. For example, some 13% of respondents currently invest across all three sectors, while in 2024 this will rise to 35%. Some 28% of respondents are invested in two sectors today, and in five years’ time this will rise to 68%.
This echoes our expectations for increased diversification within Residential Investment, with investors spreading their exposure across age groups. The drivers of each sector are relatively distinct, with Student Accommodation linked to the expanding tertiary education sector, PRS responding to the massive shifts in tenure seen in the UK over the last two decades, and the underlying need for homes in many key areas across the country, while the Senior Living market is underpinned by the sharply ageing population and the need for age-appropriate housing that offers elements of care.
While there are significant differences in market drivers, there are key synergies in construction and operations, making a move across sectors even more appealing for investors.
The differing maturity of the markets, with the still-establishing Senior Living market sitting higher on the risk curve, means investors can blend their yields, with the expectation of yield compression in the future. This follows the trend seen in the PRS market in recent years, and the more mature student market over the last decade.
GROSS TO NET
We asked respondents about their current gross to net, and the mean average of the responses from London and the regions are blended, as shown in the chart. Generally the figure was higher in the regions, reflecting the typically lower rental levels in regional cities.
The spread between the totals in the three sectors is perhaps not as large as may be commonly assumed, but it also shows that Student Accommodation, as the more mature market, is the most efficient in terms of operational costs in part due to the higher density of tenants helping to drive operating efficiencies. At the other end of the scale, the Senior Living market has the largest gross to net leakage, which is to be expected given the typically higher levels of servicing, care and amenity provided.
RENTS AND OUTLOOK
An examination of the latest rental growth shows the spread across the country for both Student Accommodation and private rented apartments
Rental growth, in the Student Accommodation market, and the wider residential rental market, which includes properties owned by individual landlords, has varied according to geography over the last year, as shown on the map to the right.
The student market has been strongest for rental growth in Bristol and Edinburgh in the year to the start of the current academic year.
Meanwhile, an examination of asking residential rents shows that they rose most strongly in Birmingham and Edinburgh, although the asking rent growth seen in London, of 3.8%, is higher than the 0.4% growth in achieved rents – which comes from data modelled by the ONS. The two sets of data are not directly comparable, as they come from different samples, but it suggests that not all asking rents in the market are being met by tenants.
However, asking rents have risen by an average of 2.7% a year over the last decade, indicating the direction of travel in rental growth, while the annual growth in Student Accommodation rents is estimated at 3.1%.
The PRS market is not yet mature enough to deliver robust data on rental growth in investment-grade PRS properties alone, although anecdotal evidence shows that in some cases rental premiums can be achieved depending on the location, specification, servicing and amenities of the building.
The Senior Living market is also not yet established enough to have data on the growth of rents.
When we asked our survey respondents what they expected in terms of rental growth over the next five years, the average figures suggested a continuation of the current trend, although those in the Senior Living rental sector are expecting higher annual rental growth than the PRS market.
LOOKING TO THE FUTURE
Which cities will outperform the market over the next five years?
The survey respondents identified the cities where they saw the biggest opportunities in each sector. When examining the top three cities in each market, London and Bristol emerge as opportunity areas across all three sectors. This suggests an overlap of the different drivers for each sector to provide a favourable investment environment – from strong student demand, large-scale city regeneration and development as well as strong employment conditions, and finally a lack of senior living units. Birmingham is the best opportunity for PRS by quite some margin, according to respondents, driven by regeneration and infrastructure improvement.
When asked which sector would outperform in 2019, our survey respondents suggested that PRS would narrowly beat Student Accommodation.
Courtesy : Knight Frank