Posted by Macquarie Asset Management
June 02, 2021
This article first appeared in the PERE Residential Report in June 2021 and is reproduced here with the permission of the publication.
Residential real estate is prized for its resilient qualities and has weathered the covid-19 pandemic relatively well, with the sector beginning to recover both early and sharply in some markets.
However, it would be wrong to say the sector has been unaffected by the pandemic, according to Macquarie Asset Management’s co-head of real estate in Europe, Dana Gibson, and head of real estate strategy, Rod Cornish. The pace of change in the sector is accelerating as covid-19 acts as an accelerant to existing trends and encourages residents to rethink their needs.
Rod Cornish: One of the reasons purpose-built rental housing is a key part of our long-term strategy is that we believe structural tailwinds support the sector’s performance across cycles and its ability to bounce back from downturns more quickly. This is partially due to policy, with governments often keen to get the residential market moving again to promote economic activity.
We have seen overall residential prices rise about 10 per cent in the past 12 months in the US, albeit with quite a lot of regional variation. UK prices have risen around 9 per cent, though only 3 per cent in London, with Germany rising 11 per cent and Australia up 6 per cent over the same period. Those price rises mean, of course, that affordability continues to be stretched. The average price-to-income ratio across Europe is 7.4 times, but in London for example it is 13 times. This is one of the key factors underpinning purpose-built rental housing.
Dana Gibson: Housing price growth in the UK has outstripped wage growth by a considerable margin over the last 20 years, which has led to an acute and rising affordability issue. At the same time, the expectations of renters are evolving; there is an increasing demand for high quality rental housing with enhanced spaces, more functional amenities, and better, simpler service.
DG: Europe is a fragmented market, with a unique mix of structures and traditions, and this adds to the complexity for investors. You have rent control in some markets, massive undersupply in others.
Germany, the Netherlands and the Nordics are the continent’s large, mature markets with deep domestic capital bases and great fundamentals, however they face some regulatory challenges. The UK, Spain and Central and Eastern Europe have affordability issues, as well as a lack of suitable, purposely designed, modern stock that offers what renters are looking for.
The UK market is evolving very quickly, with very little modern build-to-rent stock and a growing private renter population. There are about 4.4 million households in the private rental housing market in England alone, so the opportunity is significant and largely untapped by the institutional market.
RC: At present, less than 3 per cent of private sector renters in the UK live in institutional grade purpose-built rental housing, which compares with 15 per cent in Germany and 37 per cent in the US. There is also a large Millennial population which is buying homes later than ever due to stretched affordability and different priorities.
DG: Many institutional investors in the sector in Europe have tended to own and manage their portfolios directly, concentrated in their own domestic market. However, as these investors seek to diversify across markets, we expect there will be strong demand to partner with specialist full-service platforms that can develop, own, and operate units at scale.
This is a global trend too. Residential is a very different business to office and industrial, so that focus and operational expertise is important for accessing more resilient assets in the sector.
We believe demand from investors will support the creation and growth of specialist groups, particularly as investors seek enhanced data transparency and tech-enabled management systems. We also believe ESG, specifically the social utility derived from housing, will become hugely important to institutional investors active in the sector.
Dana Gibson, Senior Managing Director and Co-Head of Real Estate, Europe
DG: ESG is increasingly a focus for institutions, who are demanding better exposure to ESG focused strategies, as well as to governments who are looking to the residential real estate sector as they scale up their net zero ambitions. For example, the UK government is targeting 75 per cent less emissions in new residential spaces by 2025; there is a massive opportunity in advancing these goals by developing product that meets these demands.
Sustainability is also increasingly capturing the attention of renters. This is not just in the form of emission targets but understanding how it touches their lives. There is quite a focus on the availability of green spaces within a development, as well as on wellness, clean energy, community focus and the ability to reduce waste.
Social sustainability is also very important. Housing has a utility to society so we need to be focused on affordable housing, on community engagement and supporting communities by using local tradespeople, for example.
RC: In many cases, covid-19 has accelerated existing trends, such as flexible working, rather than creating brand new themes. But it has driven changes in location preferences, with more people seeking the “liveable” suburbs and second-tier cities.
The pandemic has also prompted residents to reflect on what they want from rental housing. In many of the markets we are looking at a lot of the rental stock is older and lack the facilities required for working from home, whether that is only one day a week or three days a week. A two-person household with both working from home some of the time can be very challenging.
Apartment design will have to change to accommodate that, with workspaces in the apartment or in the building. The need for green space, whether within the property or nearby, is important and ties in with a growing focus on the wellness of residents. Having all of those facilities professionally managed will be a big differentiator.
DG: Operators and developers are trying to solve the conundrum of the “two Zoom household”. How can you have a one-bedroom apartment where the residents will at some point both need to be on separate Zoom calls while working from home? So, apartment design needs to be properly adapted as well as the design, purpose and function of amenity space.
Rod Cornish, Managing Director and Head of Real Estate Strategy
In the past amenity offerings were focused on aspirational things, such as a cinema or something you might have in a hotel, like a rooftop pool. These types of amenities may look great in a marketing brochure but may not be functional in real life. More thought needs to go into how such lifestyle spaces are designed and what their purpose is. We need to deliver amenities genuinely valued by residents, whether it is a gym, co-working space, a library, a genuine community area or outdoor space.
RC: We have seen rents worldwide increasing in suburban locations and in smaller cities as technology and the pandemic encourage new ways of working. However, we have also observed people just starting to move back towards big cities too, partly to take advantage of cheaper rents. These are not necessarily contradictory trends but highlight different types of people moving to suit their changing lifestyles and stages of life.
DG: Living in London right now and watching the city starting to come back to life after an enforced hibernation, you cannot help but think it is going to grow stronger and urbanisation is going to continue. Humans like interaction, they like to be in cities. We can innovate and collaborate in a city in a way that does not happen elsewhere.
However, I think there will be a greater focus on transport efficiency and reducing journey times. We will see more developments around transport hubs, which might be suburban or city-fringe, but tending to become a bit more urban in function. Either way, there are going to be greater expectations from residents for such infrastructure, as well green and community spaces both within and around residential developments.
RC: Second-tier cities are where we are seeing population growth and jobs growth globally. It has been significant in the US and we think that it is going to be a big story in the UK too. We believe there will be a focus on cities which have good transport links to London and university towns.
DG: We see there being interest in many of the major cities across the UK, especially where there is heavy investment in transportation infrastructure. The affordability issue is more pressing in London, obviously. There are parts of the capital that may present opportunities, but many regional cities are attracting young professionals and growing families, which are the target market for purpose-built rental housing.
Accessing stock is challenging, and institutions are moving up the risk curve, including by seeing development as a route to entry. We are seeing local councils looking to alleviate housing shortages, which is helping to ease planning consent processes. There is also potential for the conversion of office or retail spaces, which could offer new opportunities across the UK.
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