By Mary-Anne Bowring, Group Managing Director, Ringley
It’s the world’s largest – and arguably oldest – asset class. Yet for years residential property has often been the poor cousin of institutional real estate investment, especially in the UK. However, with coronavirus casting doubts over the future of offices and accelerating the hollowing out of physical retail, institutional investors are starting to look more and more at residential in all its forms.
Fundamentally, pension funds and insurers need investments that generate long term income streams to match their liabilities. With traditional safe bets such as sovereign bonds offering ultra-low or even negative yields, residential property has grown in attractiveness as an asset class.
Historically many UK institutions would have invested in offices or retail as part of their real estate allocations. People will always need somewhere to work and shop – the thinking went. The pandemic has turned that upside down.
Lockdown forced a mass experiment in remote working, and many companies found they functioned pretty well. As a result, techno-evangelists are declaring the physical workplace to be dead and claim the future of work is virtual, while major corporate occupiers are downsizing their space requirements or saying their employees can work remotely indefinitely.
Similarly, lockdown led to a boom in online shopping. Bricks and mortar retail were already struggling pre-pandemic as Brits – some of the most digitally savvy consumers in the world – browsed and bought on their phones, laptops and tablets. For many stores, coronavirus will be the final nail in the coffin.
As a result, institutional investors are looking elsewhere for income, and many are settling on residential property. It is not hard to see why. While many expect retail values to plummet further and offices to also decline in value, house prices are rising not just in the UK but globally. Yet while institutional investors may invest in housebuilders, they’re not buying individual houses themselves for capital appreciation.
Many however are investing directly into rental housing – a trend that was occurring before Covid-19 and will likely accelerate after thanks to the defensive, counter-cyclical nature of rental housing, which is especially appealing in today’s uncertain climate.
During a normal downturn – and this isn’t an ordinary recession – people are more likely to rent rather than buy. House prices may be rising for now thanks to government interventions, but as the full economic impact of coronavirus begins to bite, they may well fall.
Put bluntly, rent is also one of the last things to stop paying. And at a more fundamental level, while people may not always need a fixed place to work or shop, they will always need a place to live. This makes residential less vulnerable to the type of disruption we’ve seen upend retail and to a lesser extent offices.
Institutional ownership of rental housing is commonplace of North America and many European countries. In fact, in the US, rental apartment blocks – what they call multifamily housing – is the most traded asset class. Yet institutional investors have only just started to enter the UK rental market despite pension funds and insurers owning vast swathes of rental housing at the turn of the 20th century, when most Britons rented.
It’s not just rental housing that is proving alluring. Demographic drivers – such as an ageing population and the rise in singledom – are encouraging institutional investment into specialised housing types such as later living and co-living. Private investors are also moving into affordable housing, a sector to date largely dominated by the state and charities.
Having long been considered alternative despite housing predating offices and even shops, Covid-19 is fast-tracking residential to the mainstream and making it a key part of any investor’s real estate portfolio.