We are living in a world of ultra-loose monetary policy. Quantitative easing, against a backdrop of global instability, has pushed government bonds into negative territory.
More surprisingly, we are now seeing negative yields on some corporate bonds – meaning you would have to pay to lend money to Nestlé.
The significant re-rating of equities, with the FTSE having recently traded over the 7,000 level, has left many investors overweight. Already long on equities, and with bonds lacking income, particularly crucial for those liability-matching pension funds, investors are wondering where to go.
Prime UK real estate has long been seen as a safe haven, and with the material spread it offers over most government bonds it has been an attractive proposition for investors, evidenced by the influx of overseas capital. Scarcity of product means that traditional investors in UK property are having to look at non-core sectors such as student accommodation, the private rented sector and retirement living.
This has happened at the same time as investors realise that alternative real estate sectors can offer benefits over offices, shops and sheds. Alternatives are often characterised by being let directly to the end user. Historically, this was off-putting to any investor needing to assess covenant strength. But it can also offer tenant diversification and mitigate risk. The longer-term financial viability of these sectors is further supported by positive demographics – a very attractive attribute when the traditional safe havens are being affected by such things as online retailing, hot-desking and telecommuting.
The most established of the alternative sectors in the UK is student accommodation. A fringe sector 20 years ago, pioneered by Unite, it is now firmly in the category of institutionally acceptable. Since Unite’s foundation in 1991, the number of full-time students in the UK has doubled and this trend is not set to change any time soon, as government is removing the cap on overseas student numbers from autumn 2015. Foreign capital has again jumped on this bandwagon, illustrated by £2.5bn of investment in the sector in March 2015 alone.
With continued pressure on housing, and the average age of the unassisted first-time buyer rising to 37, is the PRS set to be the next big thing? Put off by the lack of quality product at sufficient scale, investors have been turning to build-to-rent. This has some similarities with student accommodation – a structural shortage, early development being very gradual and pioneers potentially enjoying first-mover advantage.
In the UK, the professional market remains in its infancy, with 73% of the PRS owned by individuals, 12% by companies and partnerships and only 3% by institutions. In the US, by contrast, the equivalent sector, “multi-family housing”, is established and sizeable, at circa $22tn and with 25% of it in institutional hands.
Aside from a lack of product, viability and operational and reputational risks have been the key roadblocks to institutional investment. With a big focus on housing policy in the general election, there will be political pressures to support this sector. We are already seeing more positive planning rhetoric regarding development, with an understanding that to compete against open-market housing, there may need to be requirements for less affordable housing and other planning gain requirements.
Growth in this sector will be about lifestyle choices. Accommodation that is affordable with a lower case “a”, delivering a strong service offering and in urban locations near transport nodes, should offer not only a good long-term income stream with index-linked qualities, but also a prime product that is likely to see a positive yield shift.
Probably the sector where we will witness the strongest demographic support over the next 20 years is retirement living. The population of over 65s is predicted to grow in that period from 11.4m to more than 17m. They are also forecast to be the wealthiest part of the populace. So far, virtually all the product is needs-based rather than choice-based. If this is not an opportunity, I don’t know what is.
Given the immense demand for long-term stable income and the potentially vast size of these alternative assets classes, in 20 years’ time we may find ourselves having to rename them as they become the mainstay of real estate investment.
Rebecca Worthington is chief executive of Lodestone Capital
