Is commercial real estate metamorphosing into residential?

EDITOR’S COMMENT A couple of weeks ago I wrote about how, when it came to real estate, every political party’s manifesto centred heavily on housing. “What about commercial?” I crowed. “It is important too and has a vital role to play in strengthening our economy,” I hollered as a thumped my fists on my real estate-supporting drum. But this week, off the back of numerous conversations with big investors, smart lenders and even smarter analysts, I wonder if I may have been a little bit wrong. Is the commercial real estate world metamorphosing into residential? And, therefore, are those party manifestos correct to focus on housing? Well, I’m going to say yes and no. And not just because I struggle sometimes with admitting I’m wrong. Those party manifestos should be focusing on housing in its widest sense. Maybe the general public isn’t quite ready for the term “living” yet, but perhaps it is beds of all sorts that are going to drive investment into the UK, perhaps it is that which is going to boost our economy and solve some of the fundamental societal challenges we face. Residential, or the living sector, is increasingly becoming a core component of real estate investors’ portfolios. In EG’s quarterly gathering with its investor forum this month, our experts – who between them represent billions of pounds of AUM – posed the question of what a perfect portfolio would look like today. The consensus was at least 40% weighted towards residential or the living sectors. The days of diversification, said the forum, could well be behind us. The more sensible approach is to pick one or two core sectors (of which resi will be one, of course) and be expert at that. “You need to be in the right sector at the right time now,” said one of our forum. “Focus on one or two things and go for it.” Offices came in for a bashing, with one very seasoned player saying they were an investment that only looked good for three in every 10 years. “They are great to hold for three years,” he said. “You’re indifferent for three years and then for four years you don’t want to hold them.” Residential, however, despite the challenges that come with it, remains very much in vogue. “If you’re going to play in real estate today, that is the best place to be,” said our investors. And that is backed up with empirical evidence. A survey by Investec of 110 high-net-worth investors found some 98% were currently investing in residential of some sort. Almost half were investing in and expecting to increase investment in residential for sale, 42% in build-to-rent, 36% in the purpose-built student accommodation sector and 27% in retirement living. Residential for rent was a top investment priority for investors, with 96% of the 110 surveyed investing, compared with 84% in 2022. PBSA saw the largest rise in popularity, with 87% investing in the sector today compared with 71% in 2022. Figures from INREV, out this week, show a tripling of allocations to residential investment among the institutions. In 2023, institutional investment in residential real estate hit 22.7% – up from 6.6% 10 years earlier. That means residential has now moved from the smallest to the largest major sector across single-sector funds. Offices and retail, on the other hand, have retrenched. As more and more professional investors and smart and seasoned real estate specialists pile into the living sector, perhaps we will start to see the housing crisis ease. By developing and investing in all types of living, from student, to BTR, co-living, single-family housing, traditional homes for sale, retirement living and everything in between, perhaps real estate can start to provide affordable solutions enabling a place to live for everyone. It does need the right policies and planning systems in place. It will probably need the right incentives and a favourable tax system too, but if whichever party makes it to Number 10 next month really does want to make housing a core pledge in its party policies, then there is a sector ready, waiting and very much hungry to invest.