London and residential are the hot topics in real estate at the moment. London mayor Boris Johnson last week announced plans to increase his target of building homes in the capital to 42,000 pa, almost double the amount built in 2014, new PRS funds are springing up and the availability of affordable housing remains a political hot potato for every party.
But for investors in London is residential the safest and most lucrative bet? Or will the traditional asset class of commercial real estate be the winner?
That was the topic in a BNP Paribas Real Estate-supported discussion on investing in the capital.
Early on in the debate, supporters of residential investment made the caveat that investors looking for returns from homes should be targeting London’s zones two to six, not the already overpriced zone one. But soon the argument over which asset class would win turned to supply.
“Resi is great, but commercial is secure,” said BNP Paribas Real Estate chief executive John Slade, adding that a lack of supply of decent and suitable stock meant that demand and fundamentals would remain strong.
“There is not a lot of commercial development right now. If you are looking for big floorplates there are very few buildings,” he said. “But if you go to the South Bank, there is a lot of resi coming through.”
There are fewer than five buildings in central London that can offer 100,000 sq ft over the next 12 months, said Mark Swetman, founding director of LS Estates and a former Hines director. He added that in the short term this lack of supply in London offices would create real rental growth, giving commercial the upper hand in terms of investment choices.
However, Legal & General Investment Management’s head of real assets Bill Hughes said that in the long term, residential was likely to win out, particularly the PRS.
As an investor in commercial property and at the early stages of a major push into the residential market, Hughes was able to argue both sides of the proposition. He said that the commercial market was very cyclical and was currently at a point in the cycle that was very strong, making it a secure asset class in which to invest today. Residential or PRS, on the other hand, is not cyclical. As such, he said that as an investor he viewed residential as the winner over a 10-year period, with commercial coming out on top over the next few years.
However, the panel largely agreed that for residential to become a truly dominant asset class it needed scale, which both Hughes and BNP PRE UK residential director Adrian Owen saw coming over the next five to seven years, particularly through the growth of PRS.
Owen said that with the average age of a first-time buyer now over 40-years-old, private rented housing had no option but to emerge as a dominant asset class.
“People are used to renting rather than owning now,” he said, citing the population’s increasing use of services such as Spotify and Netflix.
“PRS is a very immature market, which is why it is very hard for the institutions to get in,” said Owen. “But it is here to stay and it will become a mature market.”
Even pro-commercial Slade agreed: “The sands are shifting. PRS is here and there is a lack of commercial stock, but people want to invest in London, so PRS is going to be an asset class to rival commercial.”
