A range of alternative residential investments are gaining investor interest, attracting funds as traditional retail and commercial assets offer less reassuring returns.
Research by Knight Frank notes a 9% increase in investment in alternatives, year on year, in the UK. And while investment was up 4% in the more mature student accommodation market, build to rent has experienced a 17% rise, and senior living projects a 13% increase. In total, these “residential alternatives” have seen an influx of GBP87bn in a year, researchers calculate.
In a recent research document, JLL talks of “six certainties” that will guide the residential market over coming years. Shifts include a move towards older parenting, which supports the growth of demand for rental homes. In addition, there will be 1m more over-65s in the next five years, a figure that will continue to grow. It predicts 2.5m more people will live in urban areas by 2024, meaning increasing pressure to densify living, and promoting growth of co-living. New homes will need to be well connected, technologically and physically.
At CBRE, the dedicated alternatives team has noted three trends during the last year – polarisation, international capital and a growing interest in operating businesses.
Taking comfort from the maturing student accommodation market, money is now spreading wider. “There are a number of investors and developers who are looking at all three – there’s some cross pollination,” said Matt Bowen at Knight Frank. “And I think there are common themes between the hotel sector, student accommodation and co-living.”
In the build to rent marketplace, Bowen said the fundamentals look encouraging. “Graduate and young professional accommodation is a much bigger proposition than student – we have a huge opportunity.” He sees opportunities in “streamlining rental, and adding inclusive services – the structural drivers are substantial.”
The opportunity is also spawning new entrants in the development space, who are coming in alongside US majors such as Greystar, who have previously launched in the UK, aiming to replicate their home market success. The US specialists have yet to gain substantial traction, or build many schemes on the scale of those they are used to managing in US cities.
Among new entrants is Scott Hammond, one of the founders of Essential Living, an early entrant into the UK’s purpose-built, build-to-rent housing market, who has branched out with a new venture, Eutopia Homes.
The group already has a GBP300m+ pipeline, in three schemes that combine homes for sale and those for long term rental, with other elements. In Exeter, it will combine houses and flats for sale with 230 build-to-rent units, and a 65-bed retirement community. And in Birmingham, a development will combine 480 homes, a 167-room hotel and affordable workspaces.
Hammond told Property Week: “UK regional cities are attracting swathes of investment, thanks to rising student retention rates, improving culture and leisure scenes and new employment opportunities driven by major corporates moving operations outside of London. By creating mixed-tenure developments, we can help create genuine communities, accelerate delivery and de-risk development while meeting a range of housing needs.”
While the Knight Frank data suggests the elder living niche is currently small, researchers at GlobalData suggest there is considerable potential for growth, noting UK government predictions that one in four people in the UK will be over 65 by 2037. “Not only will this present new challenges for the health and social care sphere, it will also mean that providing housing for this growing group, which is both suitable for a range of needs while desirable place to live, presents a new opportunity for the world of planning and designing,” said GlobalData’s Ellen Daniel. “Those over 65 live in a third of all dwellings, meaning better provision of housing for the over 65s could offer benefits across society.”
Dedicated elder living developments, apart from freeing up underused large homes, could also bristle with new technology, both providing assistance but also delivering health monitoring – improving quality of life as well as reducing health sector burdens. “It’s at a very early stage – it’s a difficult one to call,” said Knight Frank’s Bowen. But looking ahead to 2025, his team predicts investment in student accommodation will grow 27%, while build to rent investment will grow 114% and senior living investment 354%.
HA Perspective [by Andrew Sangster]: Knight Frank has decided to call the investable bit of residential, residential alternatives. It encompasses student accommodation, built-to-rent and senior living in what is a subset of the operational real estate market.
The big push is into the latter two sectors although the purpose-built student accommodation market is currently much bigger. Looking forward, Knight Frank reckons that the PRS will be bigger in the UK in terms of scale than student accommodation within two years. Senior Living will overtake student accommodation within 10 years.
All three sectors are in growth, however. In 2015, student accommodation was worth GBP31bn, PRS GBP15bn and senior living GBP632m. By 2019 this had grown to GBP51bn, GBP31bn and GBP1.3bn respectively. By 2025 the forecasts are for GBP65bn, GBP 75bn and GBP5.9bn.
Knight Frank points out that, based on IPF data of investable assets, residential alternatives has already overtaken industrial property, one of the three established commercial asset classes (the others being offices and retail). Industrial is worth GBP69bn.
Residential is something of a paradox given that its total value in the UK is around GBP7 trillion. So residential alternatives is a small fraction currently. It is not unlike the hospitality sector in that most of the value of industry is in non-institutional hands. And both resi and hospitality are in an exciting stage of evolution; an evolution that is seeing them overlap with each other.