Against the backdrop of record house prices, changing demand for property and the emergence of new asset classes, the UK’s living sector represents a burgeoning opportunity for investors.
In recent years, the sector has undergone a transformation. From an investment perspective, certain uses within the sector were historically badged as “alternative asset classes” and mainly coveted by specialist residential investors.
In the search for yield, significant value can be unlocked in the living sector, with a broad range of investors now looking to fund and secure returns from newly developed assets such as care homes, build-to-rent and student accommodation.
The appeal of the living sector shouldn’t solely be attributed to the Covid-19-related disruption of the traditional commercial property market, which continues to play a key role for investors and must not be written off. It should instead be considered a result of residential property’s ability to deliver institutional-grade returns – a fact increasingly recognised by investors.
Investment into the living sector has risen accordingly, not just in the UK, but also internationally. Savills’ research reveals that residential property became the largest sector for investment globally in 2021, overtaking offices for the first time.
So with a buoyant international residential market, why should investors choose to focus on the UK’s living sector?
Supply challenges
The UK’s housing shortage has been well publicised. Completions are still lagging behind the number of new homes that need to be built per year to keep up with demand.
Several parts of the living sector are facing severe gaps in supply. Take elderly care for example. According to Knight Frank, at the end of 2020, there were 78,383 homes equipped with care units in the UK. This is in comparison with a total population of over 65s of 12.4m.
A similar shortage is present in retirement housing (ie without care), which, even with a predicted 10% growth in stock, is only expected to total more than 800,000 homes by 2024.
The same situation can be seen replicated across other parts of the UK’s living sector.
Solid foundations
These shortages are placing a sustained upward pressure on pricing in the UK, forcing unit prices to record levels, at least in the short to medium term.
While the jury is out on the long-term future of house prices, investors can take confidence from the fact that the UK’s living sector is underpinned by the strong residual value of its assets – ultimately, people will always need somewhere to live.
Some may point to 2008 as an example of where the sector can falter; however, it is important to highlight that there is a key difference between the challenges facing the UK’s residential property market and those seen during the crash of 2008.
Back then, the market had systemic funding challenges, while the heat today is primarily driven by low supply and the effect this has on land and home prices.
It is no coincidence that several UK housebuilders are now under private equity ownership, or subject to potential bids. Many investors are recognising the value of housebuilders and their freehold estates, as demonstrated by Miller Homes, which was sold by Bridgepoint for a reported £1.2bn after acquiring the developer for £650m in 2017.
Realising its full potential
Focusing only on standard residential housing and capital values, however, ignores the unique opportunity the UK’s living sector presents. Indeed, its main strength is the diversification of its asset classes and growing number of potential revenue streams.
This point can be best expressed by examining the senior living, student accommodation and BTR markets. These assets now feature a wide range of housing and service models, providing different types of living experiences, amenities or care provisions.
In the senior living market, housing models span luxury senior living developments for those over a certain age to buy or rent, retirement apartments, housing with extra care facilities and traditional care homes. The various models create new opportunities for investors that can not only tap into real estate returns, but also those associated with operating the facilities and services provided.
This broadening out of potential revenue and value can also be seen in the student accommodation and BTR markets, where investors are able to access separate income generators from extra facilities such as a concierge or gym.
BTR is innovating rapidly when it comes to the type or location of properties, with the emergence of single-family suburban developments. This marks an evolution on the typical smaller city-centre apartments the market was founded on. These new models are enabling investors to diversify into other residential areas such as family housing where there is scope to secure longer tenancies and build new revenue streams.
Legal & General announced in November 2020 that it was launching a suburban BTR arm, with the aim of delivering 1,000 new family homes a year in response to what it termed as a “societal need for high-quality family homes to rent”.
Such high-profile market entrances show the attention the living sector is now demanding. Investors are realising the potential returns that are available, while taking confidence from the sector’s capital value growth and the gains that can be secured should they choose to break up and sell parts of their portfolio.
Future-proofing your portfolio
One consideration that investors must address is the importance of integrating environmental, social and governance assets into their living sector portfolio. By doing so, investors can take proactive steps to bolstering future yields and long-term capital value resilience, while positively contributing to social and environmental factors.
Investors should incorporate ESG to create a genuine risk matrix that successfully maximises the living sector’s potential to secure institutional-grade returns.
The living sector isn’t immune to the challenges currently facing the UK property market and wider society. There are bumps in the road that need to be navigated, including legislative reform, rising inflation and living costs, and the long-term economic impact of Covid-19.
Recent history does, however, suggest that the living sector is sufficiently resilient and offers enough variety of housing to withstand significant pressure.
Catherine Williams is a partner and head of Shoosmiths’ living sector
