It feels like we are quite late in the real estate cycle, or indeed in certain subsectors past the peak of the current cycle which you could say was in the summer of 2015 based on levels of enthusiasm at that point and the level of transaction volumes that year. There are certainly some subsectors to be wary of: City offices (where the vacancy rate could increase on the back of new supply and Brexit concerns), Prime residential in London (where too many luxury apartments have been built for off-plan sales to overseas investors and tax increases are affecting volumes and pricing), and retail (which is oversupplied on most high streets and in many shopping centres and the internet continues to take market share).
However, demographics, structural changes, technology and societal shifts are producing some very strong drivers of demand and will continue regardless of Brexit or a changing economic landscape. At the same time there are some sectors that are undersupplied due to many years of a lack of development since the GFC.
As a result we have conviction about the residential and logistics sectors – in particular: (i) Build to Rent/Multifamily; (ii) Student Accommodation; (iii) Senior Living; and (iv) Last mile logistics.
Build to Rent / Multifamily
There is high demand for renting:
- Because of population growth, affordability issues, later family formation, urbanisation and the sharing economy trend
- Millennials are now used to living in purpose built student accommodation and are looking for better / more affordable accommodation than is currently provided
At the same time there is limited supply:
- Since the GFC there has been very little development outside London
- Multifamily / apartment blocks designed for rent did not exist until very recently
Despite this, mainstream property investors own only c.2% of the c.£1 trillion Private Rented Sector (PRS). This is changing as investors have noticed the changing societal attitudes, the supply/demand imbalance and the fact that the residential sector has outperformed other real estate sectors with less volatility. The UK market is starting to look a bit more like the US (20% of housing is rental vs 32% in the US and 60% in Germany) but still has a long way to go. The private buy-to-let market is being targeted by the government with higher taxes and an institutionally backed professionally managed market is starting to emerge, as well as new co-living and multifamily products.
Not enough houses are being built (> 300,000 pa recommended): 
2m → 5m increase in renting households since 2000:
Source: The Size and Structure of the UK Property Market 2013: A Decade of Change – IPF, PRS in the New Century (Cambridge 2012); Department for Communities and Local Government (November 2010), IPF Investment Property Focus – Summer 2015, ONS
Student Accommodation
There is high demand from students:
- Continued growth in applications
- Overseas student numbers have grown strongly
- The introduction of tuition fees also resulted in the removal of student number caps
At the same time there is limited supply:
- Limited development outside London since the GFC
- Significant amounts of existing stock is low quality
- The private purpose built market still only makes up 7% of supply
There is strong interest from global investors for stabilised investments and we believe there is scope to compete with existing stock even in mature markets where you can develop in better locations and create a better product.
Overall student numbers continue to grow and non-EU growth has been very strong (14% of students are non-EU, 5% are EU students). We don’t think that students should be included in immigration targets.
Private purpose built accommodation makes up only 7% of the market:
Source: HESA 2014/2015, UCAS. End of Cycle Report, CBRE
Senior Living
There is high demand from retirees looking to downsize into specialist senior housing:
- Compelling demographics of the ageing population
- Projected increase in over 65s from 12.4m in 2014 to 16.5m by 2039 (and an increase in the over 85s from 1.5m to 3.6m)
- c.£1.3 trillion in housing equity owned by the over 60s, of which 96% is un-mortgaged
- Downsizing to release equity (58% of over 60s would be interested in moving)
Limited Supply:
- There are limited existing schemes and the UK market is tiny compared to the USA and Australia
- Early stage of market development
% of over 60 year olds living in senior housing:
Source: National Population Projections, Office for National Statistics (2012 based), Top of the Ladder, Demos (2013)
Last Mile Logistics
There is high demand for distribution, storage and logistics space:
- Take-up to support internet retail operations continues to grow
- There continues to be strong growth in demand for smaller units/urban logistics to meet same day/next day delivery targets
There is limited supply:
- Overall availability has dropped to below 6%
- There has been limited development and strong take-up
There is now strong rental growth and rent frees are reducing with strong investor demand for long leases. Higher yields are also available in industrial with an opportunity to extend leases as part of a Value-Add approach.
Continual growth in internet retailing is causing structural changes to the retail and industrial sectors:
Source: Gerald Eve, Capital Economics, ONS
Conclusion
I think that the research is compelling and that ‘beds and sheds’ offer a rare opportunity for investors to find reliable income with growth prospects. Moreover this income growth ought to be less exposed to the possible negative effects of Brexit and other global economic risks than many other real estate sectors that are more closely tied to business and consumer sentiment. The fact that these sectors can offer both growth and defensive qualities is attracting a great deal of investor interest. Our job is not to try and compete with these large pools of capital but instead look to create what it is they want through development or active asset management. This is where the Moorfield team is unique in having the experience, skillset and pioneering approach to unearth opportunity.
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