by Charles Ferguson Davie
Within the UK living sectors, a cyclically attractive entry point is combining with powerful long-established fundamentals to create a compelling investment case. There is a significant opportunity for investors to deliver best-in-class purpose-built residential assets for rent at a time when there is very little new supply being developed.
Near-term uncertainty driven by geopolitical and macro-economic conditions is set against a longer-term structural opportunity to invest in UK living real estate.
The chronic housing shortage has been building for decades and is now getting even more acute as high levels of population growth, combined with very limited levels of housing development, are worsening the supply–demand imbalance. Major cities and commuter areas are set to continue experiencing a deep undersupply of appropriate quality rental housing, exacerbated by structural demographic tailwinds such as urbanisation and population growth.
This systemic supply-demand mismatch is fundamental to establishing an investment strategy that is supported by long-term structural defensive drivers and presents an exciting opportunity in the current market.
The ongoing supply shortage should support high occupancy levels and rental growth. Consistent rental growth should underpin yields, with yield compression and capital growth driven by leasing and stabilising assets, and potential for greater upside returns if wider market conditions improve. In addition to this demand-supply scenario, investor interest in the living sectors also comes from demonstrable inflation-linkage.
If inflation trends back to the Bank of England target, as expected by 2027, interest rates will likely be reduced further and this will in turn drive yield compression, as gilt yields should also fall. However, if inflation remains above target, the living sectors should perform better than other real estate categories, as residential rents have demonstrably higher correlation to inflation compared to commercial property rents.
As a result, the living sectors are increasingly recognised as a defensive, inflation-hedging investment opportunity. They also can play a diversifying role within institutional portfolios, being marked by low levels of institutional penetration relative to offices, retail and industrial.
The UK’s rental housing market is immense in scale, with a value of £1.5 trillion and comprising five million renters, yet remains under-institutionalised, with only 2% owned by professional investors and there being only 130,000 completed build-to-rent units. At the same time amateur buy-to-let investors are leaving the market, further reducing supply levels, and institutional investors are looking to correct historic underweight exposures.
Institutions are looking for best in class assets with the latest building safety and environmental credentials, which are very scarce, and there is an opportunity to satisfy this demand at the same time as that of customers looking for a better experience.