Residential investors to pursue blended and more diverse strategies

Our research suggests that single family housing, co-living and seniors housing are the next growth areas.
Written By:
Oliver Knight, Knight Frank
5 minutes to read

Currently just 17% of our survey respondents, of 54 leading investors who, combined, currently account for £76 billion in residential assets under management across the UK, invest across all three residential sectors. Echoing our expectations for increased diversification and a blending of strategies within the residential investment market, this is expected to have risen to 42% by 2026 as investors spread exposure across age groups.

Such an approach reflects the fact that, while there are significant differences in market drivers, there are synergies – particularly with regards to construction and operations – which makes the decision to move across sectors more appealing.

Scale is also a critical factor in the success of investor’s long-term strategies, with the pursuit of efficiencies of scale having significant potential to drive outperformance across a portfolio.

Doubling down on PBSA

Purpose-built student housing (PBSA) is the most mature of the sectors. It is a proven counter-cyclical asset class and, despite the disruption imparted on the 2020/21 academic year by Covid, it remains attractive thanks to the promise of income-producing assets with defensive, counter-cyclical qualities. Our survey demonstrates continuing commitment from investors with little evidence of a change in sentiment.

Investors have been prepared to look beyond any short-term instability to focus on the market’s long term growth prospects. The latest applications data from UCAS suggests student numbers have recovered to higher than pre-covid levels, for example, with accepted applicants from outside the EU up 3% year-on-year.

Recent reports on occupancy and rent collection also point to a strong recovery as students – both domestic and international – return to campuses in greater numbers. Longer-term, a coming demographic jump in the UK among university-age students is expected to increase the number of 18-year-olds in the UK by more than 100,000 over the next decade, according to ONS forecasts. Total full-time undergraduates, including international students, are forecast to increase by over 240,000.

Development volumes are increasing to meet expected demand. The number of purpose-built student bedrooms completed more than doubled last year to 30,000, lifting the total number to 700,000. A further 21,000 beds are in the pipeline for the year ahead, which would take the total value of the market to £72 billion.

Diversifying within BTR

Build to Rent (BTR) has become central to investor strategies, with 81% of investors saying they currently invest in the sector and will continue to do so. But as investors search for scale and grow their exposure to the private rental market strategies are evolving.

For many, that means switching their attention to single family housing schemes, as well as co-living. Almost 70% of respondents to our survey expect to be invested in Single Family Housing (SFH) in the next five years (from 42% currently), whilst 27% expect to be invested in co-living (up from 17%).

The results mirror our separate research which identified £8 billion in capital waiting to be committed to the SFH market. For investors already active in the multifamily market, SFH offers exposure to different geographies and a diversified demographic, made up of families more than young professionals. Well-connected city fringe locations could offer development opportunities for this type of product, as could parcels of land within larger mixed-use developments.

Growth is also expected in multifamily PRS. Some 31% of respondents share the view that multifamily PRS will provide the best returns of all residential investment sectors in 2022.

Rising investment has supported a rapid increase in development volumes, with more than 180,000 BTR homes in the pipeline, though operational stock still only accounts for 1.2% of the total private rental market. Using the more mature student sector as a benchmark, we estimate that the UK BTR sector could account for 30% of the private rented sector at full maturity, highlighting the scale of the investment opportunity.

Higher inflation presents a challenge to affordability and rental growth in the short term, though higher consumer prices are expected to be transitory. The longer-term outlook for rental growth is supported by a positive outlook for earnings, which are expected to grow in real terms over the next five years.

Seniors Housing: The next wave

The case for seniors rental is compelling. Rental is a small but growing part of the wider expanding seniors housing market. Given the significant imbalance of supply and existing demand, on top of the ageing population, and requirement of flexibility from this demographic, there is a significant opportunity for institutional investors.

Our research supports this view, with 67% of respondents to our survey expecting to be invested in the sector within the next five years, up from 31% who are currently investing. We note some 25% of the record £1.4 billion invested in the UK seniors housing market last year was for rental product.

We have also seen an increase in the delivery of rental within the sector, with more operators offering rental - predominately pepper-potted within for sale schemes. Our latest research supports this, with two thirds of private operators currently offering rental as a tenure option. There has also been a pivot to fully BTR platforms being delivered.

With backing from institutional investors further growth is expected, particularly given the prospect of higher yields while the sector matures. Consequently, the number of private seniors rental properties in the UK is expected to increase by a huge 166% over the next five years, from almost 5,000 currently to more than 13,000.

However, while there is clearly a strong appetite from investors for seniors housing, the lack of specialised operators poses a challenge, and was identified as such by 56% of survey respondents. But with the backing of an increasing number of global investors, and a greater understanding of the proposition, we expect this will change.