While globally multihousing real estate represented just over 10% of commercial real estate transactions in the year to Q3 2018, in the US that share was over 30%, according to Real Capital Analytics. This demonstrates a clear roadmap for the evolution of the sector in other markets.
So what is behind the growing tenant demand for rental housing globally? Clearly, there are important nuances from country to country, but two common themes emerge: home ownership is less affordable for younger generations; but these generations also place a greater value on the flexibility that renting, as opposed to buying, can offer.
From an investor’s perspective, gaining exposure to this evolving sector provides a number of opportunities: the chance to diversify their existing income-producing real estate portfolio; to make a cycle-appropriate entry into income-producing real estate; or even to leverage any existing residential development skills.
For those seeking to gain access to established multihousing markets, the US is home to the most mature and liquid institutional investment market and has attracted more than two thirds of global multihousing investment since 2010.
The single strongest argument in favour for adding multihousing to a real estate portfolio is the defensive and countercyclical characteristics of its income stream.
Elsewhere, the European multihousing market is becoming increasingly diversified and mature and now accounts for 18% of real estate transaction volumes across the continent.
While Germany remains the most established European market, the UK, Dutch, Swedish and Spanish markets are becoming increasingly institutionalised as global investors seek to take advantage of their growth potential. Indeed, almost 50% of European apartment investment was from cross-border sources in 2018.
Beyond the comparatively established markets of North America and Europe, Asia Pacific is the only region with a developed multihousing sector, with over US$54.4 billion in transaction volumes since 2012. However, the bulk of activity in this market is concentrated within Japan.
Although expanding, the sector is in its relative infancy in Australia where institutional and private investors are currently seeding the first multihousing projects across major eastern seaboard cities.
Foreign capital (both private and institutional) has been a key driver of investment demand across established gateway multihousing markets. And, as investors seek to gain the portfolio benefits of multihousing assets, a multitude of global investors will continue to target both forward funded or stabilised multihousing assets that are not otherwise available within their respective markets.
Clearly, there are important nuances from country to country, but two common themes emerge: home ownership is less affordable for younger generations; but these generations also place a greater value on the flexibility that renting, as opposed to buying, can offer.
Given that a number of institutional investors remain underweight in terms of their exposure to both real estate and the multihousing sector, investor demand is expected to persist in the long term.
Global demographic trends driving the evolution of the sector will ensure there is sufficient development of investment-grade stock to meet growing demand from institutional investors wanting exposure to the sector.
A portfolio of benefits
So how can private investors benefit from exposure to this market? The single strongest argument in favour for adding multihousing to a real estate portfolio is the defensive and countercyclical characteristics of its income stream.
These characteristics are underpinned by the intrinsic secular and structural changes currently under way across global residential markets: home ownership is falling as affordability constraints are rising in many markets.
These trends are only expected to continue, as a young generation continues to seek dynamic living arrangements and affordability issues remain for first-time buyers.
The countercyclical nature of the multihousing income stream is a consequence of debt market frailties during economic downturns making it difficult for prospective buyers to purchase a home, ultimately limiting new supply in the market.
This creates an imbalance between supply and demand drivers within the rental market and helps spur rental growth in the multihousing sector.
This runs counter to the trend in core real estate sectors where income streams typically have a strong correlation with economic growth, and subsequently tend to suffer during a downturn.
An additional feature of multihousing income streams is that they are also partly non-cyclical, providing insulation from market volatility while still offering plenty of scope for growth. The closest comparison would be retail assets anchored by tenants that cater to needs linked to non-discretionary spending, such as supermarkets.
These low correlation characteristics make multihousing an attractive investment prospect within a diversified real estate portfolio due to its ability to protect the downside risk associated with the cyclical nature of real estate markets.
This provides private investors with an ideal investment platform to support wealth preservation, and maintain cash flow during all stages of the economic cycle.