The runaway success of residential
The latest figures from the UN put the world’s population at 7.7bn. This is expected to increase by a further 2bn by 2050 before reaching 11bn by the end of the century. Retail property might be suffering the effects of modern (online) shopping habits, but demand for housing is only going to get stronger.
This divergence of fortunes has not been lost on institutional investors, which have been adjusting their strategies accordingly. In the latest edition of IPE Real Assets, we highlight the effect of retail’s weakening on Australia’s property fund market, where a number of investors in shopping-centre funds have been heading for the exits.
As the CIO of the Investment Management Corporation of Ontario (IMCO) says, the C$60bn (€40bn) institutional investor is seeking to reduce its retail exposure while laying the groundwork for a long-term partnership to invest in US multifamily markets.
More than three-quarters (78%) of institutional investors surveyed by IPE Real Assets are targeting residential markets (compared with 50% targeting retail).
It is not only population growth underpinning housing as an institutional asset class. Personal incomes have not been keeping pace with inflationary house prices across much of the world, rendering home ownership increasingly unaffordable and, as a result, placing more demand on the private-rented sector. All the while, a growing body of institutional-backed housing specialists have been improving the quality and professionalism of the rented-accommodation sector.
But rents are also becoming increasingly unaffordable in major cities. As we highlight, luxury units dominate development activity. We ask whether investors are building the right types of housing to support urban populations.
However, there has been growing interest in affordable and social housing from institutional investors, as part of a burgeoning area of impact investment. As bfinance says in a new report, “The impact real estate sector already offers more than 20 dedicated funds focusing on opportunities in areas such as affordable housing, social housing…. This figure is growing, with a significant number of real estate managers in the process of launching funds or separate accounts in this space, while others are actively considering doing so.”
But even outside impact-investment mandates it is important to have an awareness of affordability and its implications when it comes to investing in residential markets. There is growing political risk surrounding the issue.
Germany already has rental curbs in place, and London’s mayor Sadiq Khan has made rent control a key element of his re-election bid (although it has been noted that he would not have the power to enforce any measures personally).
The Spanish government is also implementing measures that would include keeping rental increases in line with inflation. As well as keeping rental increases within CPI inflation during contract periods, lease terms will also be extended to five years for individuals and seven years for companies.
Enrique Losantos, CEO of JLL Spain, says the measures have “laudable goals” but are flawed – the distinction between individuals and companies, especially. “These measures are at odds with the actual ownership of rented properties in Spain, where 97% of rented homes are owned by individuals and just 3% are held by companies or other vehicles,” he says.
SOCIMIs, Spain’s listed real estate investment trusts, own about 25,000 homes, just 0.1% of the country’s housing stock. “These vehicles are therefore incapable of impacting prices or market dynamics on their own,” Losantos says. “It is also important to highlight here that the recovery of the Spanish real estate market has largely been thanks to large institutional investors, which have believed and placed their trust in Spain and its legal stability.”
Blackstone is another major investor in Spanish housing – most notably through the purchase in 2017 of a majority stake in a €30bn real estate portfolio owned by troubled lender Banco Popular.
Spanish housing is still on the radar of the company and is an important target for its latest European opportunity fund, for which it is understood to be close to raising $10bn (€9bn). Arkansas Teacher Retirement System, one of a number of investors committing to the fund, revealed in a board meeting report that Blackstone Real Estate Partners V will, indeed, target distressed residential assets in Spain.
Some reports have suggested that the new rental measures could curtail Blackstone’s ambitions. But a source close to Blackstone’s new European fund said the company still favours the market.