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Real estate living: A key opportunity of the next cycle?

3 min read 19 Dec 22

While living sectors are not immune to the impact of rising interest rates, long-term rental growth prospects remain attractive. Housing is a fundamental need, and the UK’s housing shortage is palpable. Current pressure on yields could therefore create a key buying opportunity. 

Enhanced risk-adjusted return potential

Higher interest rates are making mortgage costs more expensive, instigating house price falls and impacting investment values for rented residential property. However, the sector has historically seen resilient income streams and capital values through market cycles, when compared to other sectors and asset classes. Though occupancy and rents fell temporarily during the pandemic, rent collection rates exceeded all other property types. 

We therefore expect yields to move out by less than for commercial sectors, while strong potential rental growth could help to offset capital value falls. At the same time, discounted pricing could offer an opportunity to enhance risk-adjusted returns through new acquisitions. 

Demand for rental housing continues to rise

The robust nature of the rental market is never more evident than in a downturn, since uncertainty and weakness in the owner-occupier market can encourage people to rent – and rent for longer. Higher borrowing costs are likely to make buying a property more difficult, offsetting further stamp duty exemptions from the government.

As a result, more people are seeking rented housing. A higher number of tenants are also staying in situ, with tenancy lengths extending, further exacerbating the limited supply issue.

Rental supply is under increased pressure

The rental market has seen a reduction in supply since the pandemic, following a widespread retreat of Buy to Let investors as a result of tax and regulatory changes. This could expand further if private landlords are unwilling or unable to upgrade homes to meet net zero carbon targets. 

“Fundamentally, residential property is an asset type investors want in their portfolios, owing to attractive rental growth prospects, in addition to defensive qualities and diversification potential.”


Pressure on the availability of rented stock is, in turn, driving up rents. Potential policy intervention aimed at improving affordability, such as rent controls, is unlikely to provide a permanent solution, and could further exacerbate the problem by dampening the sector’s investment appeal. We believe alleviating the supply gap remains the primary solution.

Meeting evolving housing needs

Build to Rent investors are well placed to meet evolving needs across the housing spectrum, from affordable social and Shared Ownership homes, through to senior housing. M&G’s investment in sustainable housebuilder, Greencore Construction*, provides the capacity to deliver high quality, energy efficient homes that can minimise costs for occupiers.

Allocations to Living sectors continue to grow

Fundamentally, residential property is an asset type investors want in their portfolios, owing to attractive rental growth prospects, in addition to defensive qualities and diversification potential. Headwinds facing traditional sectors such as offices mean allocations are likely to shrink, and will need to be replaced. The Living sector is a clear target; likely to reflect a growing component of portfolios as the market continues to mature.

A key investment opportunity

With a large volume of capital targeting the sector, we expect pricing to remain under pressure in the longer term. The ability to buy in at cheaper levels today, we believe could reflect one of the key investment opportunities of the next cycle.
 

* Greencore Construction was set up in 2013 by Ian Pritchett and Martin Pike. Its aim was to build high performance, low carbon buildings using natural materials – predominantly hemp, lime, and timber. Today, Greencore combines a strong scientific approach with pragmatic and practical delivery using an experienced team. For more information visit https://www.greencoreconstruction.co.uk
 

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.

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