5 min read 8 Sep 23
Decades of underdevelopment have resulted in a chronic supply and demand imbalance of housing in the UK. The government is committed to tackling the problem, but the scale of the affordable homes deficit in particular continues to dwarf progress. As such, housing remains in acute need, sustaining upward pressure on house prices over the long term, particularly in employment hubs like London and other major cities.
House price affordability constraints remain well above long-term averages nationwide, meaning large deposits are required to get on the housing ladder. This has pushed more people into flexible and affordable housing tenures over the past ten years, with unprecedented demand for Private Rented Sector housing since the pandemic.
While wages have risen in nominal terms as a result of inflation – diffusing house price to earnings ratios since their peak in Q3 2022 – the impact of higher living costs means wage increases are not always meaningful. Rents are rising while mortgage payments have doubled for some homeowners. “Those seeking to buy a house are now hamstrung by upfront and ongoing costs that are hard to meet,” says Alex Greaves, M&G Real Estate’s Head of UK and European Living.
“A slowdown in construction will store up an even greater problem in a few years’ time. People still need somewhere to live yet the supply shortage looks set to expand.”
The economic environment is also weighing on housebuilders, owing to slower sales; a result of higher borrowing costs. Even if the rate hiking cycle has peaked, these dynamics will take time to unwind, and a wave of debt will require refinancing. This is likely to impact new starts, which appear to be easing back in all parts of the housing market, as shown by a drop in planning approval requests. In the Build to Rent sector, this compounds already constrained supply as a result of the widespread retreat of Buy to Let landlords, following tax changes.
Institutional capital is a fundamental part of the solution, with the potential to increase housing stock across the spectrum – from purpose-built student accommodation and Build to Rent apartments, to senior living and affordable housing.
“This requires a granular understanding of people’s drivers as they move through different life stages, in order to create and manage homes that meet people’s needs,” stresses Greaves. Young people are often drawn to cities for work and social opportunities, creating demand for well located, professionally managed apartments for rent. As children come along, more space, access to good schools and stability typically become more important. Moving further out of town can help to facilitate this, as well as accessible housing schemes like Shared Ownership.
Providing homes across the living spectrum represents a scalable opportunity for institutional investors to generate attractive risk-adjusted returns and create a positive social impact. The necessity and undersupply of housing underpins the sector’s continued resilience, with the potential for strong rental growth and sustainable income streams, linked to inflation.
The impact of higher interest rates across asset types could result in a marginal softening of residential property yields, in our view, however income streams and capital values have historically remained resilient through market cycles. Furthermore, favourable rental growth prospects could help to offset capital value falls.
With interest rate rises exacerbating underlying issues, the need for good quality, flexible and affordable homes continues to rise. Institutional investors continue to target the Living sector owing to strong market fundamentals and portfolio rebalancing, supporting new housing supply. We believe the weight of capital is likely to maintain pressure on yields in the longer term, meaning the ability to buy in at cheaper levels today could enhance risk-adjusted return potential, while also helping to alleviate the housing crisis.
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.