With our Operational Resi Conference on the 10th September we caught up with one of our inspirational panel participants, Richard Valentine-Selsey.
Richard is Head of European Living Research at Savills. He is primarily focused on providing thought leadership and consultancy advice on the residential investment market and alternative sectors, including student housing, co-living, healthcare and retirement living across Europe. He is also leading on research into modern methods of construction.
Here’s what he had to say about the future of rental living.
Can you tell us about the evolution of rental living as an investment prospect within the UK?
It started 12 years ago when the Montague report was published. There was a realisation that we needed to do something to bring institutional investment into the residential sector. We couldn't be purely reliant upon individual buy-to-let landlords, which started the thought process in investors minds around bringing living, as a whole, back into their portfolios.
They’d been active in the student sector for some while but the report kick started the desire to enter the build-to-rent and resi sector. Especially with the kind of changes we've seen with in the run up to COVID and post COVID and the retrenchment from the traditional commercial sectors. That kind of mantra of logistics, living and life science becoming the key three for investors looking forward. That’s shifted where investors are looking to allocate their investment portfolios.
This has led to a number of people looking to enter this market and come up with stock that they can invest in. Investment into residential really kicked off with the emergence of multifamily towers in London and regional cities but then came the realisation that renters don't just live in cities and there's renters across the country. So that's opened up a whole new spread of areas they can look at.
While that has been going on we've also seen the emergence of co-living models that are a hybrid between student housing and multifamily accommodation. This is where investors have been exploring the need to provide buildings with a high level of service but with the compromise of slightly less private space. As a result they can offer a more affordable city centre property in an area that people might not be able to afford to live on their own or have their own private space but still get access to all those amenities whilst offering the flexibility that you don't get with a six to twelve month tenancy in a “normal” rental property.
The big challenge we've got in the UK is there is not enough institutional-grade stock on the market. As a result investors have to go and build it, which means the need to find a contractor to work with and someone to get planning and develop it for them.
This means that there's more money chasing opportunities than there are opportunities around. The challenge we've had in the last 18 months has been that the cost of debt has slowed down the ability for some of these deals to happen or have taken longer to get through. There’s also the consideration that with build costs going up it’s harder to build at a competitive price.
It's interesting to note that 2023, despite all the issues, was the second largest level of investment into build-to-rent since we started recording it back in 2011.
The other evolution which we touched on a bit earlier is the diffusion of investment across the country. Five to six years ago, the vast majority of investment went into London and then the big six regional cities. Investors were very cautious to go to places where they didn’t know for sure that there was a supply and demand imbalance that would create rental demand and wanted to know that the market was substantial. Half of local authorities in the UK now have some level of build-to-rent or single family housing in operation or the pipeline.
Investors are realising that there are opportunities to move across the country and build portfolios rather than just being stuck and restricted to being in a very large regional centre.
There’s also a generational shift in the type of products that investors are looking to go into. We’ve moved on from the first days of buying stock that was designed for build to sell. Now investors are considering the design, the layout, the amenity space of the building to make sure it is meets the needs of the renter and is optimised for operational efficiency. .
We’re now onto generation two of the purpose built model where we’re seeing the overlaying of a genuine full-service solution where renters are receiving a genuinely different product than just renting from a buy-to-let landlord.
We’re also seeing greater investor comfort with larger schemes. In the early days most investors were testing the water with around 100 units. Now there are schemes of upwards of five hundred units on a single scheme where the investor is no longer concerned about the concentration risk of renting these properties. Investors have realised, and seen in the data, that there is enough demand for the property as long as it's priced correctly.
Furthermore, a single site with 700 units is much more efficient than operating 7 smaller sites of 100 units dotted all over the place.
What will the next phase of the evolution be?
The next phase will see the true blending of users across sites and a refreshed focus on mixed living rather than “I just do multifamily” or “I just do student accommodation”. A good example of this is Unite, the UK’s largest student housing operator, where they have now diversified and purchased their first of multifamily block in London.
This next phase will see the full life cycle living piece of taking someone from student housing and then all the way through until they need to go into senior living or purchase somewhere else.
Also we’ll see continual change in who it is that's driving this forward and who the investors are. The UK has been very attractive to overseas investment for many years. We've continued to see new interests coming in from US, Asia and Europe looking to enter the UK market and come into the living sectors.
With the kind of rebalancing of portfolios away from traditional commercial investment, the money will go into resi. The challenge will be, can we build enough stock quickly enough to get these projects going? Also will we get the planning permissions through and will the construction be able to happen?
We found in our most recent European Living Investor Survey, which came out in March, that access, stock and scalability were put as high risk factors for people interested in delivering on their investment ambitions. They're cognizant that there isn't necessarily enough of the stock that they want to buy for them to become significantly active.
Where should investors put their money?
The $100 million question!
I would probably be putting my money into the single family market. Right now there is a great opportunity for investors to be working with developers and the house building sector to help accelerate the delivery of large sites.
I would also look at student housing. The well-publicised challenges facing many university cities (in terms of housing their students) where they're hit by both the limited delivery of new PRS over the last decade or so, with the falling number of available properties.
Now, notwithstanding some of the challenges facing universities at the moment, if you choose the right cities with the right university partners, there is significant demand that will continue to be there.
What are your top three pieces of advice for people attending the event?
- Come with an open mind to think about, and challenge, what your preconceptions are of rental living.
- Come armed with questions and issues that you want to find out about and don't be afraid to put someone on the spot.
- Think about how you and your business can help to drive forward the sector and push out to the wider public what we need to be doing to continue to grow.
Any final thoughts?
We’ve come through the worst of the stormy weather and there is light on the horizon with the economy looking better and interest rates likely to come down this year, which I think will unlock more opportunities. Now is the time to get your ducks in a row to get the market moving through the second-half of this year.
To learn more about Operational Resi Living, join us at the UK’s leading Rented Residential Living Property Conference
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