Renting For Life

October 2019

An investment opportunity not to be missed!

 

Imagine, if you will, the average Brit being approached in the street by someone offering an amazing investment opportunity that has apparently worked for thousands in the past. It could make you a small fortune and give you enough money to retire on. And it’s not Bitcoin.

 

But to participate you have to invest the lion's share of your life's savings and take out the biggest loan you can afford on your current income to invest in the scheme. You won't receive any income or dividend from this investment and your success depends on you personally selling the investment at a profit in the future. Of course, he goes on to explain that your investment is at risk if values go down. In fact, you could lose the whole investment and ruin your credit rating but at least your other assets are safe (unlike in America!) Oh, and the name of this investment is a mortgage or "death pledge" as it translates in old Norman legal French from where it originates. Appealing?

 

You can just imagine the pennywise British queuing up for this investment can't you? Well we did! In fact by 2003, over 70% of the British population lived in a home that was secured on such a mortgage.

 

There’s money in property

 

Clearly something was driving this stampede towards the biggest financial risk that the majority of those involved had ever taken on in their lives.

 

The answer, we are reliably informed by Dr. Mark Andrew of Cass Business School, is explained by the Standard Housing Arbitrage Condition formula; see if you can spot it.

 

UCC=(1-θ)r+δ+tc+pt–phe+λ/μ

Where the user cost of owning a house (UCC) is determined by:

 

  •  r = mortgage interest rate [+]
  •  δ = depreciation/maintenance expenditure rate [+]
  •  θ = housing mortgage subsidies / tax breaks[-]
  •  pt = property tax rate [+/-]
  •  tc = annualised transactions costs [+]
  •  λ/μ = credit market constraints [+]
  • phe = expected (housing) nominal rate of capital gains [-] where (phe = ge + π) and

                       o π = general inflation rate [-]
                       o ge = expected (housing) real rate of capital gains [-]

 

Did you spot it? It is the phe bit- in particular ge. Put into layman’s language it means that the imputed costs of owning a house are significantly influenced by the expectation of capital appreciation or as we said above, the chances of selling “at a profit in the future”.

 

The vast majority viewed the likelihood of house prices going up as pretty assured and this would have been based on what they, and their parents, had experienced themselves. Thus the cost of owning, albeit often initially higher in actual terms, was seen as far better than renting because of the hoped-for investment gains.

 

 

Take a look at this chart of house price inflation from Nationwide. For a prolonged period from post war to 1989 prices had risen steadily. There was a fall and stagnation through the early 1990’s following recession (which partly put to bed the long vaunted idea that residential values never fall) but this then fuelled the huge growth through to 2007.

 

So this expectation of a significant investment return, over and above the simple utility of having a place to live, coloured decision making throughout the last 50 years. John German at Invesco has often said that their research shows the residential rental market to be quite rational but that the residential capital market has the ability to defy logic at times, often when phe is coming in to play.

 

Take the recent situation where many Central London schemes were valued at a level that means the rent achievable equated to a yield of maybe less than 2.5%, but canny BTR operators would not bid much below 4.5% for similar property in the location. John’s theory suggests the rent being paid is properly reflecting the location and quality of the apartment but its price is putting a serious premium on its value as an investment. Clearly other factors like phe come in to play compounded by the influence of foreign investors seeing it as a store of wealth and using different target rates, borrowing rates and even currency gambles.

 

So why the rise in renting – is it just a reaction to those high prices?

 

Renting as a choice is on the rise. Consultants PwC argue that there will be a shift in London from 60/40 in favour of owning in the year 2000 to 60/40 in favour of renting by 2025.

High prices clearly play an important part, probably best indicated by this chart of Affordability taking into account the cost of buying a house and household income. Whilst at a high level, the market is not at an extreme so there are clear secular trends at play.

 

 

These underlying trends are powerful. Society, especially in developed countries, is changing from a materialist to experiential consumer; it is not about owning things but about great experiences. If renting means I can afford to live in a better apartment than the one that I can afford to buy, why wouldn’t I make that choice? We have embraced the sharing economy and are now more comfortable to share with people rather than own in everything from music and videos through to cars and workspace. This has brought a willingness to have amenity outside the confines of our own living space and has allowed us to trade “space for place” so that one advantage of not owning might be the ability to rent a smaller apartment in a far more attractive location.

 

The search for experience and flexibility to work remotely has created the digital nomad or even the “figital” nomad as my typo just delivered! Someone who is willing to take, or maybe even searching for, opportunities to work in different locations, unencumbered by ownership.

 

On top of these, add a general urbanisation of the population with a new found desire to live centrally in cities rather than the earlier drift to the suburbs and rural areas driven both by the positives of more access to experience through culture and entertainment and the avoidance of a long and tiresome commute. The sea-change in demographics that is delivering a population that is no longer dominated by family units with a number of kids but now has over two-thirds of households without children and many more single occupiers both young and old.

 

This is delivering a consumer base that requires a whole lot more choice than the conventional volume-built family home and whose predisposition to the mortgage is far from guaranteed.

 

Renting for Life

 

So what can rental markets offer? In essence, a solution for life; both in terms of space that can suit the wants and needs of individuals at all stages of their life and in terms of the style of life they may wish to follow.

 

Purpose-built student housing is now a recognised part of the property landscape. Colleges often supplement their own stock with direct relationships with independent operators. The standard of accommodation is good and rent is often higher than an equivalent room in a shared house. Higher quality options with larger room sizes and more amenity are common, usually chasing wealthier older or foreign students.

 

Bolstered by this positive experience, students will naturally consider extending their stay of tenure in the collegiate style and look at co-living options. These offer very small apartments but considerable shared amenity space in central locations where the development of strong community in the schemes is actively promoted. Operators like The Collective have proved that this kind of offer has wide appeal across the age groups, not just the young.

 

The next progression is to the Build to Rent market. We now change from rooms to units ranging from studios to 4-bed apartments able to accommodate individuals, sharers and families. Whilst many originally envisaged these only suiting Millennials, the experience of the earlier operators has shown that BTR has wide appeal across age groups and interestingly has attracted many ”millennial-minded” older people. In the States, the market has developed the idea of age-restricted multifamily schemes to appeal to those that prefer the idea of a scheme designed to the needs of their generation. In reality, the typology of the building is pretty similar but the amenity component can be increased and charged for and maybe additional sensing can be built in to monitor the health of individual residents.

 

There is an argument that suburban semi offers a better solution to many bringing up families where the private garden, greater space and independent living is preferable. Maybe, but these families can now take advantage of new villages provided by innovative operators like Sigma Capital Group who have delivered nearly 5,000 family units through the PRS REIT plc.

 

 

Geraghty Taylor has created a very adaptable solution for the next-generation family home called LivinHome.

The concept is simple; a typology which can accommodate different lifestyle requirements through flexible and adaptable design. On a conventional basis, the home “chassis” can deliver a home for a small family with a connected rental unit. As the family grows, the rental unit is taken in for bedroom space but as the family matures and kids move out it may be re-configured to house elderly family members moving in. All of this achievable over a weekend! The BTR industry is fascinated by the application of this design to help de-risk unit mix decisions where these are no longer literally set in concrete on day one but can adapt to the experience of marketing and to changes in the market over time.

 

The next step from suburban BTR might be back in to its urban counterpart as the children move away. Or it could be a first step onto the Senior Living continuum. In America, AEW’s Research team have set out a “Continuum of Care” which stretches from age-restricted multifamily through Independent Living and Assisted Living to Memory Care and Nursing Care. The provision of new senior housing has overtaken nursing care provision and the general picture is one of providing desirable facilities for active seniors. They identify that 13% of USA’s 80+ population are occupying independent living or assisted living in private paying accommodation and why wouldn’t they when amenity in the building can represent as much as 30% of the floors space and include several high class restaurants, fitness facilities and almost certainly a bar to cater for their life-long passion for a drink.

 

This compares to less than 5% of the UK’s 80+s where the attitude is to avoid care at all cost. Just to match the US percentage, we would need to build 260,000+ units. But the number of seniors over 85 is set to treble over the next 30 years so there is a clear need for new rental solutions.

 

Where does the value lie?

 

Delivering a product that meets the wants and needs of the occupier, whatever age, is the key to creating happy customers. Flexibility of approach and provision of new and changing amenity as needs evolve is essential for retention, as well as maintaining income in a competitive consumer market. Has the nascent UK industry really embraced the fact that creating this user experience is where value lies and not in the physical asset itself?

 

Modern data capture and use of clever Proptech can inform the owner about the use of the building and help with adaptation and changes as long as the original structure is flexible enough to allow this.

 

So what have we lost by ditching the mortgage?

 

To come back to where we started, the case for renting to achieve “a life less ordinary” has been argued strongly but won’t we miss out financially?

As a renter you will retain your large deposit and possibly have some extra income that would have funded the higher mortgage cost to rent a better experience or invest. This can go in to the wider investment market or maybe into assets offering the old-world appeal of property.

There is no reason why a Sigma Capital occupier should not invest that deposit in the shares of the UK PRS REIT. This would offer exposure to a wider portfolio of assets just like the home they occupy. We may in the future see scheme-specific offerings through new exchanges like IPSX.

 

Operators themselves may bring forward clever schemes related to their own buildings to help with funding and to deliver a sense of ownership without losing any management control.

 

Maybe even clever futures products could deliver the income and capital gain from a house price index to retail customers, similar to those available to institutional investors on the Nationwide index.

 

An Englishman’s home can still be his castle; he just doesn’t have to own it anymore.

 

 

Geraghty Taylor creates differently and inventively develops new products to meet changing market requirements.

 

#BTR #BuildtoRent #Brand #Brandbeforebuilding

An investment opportunity not to be missed!

 

Imagine, if you will, the average Brit being approached in the street by someone offering an amazing investment opportunity that has apparently worked for thousands in the past. It could make you a small fortune and give you enough money to retire on. And it’s not Bitcoin!

 

But to participate you have to invest the lion's share of your life's savings and take out the biggest loan you can afford on your current income to invest in the scheme. You won't receive any income or dividend from this investment and your success depends on you personally selling the investment at a profit in the future. Of course, he goes on to explain that your investment is at risk if values go down. In fact, you could lose the whole investment and ruin your credit rating but at least your other assets are safe (unlike in America!) Oh, and the name of this investment is a mortgage or "death pledge" as it translates in old Norman legal French from where it originates. Appealing?

 

You can just imagine the pennywise British queuing up for this investment can't you? Well we did! In fact by 2003, over 70% of the British population lived in a home that was secured on such a mortgage.

 

There’s money in property

 

Clearly something was driving this stampede towards the biggest financial risk that the majority of those involved had ever taken on in their lives.

 

The answer, we are reliably informed by Dr. Mark Andrew of Cass Business School, is explained by the Standard Housing Arbitrage Condition formula; see if you can spot it.

 

UCC=(1-θ)r+δ+tc+pt–phe+λ/μ

Where the user cost of owning a house (UCC) is determined by:

 

  •  r = mortgage interest rate [+]
  •  δ = depreciation/maintenance expenditure rate [+]
  •  θ = housing mortgage subsidies / tax breaks[-]
  •  pt = property tax rate [+/-]
  •  tc = annualised transactions costs [+]
  •  λ/μ = credit market constraints [+]
  • phe = expected (housing) nominal rate of capital gains [-] where (phe = ge + π) and

                       o π = general inflation rate [-]
                       o ge = expected (housing) real rate of capital gains [-]

 

Did you spot it? It is the phe bit- in particular ge. Put into layman’s language it means that the imputed costs of owning a house are significantly influenced by the expectation of capital appreciation or as we said above, the chances of selling “at a profit in the future”.

 

The vast majority viewed the likelihood of house prices going up as pretty assured and this would have been based on what they, and their parents, had experienced themselves. Thus the cost of owning, albeit often initially higher in actual terms, was seen as far better than renting because of the hoped-for investment gains.

 

 

Take a look at this chart of house price inflation from Nationwide. For a prolonged period from post war to 1989 prices had risen steadily. There was a fall and stagnation through the early 1990’s following recession (which partly put to bed the long vaunted idea that residential values never fall) but this then fuelled the huge growth through to 2007.

 

So this expectation of a significant investment return, over and above the simple utility of having a place to live, coloured decision making throughout the last 50 years. John German at Invesco has often said that their research shows the residential rental market to be quite rational but that the residential capital market has the ability to defy logic at times, often when phe is coming in to play.

 

The recent situation where many Central London schemes were valued at a level that means the rent achievable equated to a yield of maybe less than 2.5%, but canny BTR operators would not bid much below 4.5% for similar property in the location. John’s theory suggests the rent being paid is properly reflecting the location and quality of the apartment but its price is putting a serious premium on its value as an investment. Clearly other factors like phe come in to play compounded by the influence of foreign investors seeing it as a store of wealth and using different target rates, borrowing rates and even currency gambles.

 

So why the rise in renting – is it just a reaction to those high prices?

 

Renting as a choice is on the rise. Consultants PwC argue that there will be a shift in London from 60/40 in favour of owning in the year 2000 to 60/40 in favour of renting by 2025.

High prices clearly play an important part, probably best indicated by this chart of Affordability taking into account the cost of buying a house and household income. Whilst at a high level, the market is not at an extreme so there are clear secular trends at play.

 

 

These underlying trends are powerful. Society, especially in developed countries, is changing from a materialist to experiential consumer; it is not about owning things but about great experiences. If renting means I can afford to live in a better apartment than the one that I can afford to buy, why wouldn’t I make that choice? We have embraced the sharing economy and are now more comfortable to share with people rather than own in everything from music and videos through to cars and workspace. This has brought a willingness to have amenity outside the confines of our own living space and has allowed us to trade “space for place” so that one advantage of not owning might be the ability to rent a smaller apartment in a far more attractive location.

 

The search for experience and flexibility to work remotely has created the digital nomad or even the “figital” nomad as my typo just delivered! Someone who is willing to take, or maybe even searching for, opportunities to work in different locations, unencumbered by ownership.

 

On top of these, add a general urbanisation of the population with a new found desire to live centrally in cities rather than the earlier drift to the suburbs and rural areas driven both by the positives of more access to experience through culture and entertainment and the avoidance of a long and tiresome commute. And remember the sea-change in demographics that is delivering a population that is no longer dominated by family units with a number of kids but now has over two-thirds of households without children and many more single occupiers both young and old.

 

This is delivering a consumer base that requires a whole lot more choice than the conventional volume-built family home and whose predisposition to the mortgage is far from guaranteed.

 

Renting for Life

 

So what can rental markets offer? In essence, a solution for life; both in terms of space that can suit the wants and needs of individuals at all stages of their life and in terms of the style of life they may wish to follow.

 

Purpose-built student housing is now a recognised part of the property landscape. Colleges often supplement their own stock with direct relationships with independent operators. The standard of accommodation is good and rent is often higher than an equivalent room in a shared house. Higher quality options with larger room sizes and more amenity are common, usually chasing wealthier older or foreign students.

 

Bolstered by this positive experience, students will naturally consider extending their stay of tenure in the collegiate style and look at co-living options. These offer very small apartments but considerable shared amenity space in central locations where the development of strong community in the schemes is actively promoted. Operators like The Collective have proved that this kind of offer has wide appeal across the age groups, not just the young.

 

The next progression is to the Build to Rent market. We now change from rooms to units ranging from studios to 4-bed apartments able to accommodate individuals, sharers and families. Whilst many originally envisaged these only suiting Millennials, the experience of the earlier operators has shown that BTR has wide appeal across age groups and interestingly has attracted many ”millennial-minded” older people. In the States, the market has developed the idea of age-restricted multifamily schemes to appeal to those that prefer the idea of a scheme designed to the needs of their generation. In reality, the typology of the building is pretty similar but the amenity component can be increased and charged for and maybe additional sensing can be built in to monitor the health of individual residents.

 

There is an argument that the suburban semi offers a better solution to many bringing up families where the private garden, greater space and independent living is preferable. Maybe, but these families can now take advantage of new villages provided by innovative operators like Sigma Capital Group who have delivered nearly 5,000 family units through the PRS REIT plc.

 

 

Geraghty Taylor has created a very adaptable solution for the next-generation family home called LivinHome.

The concept is simple; a typology which can accommodate different lifestyle requirements through flexible and adaptable design. On a conventional basis, the home “chassis” can deliver a home for a small family with a connected rental unit. As the family grows, the rental unit is taken in for bedroom space but as the family matures and kids move out it may be re-configured to house elderly family members moving in. All of this achievable over a weekend. The BTR industry is fascinated by the application of this design, helping tp de-risk unit mix decisions where these are no longer literally set in concrete on day one, but can adapt to the experience of marketing and to changes in the market over time.

 

The next step from suburban BTR might be back in to its urban counterpart as the children move away. Or it could be a first step onto the Senior Living continuum. In America, AEW’s Research team have set out a “Continuum of Care” which stretches from age-restricted multifamily through Independent Living and Assisted Living to Memory Care and Nursing Care. The provision of new senior housing has overtaken nursing care provision and the general picture is one of providing desirable facilities for active seniors. They identify that 13% of USA’s 80+ population are occupying independent living or assisted living in private paying accommodation and why wouldn’t they when amenity in the building can represent as much as 30% of the floors space and include several high class restaurants, fitness facilities and almost certainly a bar to cater for their life-long passion for a drink.

 

This compares to less than 5% of the UK’s 80+s where the attitude is to avoid care at all cost. Just to match the US percentage, we would need to build 260,000+ units. But the number of seniors over 85 is set to treble over the next 30 years so there is a clear need for new rental solutions.

 

Where does the value lie?

 

Delivering a product that meets the wants and needs of the occupier, whatever age, is the key to creating happy customers. Flexibility of approach and provision of new and changing amenity as needs evolve is essential for retention, as well as maintaining income in a competitive consumer market. Has the nascent UK industry really embraced the fact that creating this user experience is where value lies and not in the physical asset itself?

 

Modern data capture and use of clever Proptech can inform the owner about the use of the building and help with adaptation and changes as long as the original structure is flexible enough to allow this.

 

So what have we lost by ditching the mortgage?

 

To come back to where we started, the case for renting to achieve “a life less ordinary” has been argued strongly but won’t we miss out financially?

Well, remember, as a renter you will retain your large deposit and possibly have some extra income that would have funded the higher mortgage cost to rent a better experience or invest. This can go in to the wider investment market or maybe into assets offering the old-world appeal of property.

There is no reason why a Sigma Capital occupier should not invest that deposit in the shares of the UK PRS REIT. This would offer exposure to a wider portfolio of assets just like the home they occupy. We may in the future see scheme-specific offerings through new exchanges like IPSX.

 

Operators themselves may bring forward clever schemes related to their own buildings to help with funding and to deliver a sense of ownership without losing any management control.

 

Maybe even clever futures products could deliver the income and capital gain from a house price index to retail customers, similar to those available to institutional investors on the Nationwide index.

 

An Englishman’s home can still be his castle; he just doesn’t have to own it anymore.

 

 

Geraghty Taylor creates differently and inventively develops new products to meet changing market requirements.

 

#BTR #BuildtoRent #Brand #Brandbeforebuilding