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The impact of Covid-19

In recent years, particularly in the current low-interest-rate environment, the demand for exposure to real estate as part of a diversified portfolio has grown.

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65%
Of investors either agree or strongly agree that Covid-19 has permanently altered the UK ‘beds for rent’ outlook

However, a defining feature of Covid-19 has been the unprecedented disruption to what were considered the traditional real estate sectors, which has translated into a major shift in investors’ current and future attitudes to real estate allocation.

 

The acceleration of structural trends led by the move to online has put even more pressure on what was already an ailing retail sector, with knock-on effects for where people choose to live.

 

At the same time, the search for yield continues to be a defining characteristic for a large proportion of real estate investors. “Ultimately investors want to take as little risk as possible and achieve as high a return as possible. They want safe, secure, inflation-linked income returns, even more so now than pre-Covid and before the Global Financial Crisis in 2008, especially real estate investors”, said Charles Ferguson-Davie, CIO at Moorfield. 

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Charles Ferguson-Davie, CIO, Moorfield

Ultimately investors want to take as little risk as possible and achieve as high a return as possible. They want safe, secure, inflation-linked income returns, even more so now than pre-Covid and before the Global Financial Crisis in 2008, especially real estate investors

While the ‘beds for rent’ sector was becoming an increasingly prominent asset class before the pandemic, the defensive characteristics it has displayed during the last year have turbocharged its appeal. Higher rates of both occupancy and rent collection, coupled with investors’ growing comfort level with exposure to operational real estate, have fundamentally changed how the sector is perceived.

 

Our research reveals that 65% of investors either agree or strongly agree that Covid-19 has permanently altered the UK ‘beds for rent’ outlook. 

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85%
Of investors are expecting to either increase or maintain their portfolio allocation towards the 'living' sector over the next 10 years

Alex Greaves, Head of Residential at M&G, was in no doubt that this was a watershed moment for the sector. “I’ve spent the last 10 years talking to investors about the robust nature and defensive qualities of the residential asset classes.

 

“Look at what happened with the 90s and noughties crashes, and now we have another crisis. We’ve seen rent collection stats at 95% plus, which versus other asset classes speaks for itself.”

 

Any questions that this is merely a temporary, Covid-19 led shift are dispelled by the research. 85% of investors are expecting to either increase or maintain their portfolio allocation towards the ‘Living’ sector over the next 10 years, versus just 58% for office and less than half for retail (46%).

 

Overall, investors are three times more likely to increase their exposure to the ‘Living’ sector in the same period versus the office sector and almost four times more likely versus the retail sector.

 

According to JLL’s Head of Living Simon Scott, “Investment volumes are only going to grow. There is a lot of focus on logistics as being the most attractive asset class, but frankly it doesn’t offer the scale or diversification that the ‘Living’ sector offers.”

 

A further sign that the sector is increasingly viewed as mainstream is in its risk profile. Compared with the first Future Living report, the percentage of investors that consider the retirement living, build-to-rent (BTR), co-living and serviced apartment sectors particularly risky to invest in over the next five years have all decreased. 

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Simon Scott, Head of Living, JLL

Ultimately, the professionally managed private rental sector is only going one way, and I think we're only on the tip of that iceberg, in terms of the scale of investment and people reallocating from other sectors

With 77% of investors citing risk as the most important and influential criteria in their investment decision, the prospects are strong.

 

BTR, in particular, has enjoyed a meteoric rise in the two years since the publication of our inaugural research, with 13% more investors particularly optimistic about it over the next five years (up from 35% to 48%). “Ultimately, the professionally managed private rental sector is only going one way, and I think we’re only on the tip of that iceberg, in terms of the scale of investment and people reallocating from other sectors,” said Scott. 

The prospect of rising inflation looks set to further increase the sector’s appeal. “Inflation is now more of a topic post-Covid. We might see some inflation because of the various government support measures and it’s likely that central banks will let it run a little more than previously” added Ferguson-Davie.

 

“Some parts of the real estate world are better suited to track inflation: the only sector where rents have tracked inflation over the long term is residential.”

 

“The other sectors’ losses have been residential’s gain” surmised Greaves. Given that the risk and return profile continues to be considered the most important criteria upon investors’ decision making, Ferguson-Davie added a note of caution: “Investors currently want to be in the ‘Living’ sectors because, at present, they offer better risk/return dynamics. If that were to change, investors would switch. If in a post-Covid world there was a political, legislative or major societal shift, which might shift the desirability of the ‘Living’ sectors, then the situation could change.”  

Contact us

Mark Bladon

Head of Real Estate

Mark is Head of Real Estate lending responsible for over £1bn of loan assets, and specialises in providing development finance for industrial, residential and student accommodation projects across the capital stack.

Download the full Future Living II report

Beds for rent: The golden age