Investors are coming round to the idea of creating blended living communities, in a bid to create portfolios of residential accommodation with a truly mixed risk and return profile. The concept is already in effect in some US developments, and there is now a growing appetite in Europe.
In a recent white paper, Investec posed the concept of a new “living” asset class – incorporating private rented sector, student accommodation, retirement living, co-living and serviced apartments. It notes an evolving interest in buildings with “beds for rent”, modelling in some ways on the US market, but taking the model a stage further.
The investment case for blended living means drawing together returns from markets with differing return and risk profiles, and cycle timings. Student accommodation is perceived as offering a better return than build to rent, albeit the latter has a greater pool of potential customers, for example. Retirement living accommodation has a stronger operational element, and while currently undersupplied, offers promise that many investors view as highly attractive.
“I think it’s time to challenge the traditional approach to residential real estate investment and explore the idea that there are commonalities, and so opportunities, across all rental segments,” said Mark Bladon, who heads structured property finance at Investec.
“The investment thesis and the underlying structural shifts are clear to see. So too is the demand from occupants and investors. But whether institutional purchasers are willing to put their stock into a new investment framework – I hope they are – is a different question altogether.”
Investec is not alone in viewing with interest, the idea of investing in blended developments. Justin Curlow, global head of research at AXA IM told the report’s authors: “The investment case for a blended investment model has been pretty well proven in the US.”
Non profit think tank The Class of 2020 has also pushed forward the idea of blended living developments in Europe. Applying the title to projects that combine student living, co-living space and hotel accommodation, it points to European leaders including The Student Hotel, Greystar and Collegiate. “Blended living offers a rapidly expanding investment opportunity and is emerging as a possible solution in urban living for young people shut out of traditional home ownership and rental markets by sky-high prices and rents,” said Class of 2020 managing director Yoony Kim. “The segment provides cities with ways to address their growing housing crisis and a way to attract and retain talent.”
The UK market has some challenges not present in the US. One of these is obtaining sites at scale, with space for a variety of models to sit alongside one another in a single, major development. Culturally, the UK’s desire to own a home has hindered change, though this is now reducing: in a decade from 2007, home ownership fell from 73.3% to 63.4%. Investec says global institutions will need to find a way to penetrate the UK market.
With a more established and mature market, US operators are strong on amenities – something UK customers will not be prepared to pay a premium for, in the early days of establishment of the market. Conversely, the student accommodation market is considered to be more mature in the UK – yet it is also more strongly staked out by institutional investors. But, with year-long contracts, there is less ability to react to the market, compared with a multilet private rental block, which could see regular move-ins and departures.
Developing at scale also promises operational efficiencies, and will give those running properties the opportunity to mix support-heavy elements, with those that demand less in the way of support services. “As soon as you put an operational component on top, I would suggest a risk premium is warranted,” said AXA’s Curlow.
HA Perspective [by Chris Bown]: Blended living seems like a good idea, but….. Challenges include assembling suitably scaled sites, and breaking the UK cycle where housebuilding companies grab residential development land, and build houses purely for sale.
Probably the nearest example we have to date, is Quintain’s Wembley development. There, thanks to having big scale, and taking the time to finesse the development, the company has created a range of built to rent offerings, housing students, young couples and families with children. It’s still being developed, and is still evolving – and they’ve yet to consider adding a retirement home element.
One potential lever that could be pulled to encourage blended living schemes, is in the hands of the UK’s local planning authorities. Some are woefully out of date, failing to even consider provision for elder living; most are well versed in strong arming private housebuilders to contribute to “affordable housing” – subsidising the development of sub-market rental housing. If they start to demand major new housing schemes have rental, elder and student elements, alongside the default little houses for sale, then that would be a great first step – and the investors will fall into line. There are a few examples of this, such as Cooper’s Hill, in Englefield Green, Surrey, where student accommodation, private and affordable housing and retirement accommodation are all co-located, but these are often more by accident than design, and are rarely truly co-ordinated.
Additional comment [by Andrew Sangster]: If there is one thing positive to come out from this crisis for real estate owners it is the hope that governments see the need to be flexible when it comes to planning use.
Previous restrictions seem hopelessly out of date in times of crisis. In the UK, for example, restaurants and pubs have been prevented from operating as takeaways. These rules have been suspended during the crisis. It may well be difficult for the authorities to roll back such concessions.
It has looked for some time that historic planning restrictions were under pressure. In the new, post-crisis world, there will be the opportunity to redraft what is, and is not, permissible. Authorities need to seize the chance to construct a more rational regime.