MIPIM Day 4: Housing the World

RESIDENTIAL INVESTMENT PORTFOLIO – THE BEST IS YET TO COME

Five panelists met to discuss the residential investment portfolio and the effects of supply and demand on rents in their respective cities.

Panelists agree that the residential market is now a major asset class and provides stability as part of an investment portfolio. The market is not providing high income yields in most cities, but according to Mahdi Mokrane, the Head of European Research and Strategy at LaSalle, institutional demand for residential real estate is growing because investors want stability, capital preservation and diversification.

Bruce Ritchie of Residential Land agreed. A recent stream of regulatory changes in London makes real estate an unpredictable investment. This is a big problem for investors. “Stability would be more useful”, admits Ritchie.

Ritchie adds, foreign investment in new construction is driving up sales prices for local residents. Most of the money has historically come from Singapore and Hong Kong. This may change as these particular markets are slowing down and institutional interest in PRS is growing.

Although homes have been predominantly owner occupied in European cities, the climate is changing to resemble the American model. A lack of supply is driving up sale prices and rents, thus decreasing the owner occupancy ratios. 80% of New Yorkers rent, according to James Kinsey of Kinsey Capital, LLC. Although the percentage is not as high in Europe, the numbers are headed in that direction.

The middle class is being affected most by lack of housing supply and rent control. In some cities such as Paris and New York, the middle class cannot afford to pay exorbitant rents but they are too rich to be eligible for social housing. According to Silvio Estienne of PATRIZIA in Paris, the SNI Group raised €2bn to buy property from developers in order to address the issue of housing for the middle class.

All panelists agreed that of all the asset classes, residential real estate is a safe and stable investment attracting institutional interest. Despite low yields, Kinsey states, “If I had $100m to invest, I’d buy a few well placed multi-family assets in Manhattan”.

The Netherlands was mentioned several times as a city to watch for residential growth. Other considerations to watch for when investing in residential real estate include transport infrastructure and demographics.

 

STUDENT HOUSING: A NICHE WITH GROWTH POTENTIAL

Student housing is a specialised asset class in the US and becoming more prominent of a market in the UK. Strong and growing demand in many countries, driven by the increase in international students, including in China and much of Europe, is supporting this trend.  Foreign students especially want turnkey ready units with furniture, telephone, internet, etc. Common area kitchens and open collaborative workrooms are highly desirable. Higher end units often come with private bedrooms and baths.  Providing micro-sized units keeps prices down for those students on a tighter budget.

The panel discussion on student housing started with an introduction from Nathan Goddard of Student.com, the largest online platform for student housing supporting 120 different nationalities globally. Student.com has a presence in 20 countries and 400 markets, with its 5 largest markets being the United Kingdom, France, Germany, Australia and United States. “Purpose built” housing makes up between 3%-7% of the current student-housing inventory in these countries. Goddard says the goal is to continue to grow the global demand market and move into new supply markets.

Horst Lieber, CEO of International Campus AG in Germany commented that flexibility of unit mix is a key factor and trend in student housing. The new model for this market is shifting away from the typical shared accommodations. International Campus AG offers all levels of housing products, whether it’s the basic schemes and fully furnished apartments for price conscious students, to upgraded housing options for job starters and young professionals. With 2800 units currently under construction, inventory is expected to reach 8000 units by 2020.

Victor Lor of GSA Investment Management representing the Asian market, said: “Education is the number 1 non-commodity contributing sector to GDP”. Student housing is growing in Australia and will continue to evolve for the next 7-10 years. Japan and China are still untapped markets with vast potential. Micro trends in international politics are not expected to disrupt the growth of this growing niche market.

James Lee of Kensington Realty Advisors said student housing in the US is truly its own asset class. With university acceptance rates rising from 47% to almost 75% in recent years, the outlook for this market is bright. Lee admits that demand for amenities is getting out of control, however, the number 1 requirement for students in housing facilities is reliable hi-speed internet, while parents want value, but, will pay more to ensure their children are safe. Pure and simple for investors, is that they desire and require cash-flow. Although the student housing market is growing, the yield is only 25 basis points above multi-family. However, if amenities are provided to satisfy both students and parents, cash-flow will continue to perform and attract investors.

All panelists agreed that online learning poses a risk to the growth of student housing. However, with international students at the core of this market, the growth of online learning may have little impact since it cannot substitute the social experience of a traditional campus environment.

 

METROPOLITAN CITIES: ARE HOUSING NEEDS AND DEMANDS ALIGNED?

Ariella Masboungi, Architect and Urban Planner, Conseil General du Developpement Durable in France, moderated a panel of real estate professionals from Manchester UK and Bologna, Italy. She posed many questions: When demand for housing is significantly outpacing supply, what can cities do to face the challenges? What are the qualitative and quantitative impacts on cities as they respond to these challenges? How do cities transform in order to achieve social equality while still maintaining their overall attractiveness? And, how do we anticipate future housing needs?

Chiara Caselgrande, Vice President of Bologna’s municipal council, started the conversation by explaining how Bologna has evolved from a distressed city to a vibrant town. By focusing on “community”, the stigma has changed dramatically. 20,000 units of social housing are occupied by 50,000 tenants, not all of them Italian, demonstrating that the city is attracting residents from outside the local area.

“We want everyone to feel like they belong there”, said Caselgrande. By investing in infrastructure open space, art and design, Bologna is effectively binding the neighborhood. 40 kilometres of porticos make it easier for residents to walk throughout the city, rain or shine. And, restricting the number of cars and parking spots while improving bike paths, have made the city less dangerous for pedestrians and bicyclists. These changes have made altered the way people live in Bologna, thereby attracting and retaining a new and growing demographic.

These changes come at an expense. However, Bologna has successfully developed public-private partnerships not only for new construction, but rehabilitation of existing properties, where 70% is paid through private funds.

Ian Boylan, of Manchester City Council is focused on enhancing the city centre. Past city planners and poor city management damaged the city for years. He says they’ve “…moved forward and changed the nature of the housing offer, but still have a long journey ahead…”

Manchester has invigorated the city by repurposing existing historic structures, factories and mills. The city has also rehabilitated thousands of dysfunctional social housing units and made significant investments in infrastructure. Boylan emphasised that Manchester is a university town, and because of this, demographics change every five years. It is important to revive the city to appeal to the general public while still maintaining affordability for students, middle class and elderly. Even with these improvements and attention to affordability, “affordable housing” is only 20% less expensive than market rate.

Both panelists agree that housing affordability will continue to be a hot issue to contend with as the population continues to grow. Additionally, housing for the aging population must be a priority as this demographic is expected to grow to 60% in Manchester in the coming years.

About Author

Michelle Muñiz

Michelle Muñiz is a former real estate agent licensed in Virginia. She has almost 20 years experience in residential real estate investments and property management. In 2006, Michelle opened her own property management firm focusing on military relocation. She now owns and manages property in 5 states. As a graduate student at the University of San Diego’s MSRE program, Michelle hopes to grow her knowledge in commercial real estate finance and investments to expand her portfolio to include multi-family assets.

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