Michael Walton, Chief Executive, Rynda Property Investors
Social changes accelerated by Covid-19 are shaking the property investor community to its core, as the risks from investing in traditional ways increase. This is important to us all as a significant part of most of our pensions are invested in property.
Traditionally, offices and retail assets have been the focus of investors looking for a predictable income return with some capital growth over the medium term. While pension fund trustees may have varied the focus of their capital allocation between different countries, most of their real estate allocation would have been there.
The shift to internet shopping, most pronounced in the UK at over 30 per cent during the pandemic, has reduced the need for retail units – as is so clear in our high streets. Investors at best have seen a reduced level of rental income and at worst been faced with empty shops and liabilities for business rates, insurance and service charges. While these changes were evident pre-Covid, the pandemic has supercharged the change in demand.
Offices, while not wholly insulated from changes pre-Covid, have witnessed a fundamental change in risk perception during ‘the work at home if you can’ government edict to counter virus contagion. What two years ago was a comfortable trustee allocation to prime offices is now filled with doubt and risk – will your tenant’s business survive, and if it does will any or as much office space be needed? Even if your tenant does want to keep the offices, will values decline as a glut of office space becomes available and rental levels decline?
With these headwinds, it would be easy to assume that investors would simply turn away from property and invest in additional equity and fixed income strategies. However, such strategies are providing very low-income yields and are currently viewed as ‘fully valued’ – so alternative property uses have come into the spotlight, including residential properties, student accommodation, care homes and infrastructure assets.
But are these sensible investments? And what is driving long-term demand and supply?
Focusing on care homes and student accommodation, the driving force of demand is demographics. To quote from a recent Office for National Statistics report: ‘In mid-2016, there were 1.6 million people aged 85 years and over (2 per cent of the total population); by mid-2041 this is projected to double to 3.2 million (4 per cent of the population) and by 2066 to treble, by which time there will be 5.1 million people aged 85 years and over making up 7 per cent of the total UK population.’
Over the next decade, the number of 18- to 20-year-olds in the UK is set to expand considerably and this, combined with a significant overseas interest in British higher education, means growth in student numbers and an increasing need for student accommodation. Therefore, demographic fundamentals are likely to underpin steady real estate returns for investors in these two sectors – hence the investor focus.
Investing in these alternative use properties is not without risks. For instance, what type of care home or student accommodation will be required and in what parts of the country is demand the greatest?
If you are tempted to consider these sectors of the real estate market, make sure your advisers have access to deep research and that they thoroughly understand the basis on which students choose universities and care homes are selected for loved ones. Do they know that accommodation choices will vary from first-year to post-graduate students and what the difference is between ensuite rooms and wet rooms in care homes? Consider the costs and economies of scale of managing these assets and consider the development of a brand for enhanced investment returns. For care home investment, check out the demographics in a three-mile radius of the site to make sure there is not only demand but also a ready supply of staff for the home.
Question your advisers’ experience and, if possible, ensure they are personally co-investing with you so there is an alignment of interest. It is also important to recognise that, at times, not investing might be the right strategy. Many alternative sectors have limited opportunities to invest and are therefore prone to sharp price changes when several new investors all want to enter a market at once.
Care Homes and student accommodation are an important investment opportunity.