The shortage of low-cost housing is now a pressing issue worldwide. Resolving this problem could provide a huge boost for social cohesion and economic productivity. It could also meet the return requirements of long-term investors.
A lack of living space
Low-cost housing is in short supply in cities in North America, Europe and Asia. Not only are insufficient houses being built, but countries are also not buildings the right type of homes. Although the number of new dwellings has been in decline since the mid-1970s, low-cost housing now accounts for less than 15% of the total, compared with nearly 25% in 1991. Any potential resolution of the problem should involve a considerable amount of investment, probably from sources not typically associated with the sector.
Meanwhile, large pools of pension-fund and insurance-company capital are searching for long-term investments that can provide stable incomes to meet long-term liabilities. Our experience of managing rented residential properties across Europe suggests that these properties can provide stable and durable incomes.
Residential tenants in Germany typically stay for between eight to 10 years. Not only are there benefits from residents seeing their apartment as a home, but this longer duration of stay also assists with operational management efficiency and provides a better rental structure.
The rule of three
So we have a problem – a critical shortage of affordable housing – and a solution – utilizing a pool of long-term capital. But to put these together, we also need rental-property operators with day-to-day experience of managing low-cost housing. These include housing associations and local authorities.
So we have a problem – a critical shortage of affordable housing – and a solution – utilizing a pool of long-term capital
Operators and investors have complementary roles to play in solving the problem of low-cost housing. Operators bring experience of managing properties but need to bolster or diversify their sources of capital.
Meanwhile, investors need to deploy their capital but lack experience in managing assets. “Asset-light” models that combine one entity’s capital with another’s expertise are already well established in other UK real estate sectors such as hotels, supermarkets and student housing.
But a third party must be included too. Government involvement is vital to provide the public-policy framework needed to make progress. Housing policies that lean towards a private-ownership model have philosophical merits, but they can inflate pricing and exacerbate conditions for those in need of low-cost housing.
The economics of constructing and managing lower-cost housing imply that some form of government subsidy is required, but the UK is currently spending £28 billion ($37.2 billion) a year on housing benefit. The increasing relevance of the topic to voters may help them to convince policy-makers that more action is needed.
Building a solution
Such government support could take the form of selling part of the public estate of land. The windfall gains from such sales and the subsequent impact on government finances certainly need to be considered, but a worthwhile compromise might be found between the cost of the land and the value of the solution.
The residential units would be purpose-built blocks, using modern construction techniques. As they would be permanently for rent and not subject to disaggregation through schemes which permit private ownership, this would lead to real economies of scale.
We have seen this while managing entire blocks of flats for German residential investments. Nor would it be in the long-term investors’ interests to break up the residential blocks as such housing can more easily be managed for its long-term income – hence ensuring a large pool of prospective investors. It should be noted that that UK real estate has already attracted capital from the U.S., Canada and the Netherlands, all markets where institutional residential rental models are more advanced.
Finance for such investment would probably involve a private-markets model. For example, capital from pension funds and insurance companies could be used to finance diversified purchases of residential blocks from housing associations. The housing associations would continue to manage the tenants, with the rental income, on an inflation-plus basis, returned to the long-term investor over a period of 10 to 15 years.
The issues are complex, and there is no one-size-fits-all solution. However, we believe that real estate managers, long-term capital owners, housing associations, and local and central government could profitably combine their resources to address a longstanding problem in the housing sector, both in the UK and in many other countries.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks may be enhanced in emerging markets countries.
Property investments may carry additional risk of loss due to the nature and volatility of the underlying investments and may not be available for investment by investors unless the investor meets certain regulatory requirements. In considering the prior performance information contained herein, potential investors should bear in mind that past performance is not necessarily indicative of future results, and there can be no assurance that such investments will achieve comparable results.