Resi to remain ‘the winner’ in real estate investment

The past year has been one of great turbulence for the UK’s living sectors, with economic instability including construction cost inflation, interest rate volatility, an election and regulatory change. These factors led to a dampening of investor sentiment and limited developer financing, resulting in a challenging market for transactions in the forward-funding space. Up until the third quarter of the year, investment into single-family homes led overall investment in the build-to-rent sector. According to Savills, SFH accounted for 50% of total investment as of October, at £2.4bn. The trend will continue into next year, as institutions such as Hines, Patrizia and Pension Insurance Corporation have plans to invest in the sub-sector. Cath Webster, chief executive of Thriving Investments, said: “2024 has been a busy year for Thriving Investments and one in which we’ve seen continued investor demand for our UK residential strategies, including our single family housing and discount market rental homes. “The year saw the UK government set housing targets to solve the country’s housing problem. It will take innovative and new approaches, as well as collaboration, to help the UK build at scale to meet these targets, and private capital is needed to help deliver that. In that vein, we recently announced a new partnership with Gresham House to create a new UK leading affordable housing fund management platform, a transformative partnership that will help us accelerate our ambitions in the shared ownership sector. “Affordability will remain a critical characteristic of the UK residential investment market in 2025. Investor interest in the residential sector is heightening with continued recognition of the urgent need of new housing supply, coupled with the social impact that housing, such as discounted rental products and shared ownership, can deliver.” BTR headwinds As for multifamily BTR, viability proved to be a hurdle due to elevated debt and construction costs, as well as the Building Safety Act. Mike Dodd, development director at Socius, said: “Over the past year the sector has experienced some headwinds, such as construction cost inflation and rising interest rates, limiting developer financing and mortgage availability, and a dampening of investor sentiment. The industry has also been navigating structural shifts in both policy and regulation, such as the Building Safety Act, which has added a layer of complexity to development projects. “However, we now have a new Labour government, which appears to be pro-development and pro-growth. The government’s headline of delivering 1.5m homes over the next parliament is a positive ambition which we support, but we shouldn’t underestimate the challenge that delivering at this scale will be for the industry. “Going into 2025, the outlook is cautiously optimistic with a real appetite to get building again. There are genuine reasons to feel positive, with inflation seemingly back under control and interest rates potentially peaking, we are seeing a return in investor confidence and plenty of capital to deploy. However, we do urgently need to prioritise the skills gap in the construction industry to ensure we have the supply chain required to build the infrastructure and housing we sorely need. I would like to see the government investing a lot more in construction skills and training, and to really incentivise people back into the industry.” Ben Pile, head of European residential investment and asset management at Barings, said: “The UK residential market in 2025 presents both opportunities and challenges. Demand remains strong, driven by urbanisation, rising numbers of single-person households, and ongoing immigration. These trends create significant investment opportunities, particularly in key urban areas. However, rising construction costs and tighter financial conditions continue to strain viability and achieving planning is not straightforward. “Navigating the Building Safety Act will be another key priority in 2025. While safety is crucial, the additional regulatory gateways will require time and resources, making compliance a top priority for developers and investors alike. Industry collaboration and clear guidance from the government will be key. While challenges remain, the sector’s strong fundamentals and adaptability will play a critical role in addressing these hurdles and capturing the opportunities that lie ahead.” However, 2024 saw a rise in the trade of operational multifamily BTR which proves the trade-ability and long-term viability of the sector. EG discussed the emergence of the trend at length in its roundtable in September.  Alex Taylor, head of Telford Living: “There are exciting opportunities for the living sector as we head into 2025 across a range of strategies. That’s a result of near universal demand on a range of tenures, significant investor appetite to increase allocations to living, and what may come through an improved economic environment and the government’s desire to boost housebuilding. Challenges exist, such as rising costs, gateway complexities and existing planning regulations, but these combined with the tailwinds just mean there are selective, but highly compelling, opportunities. “PBSA will remain a cornerstone of the UK living sector. In a flight to quality, schemes in Russell Group universities in particular will lead the way. Mid-market BTR remains among the most attractive asset classes for investors in the longer term, offering a stable income profile and scalability. Meanwhile, co-living is starting to play a growing, albeit selective, role in cities like London. “To unlock the opportunities in living, we need to see an emerging trend continue: namely, partnerships between investors and developers where risks and rewards are more evenly spread. The traditional forward-funding model has become less viable. Meanwhile, we should see more mixed-use, larger regeneration schemes which appeal to investors by reducing exposure to any single product type or excessive asset size. They’re complex to deliver but, for a developer like Telford Living with a strong track record, eminently possible.” Student digs Investment into purpose-built student accommodation has so far been sustained from a single large-scale transaction in which Singapore-based Mapletree acquired the Cuscaden Peak Portfolio. Other than this portfolio trading, the sector has seen various smaller deals trade with lot sizes of less than £50m. In another EG roundtable on PBSA earlier this year, real estate professionals discussed the effects of the growing concerns over the financial viability of universities and the predicted fall of international student numbers this academic year on the sector.  Dan Green, a senior partner at Tri7 Group, said: “Having been a consistently strong performer in global real estate investment markets over the past couple of years, some in the living sector are now nervously looking at UK PBSA and wondering if it has peaked. They’re wrong to do so. “In 2024, we saw the beginning of the end of what we see as unsustainable rental growth, with overly bullish pricing leading to a number of schemes’ occupancy levels being hit. We believe rental growth will continue, particularly in the higher end of the market, at more sustainable and affordable levels in a way that ensures a better deal for everyone. Likewise, we’re confident that the UK higher education sector will remain a leading global light, particularly amid Australia and Canada’s plans to reduce the number of higher education places for international students, as well as anti-immigration rhetoric and policy from the new US administration. “With a relative lack of new stock, limited development pipeline and a huge wall of capital waiting to deploy, beds look like a good investment – and quality student beds look likely to be the best of the best.” On the outlook for investment, Ben Henry, acquisitions director at Fusion Group, said: “Living sectors will continue to be the winner when it comes to attracting investor interest in 2025. More specifically, the best-performing and most attractive living sector assets will be those that feature hands-on asset management, reflecting investors’ increased appetite to work in partnership with developers as the best returns come from value creation during operating.” Affordability matters In terms of affordable housing, the sector has had “very mixed outcomes”. Olivia Harris, chief executive, at Dolphin Living, said: “There have clearly been some positive factors which we hope will have a beneficial impact upon both supply and affordability. These are namely the easing of inflation over the year, coupled with a greater political focus and ambition towards delivering record number of new affordable homes by the new government. Yet this has been countered by the broader factors impacting the housing and property sector more generally. “Be that through continuing planning challenges, changing regulation – especially in relation to building safety and sustainability – and ongoing pressure on household finances particularly for lower earners, these combined contribute to arguably the greatest challenge of all; that of viability when delivering new homes, particularly affordable homes. This has seen some of the lowest numbers recorded for start on sites, especially within London, since 2008. “Plus, from a renter’s perspective there remains significant lack of supply and a continued upward pressure on rent, highlighting the increasing needs for more affordable homes for rent. For 2025 we expect many of these challenges to continue, especially the continued pressure on affordability of private rents. This makes it even more imperative that the government fully considers the social and economic benefits of delivering more rental housing at a discount to market rent, as part of the wider programme of affordable housing delivery and this is captured within both changes to the planning system and as part of any future housing strategy.” Image © Anthony Harvey/Shutterstock