Lazard: Residential demand increases need for development

Investor appetite for rental homes remains strong but development will need to be embraced, writes James Jacobs, head of real estate for Lazard’s private capital advisory group.

James Jacobs

Residential strategies continue to attract strong interest from institutional investors. Our assessment of current investor sentiment demonstrates residential is the favored sector in which investors are likely to make new investments over the next 18 months.

Investors are increasing allocations to, and re-weighting their portfolios toward, residential assets. They are attracted by the sector’s robust demand drivers along with diversified cashflows and likely reduced rates of obsolescence.

Many developed markets are experiencing a housing crisis with new supply not keeping pace with demand. This is due to factors including population growth, changing demographics and supply constraints, such as planning.

Younger generations are more likely to rent, and for longer periods of time due to affordability issues, a desire for flexibility and a delay in having children. Furthermore, locations which are sought after do not necessarily correspond with where new homes are being built. The changing nature of employment and different growth rates between cities mean many new homes do not meet the requirements of younger people.

Consequently, demand from tenants looks likely to continue to outpace supply. Investors are therefore expected to be attracted to the visible recurring cashflow derived from owning residential rental assets and the prospect of sustained rental growth.

However, in some markets, including the UK, institutions struggle to meet their desired allocation to the residential sector. Not only is the housing crisis causing a shortage of apartments for tenants to rent; it is also creating difficulties for institutions wishing to acquire assets. Accordingly, to gain exposure in this area, investors will need to embrace development. Build-to-core residential strategies are therefore likely to be popular.

Notwithstanding the forces of demand and capital, residential development has been stubbornly sluggish. Planning restrictions create an obstacle to building new homes, whether this is height controls in London, local authority congestion issues or building on greenbelt. Fundamentally, there is a need to build more homes of the right type and in the right locations if housing crises are to be resolved. This would also then help create investible stock to satisfy institutional appetite.