Private Rented Sector: resilient income underpinned by demographics and urbanisation
- Major cities are amongst the most prohibitively expensive places to live in the world and yet continued urbanisation is a trend that is expected to persist for the foreseeable future. A confluence of demographic factors including migration, population growth, delayed marriage and shrinking household size is driving rental demand.
- This persistent growth in demand is being met with limited new supply leading to a supply – demand imbalance. While the resultant housing shortage varies market by market most major cities across the globe are suffering from a degree of a housing provision gap that is supporting strong rental value growth prospects for rented accommodation.
- We acknowledge the desirability to own is unlikely to diminish, especially in those markets where it has been the traditional preference, but affordability is also unlikely to be remedied in the short run. With ownership rates stagnating in many markets, conditions support the case for developing institutional private rental sector (“PRS”) as households are increasingly forced to consider rental options and the current stock levels are insufficient.
- From an investment perspective, we believe that the PRS sectors offer property investors with long-term and stable income streams with inflation linkages that are relatively swift to mark to market and underpinned by a granular tenant base. Operational efficiency and scale are key to enhancing net income, managing costs and producing sustainable long-term cash-flows, justifying the expensive entry yields.
- Preferred market characteristics include but are not limited to: above trend historic and expected GDP growth, growth across population groups, higher ownership cost vs renting, a market friendly regulatory environment, diverse demand, low forecast construction levels and a liquid investment market.
- Regulation is a key risk to PRS investment as political cycles can change the regulatory impact of rented accommodation overnight. We are confident that regulation should not be a reason to avoid a market; indeed, a scalable operating model, strong partnerships and a focus on place making can aim to generate sustainable long-term income even in a highly regulated market.
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