Savills : Value of UK residential operational real estate set to quadruple

• UK operational real estate to be worth £880bn at maturity, 4x current value

• Purpose built student housing: currently worth £51.2 billion; the most mature and liquid operational asset class

• Build to Rent: now valued at £96 billion (<1% of £1.5tn value of all private rented homes). Tipped to be worth c. £550 billion at maturity

• Retirement housing: ageing population will drive sector value from £120 to £260 billion

The market for student housing, build to rent and retirement housing combined will be worth £880 billion at full maturity, almost four times its current £223 billion valuation, international real estate adviser Savills says in UK Operational Real Estate: The Sky's The Limit?, a new report published today.

Institutions are already active in a sector that provides homes for rent for full-time students, young professionals, working families, and retirees. But the market for residential assets owned and operated by large-scale, professional investors is still in its early stages of development in the UK and represents a huge growth opportunity both for investors and developers, Savills says.

Investment activity will grow substantially, the firm projects, as investors come to terms both with the strong underlying demographic and economic drivers, and the design and management considerations particular to the sector.

'Common to all these sectors is the recognition that investing in where people live has great potential for investors, particularly those seeking long term income streams,' says Lawrence Bowles, Savills research analyst.

'The fundamental demographic and economic changes supporting these sectors are difficult for investors and developers to ignore. Institutional interest will continue to grow as these asset classes mature and can increasingly demonstrate their track record.'

		Student accommodation (PBSA)	Build to Rent (BTR)	Retirement Living
Size and potential	Target market	Full-time students	Households in the private rented sector	Over 75s
	Size of target market (2019)	1,844,500	5,202,700	5,693,800
	Current stock	640,000	30,400	1,193,000
	Stock at maturity	640,000	1,740,900	1,731,600
	Current sector value (bn, 2019)	£51.2	£9.6	£121.0
	Value at maturity (bn, 2019)	£51.2	£543.6	£265.6
Investment market	Investment in 2018 (bn)	£3.1	£2.6	£1.3
	Average investment 2015-17 (bn)	£4.7	£2.3	-

Source: Savills Research

Student housing - at full maturity?

The purpose-built student accommodation (PBSA) sector is the most mature and liquid of the operational real estate markets, worth £51.2 billion today, Savills estimates.

Brexit concerns are weighing on activity. Investors placed £3.1 billion in UK PBSA in 2018, 19% down on 2017, but the price per student bed remains high, at £90,000. Some 35,000 beds are expected to trade this year, with a total value of £3.5 billion.

Total stock levels stand at 640,000 beds, against a total student population which has grown 9.7% over the past five years to around 1,844,500, despite Brexit concerns and competition from apprenticeships. EU students represent only 7% of student numbers, and recent rhetoric on immigration suggests the potential for demand from places such as the USA, China and India could mitigate any fall in EU student demand.

Portfolio consolidation over the past five years means that the sector is dominated by a few specialist players. With parts of the UK PBSA market looking fully supplied, Savills expects to see larger investors turn their attention to less mature markets across mainland Europe, such as Italy, Spain and Portugal, where demand is expected to be fuelled by growing numbers of students choosing to live away from home.

Build to Rent - huge growth potential

Build to rent (BTR) is a much newer sector, with enormous growth potential and many opportunities for new entrants. Currently valued at £9.6 billion, Savills projects it will be worth almost £550 billion at maturity, providing homes for over 1.7 million households.

The current value is less than 1% of the total of privately rented housing in the UK, which Savills research puts at £1.5 trillion. The majority of this value is owned by individual buy to let landlords, a sector coming under pressure from recent changes to tax and regulations. It is estimated that landlords have redeemed 120,000 buy to let mortgages* since the introduction of a 3% stamp duty surcharge for additional dwellings in April 2016, at a time of rising demand for rental accommodation, particularly as Help to Buy is wound down and withdrawn completely in 2023.

Private renting is not a new concept in the UK, but large-scale, institutional investors have only begun to make their mark on the sector over the past few years, Savills says. Despite similarities between PBSA and BTR, relatively few investors are active across both sectors, so there is huge opportunity for crossover, Savills notes. Goldman Sachs, Legal & General, M&G, Greystar, and Aberdeen Standard are among the few to have invested in both.

'Given the similar challenges in development and management, we would expect to see more investors expanding their capabilities to cover the full spectrum of operational residential assets,' says Peter Allen, Head of Savills Operational Capital Markets. 'Student housing investors have the potential to extend their brands into build to rent and use a strong track record in a very established sector to secure favourable finance terms to maximise opportunities in a newer, less mature sector.'

Retirement living - housing an ageing population

Retirement living is also expected to expand rapidly, both as a tenure and asset class. Institutions and REITs are already active in the care home market, but the scale of activity is growing rapidly. A market for retirement housing investment is now emerging, worth £120 billion today.

The bulk of the existing 730,000 retirement housing units across the UK is sheltered housing for social rent, built using grant funding in the 1970s and 80s. Much of the balance is made up of owner occupied homes, built by specialised housebuilders such as McCarthy & Stone, who have recently started to offer rental options within their developments.

'Rules are still being written across this sector and a more investible market is beginning to emerge,' says Craig Woollam, Head of Savills Healthcare. 'Broad demographics, and an ageing population with vast stores of housing wealth, will underpin demand for well-managed, tailor-made housing options.'

Accounting just for today's over-75 population, Savills anticipates that the retirement living sector could grow to 1.7 million homes at full maturity. This is an increase of 138% over current stock.

This additional stock will comprise a mix of market sale, intermediate, and privately rented homes. This mix of different tenures and types required affects the values of these homes. Accounting for the tenure of this additional stock, the UK's retirement housing sector could more than double in value to £260 billion at full maturity.

To put this figure into context, Savills has calculated the value of housing owned and occupied by the over 65s to be more than £1.6 trillion.

* Savills analysis of UK Finance data (April 2019)