The growing force in global listed real estate
Historic shifts in home ownership underpinned by seismic demographic changes are behind a new force rising in the residential real estate industry – institutionally-owned single-family home rentals. Here, we explore this fast-growing phenomenon.
The world’s population is aging. Almost every developed country is facing an unprecedented growth in the number of older people in their populations.
The United Nations (UN) calls population aging one of the most significant social changes of the 21st century and predicts impacts across all sectors of society and business1.
According to UN data, by 2050 one in six people globally will be 65 years of age or over. In Europe and North America, this figure will be one in four. Already, people aged more than 65 outnumber those younger than five2.
These are confronting numbers.
But sometimes global statistics aren’t the best way to illustrate a trend, so here’s another fact:
Ten thousand Americans turn 65 every single day3.
It’s a phenomenal shift.
And it’s posing enormous challenges – and opportunities – for the investment world.
Housing is the core challenge.
As Baby Boomers retire, they shift from generating their income from working to paying for their living needs through drawing down their savings.
Unfortunately for this huge cohort, their retirement is coinciding with the lowest interest rates in history4 meaning their investment income is often too low to sustain their lifestyle.
This is driving a new behaviour: instead of living off the income from their investments as wealthy Baby Boomers have done in the past, many Baby Boomers are instead selling assets to fund their retirements.
And for most, the biggest asset they have to sell is their family home.
But there’s a problem: finding a buyer is becoming increasingly tricky.
The Millennial problem
The so-called Millennial generation who were born in the 1980s and 90s are in their 30s now, the eldest in this cohort knocking on 40 years old.
This is prime income earning territory and the age at which many in the past were taking on mortgages and buying homes.
But this generation is different. Many of them will never own their own home.
There are a few factors driving this.
For starters, many Millennials simply don’t have the savings or income to buy property.
Not only have they been buffeted by recession, but the rise of the finance and technology sectors and the decline of traditional work has meant well-paying jobs are increasingly concentrated in America’s coastal ‘gateway’ cities where constrained property supply has sent prices sky-high.
But there’s another, more important, factor: many Millennials are simply choosing to rent.
The American home ownership dream of previous generations is slowly giving way to a more European model where people become lifelong, secure tenancy renters.
The proportion of American Millennials who say they want to one day own a home has fallen from 40 per cent in 2016 to just 18 per cent in 20195.
This intention matters because the Millennials now outnumber the Baby Boomers in the US population6.
And from a pure investing standpoint, the Millennials’ aversion to home ownership makes perfect sense.
Making a 30-year commitment to a single, leveraged asset that provides no income flies in the face of much financial wisdom. But it has been a good source of wealth creation over many generations because each generation followed the previous into home ownership.
Now, the alternatives are proving more compelling. The rise of cheap and free brokerage accounts in the US is training a generation to invest in financial markets and crypto, while the rise of low-cost index investments provides millions with an effective way to grow their savings.
COVID-19
It is important to note that the trend away from home ownership towards renting pre-dates the COVID-19 pandemic.
And is critical not to extrapolate the extraordinary events of 2020 into long-term predictions.
But it is nonetheless true to say that COVID-19 is accelerating trends we were already experiencing.
Americans have been shifting away from urbanised, highly-dense living to less urbanised less-dense lifestyles for some time now.
Even before COVID-19 and the lockdowns and disruptions of the pandemic, many American cities were beset by congestion, density, violence and a too-high cost of living. In 2020, some of the major cities also became pandemic hotspots.
This has led to growth in the so-called sunbelt communities of the south, with better lifestyles, lower taxes and a cheaper cost of living.
The sudden dawn of working from home has only bolstered this trend.
If nothing else, 2020 has been a giant global experiment in telecommuting. Not only have we discovered that it works, we have discovered that we like it.
The emergence of effective, powerful technology tools for videoconferencing, creativity and collaboration is fuelling the already extant trend of people moving away from the big cities in search of a better quality of life.
Many knowledge economy workers in the US can now work from wherever they like and no longer have to live within a commute of their office in a major city. This is good for the workers but it’s also good for their employers who now have a vastly wider pool of potential employees from which to hire.
Institutional investment
So, we have a number of trends converging.
The rise of working from home fuelled by technology; a shift away from cities towards suburbs and lower density towns; a rising propensity to rent not buy; and a flood of single-family homes hitting the market as Baby Boomers retire.
Together, they are creating an entirely new institutional asset class: the single-family rental.
To be sure, it has been an arduous road. A little over a decade ago, in the Global Financial Crisis, as many as 10 million Americans lost their homes7. That crisis forever changed the way the nation viewed housing.
But as the bubble of unsustainable mortgage debt in the economy unwound it also allowed the creation of the first large pools of institutionally owned housing, many of which were bought out of foreclosure.
Institutional investors own around 200,000 US single-family rentals, a small fraction of the 15 million single-family homes that are owned by traditional ‘mum and dad’ landlords. This is what we call a fragmented market and one ripe for consolidation8.
By way of comparison, institutions own 55 per cent of multi-family (apartments) rentals9.
But the single-family rental is growing fast.
Baby Boomers will sell some 12 million homes over the next decade10 as they transition to retirement.
With the traditional buyers of those homes now likely to rent, many homes will not find new families to own them.
Instead, institutional real estate investors can buy a large proportion, potentially up to 1.8 million single-family homes by 2030, growing their share of the rental market some 10 times in less than a decade.
Ultimately, as responsible investors, our duty is to assess and respond to the long-term trends driving the world economy, shifting demographics is one of the most important.
The genesis of these trends can sometimes be unpleasant but are real. We have seen this in the current combination of low interest rates, home ownership affordability challenges, the pandemic and even back to the Global Financial Crisis.
But confluence of these factors is creating a genuine, long-term change in the way US residential investment will operate especially for the Millennial generation that are looking for more flexibility than prior generations.
And, we believe, this new normal will fuel the housing rental market for decades to come.
Footnotes:
1 https://www.un.org/en/sections/issues-depth/ageing/
2 https://population.un.org/wpp/
3 UN Population Division
4 https://www.bankofengland.co.uk/-/media/boe/files/speech/2015/stuck
5 American Homes 4 Rent Investor Highlights, September 2020: https://s22.q4cdn.com/136596447/files/doc_presentations/2020/09/AMH-Investor-Highlights-September-2020.pdf
6 https://www.weforum.org/agenda/2020/04/millennials-overtake-baby-boomers-largest-generation-america
7 https://www.stlouisfed.org/publications/housing-market-perspectives/2016/the-end-is-in-sight-for-the-us-foreclosure-crisis#endnote1
8, 9, 10 Morgan Stanley Research REIT Report, March 2019
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Important Notes
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